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Economics and Personal Finance/Income and Economic Goals

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What factors affect income?

  • Human Capital: Level of education, training and work experience.
  • Market Value: The level of demand that exists for the type of labor you are trained to provide.
  • Production Value: Higher skilled workers = Increase in productivity and lowers production costs.
  • Derived Demand: When the demand for a good or service affects the demand for a good or service related to it.

Economic Goals

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What is a country's economic goals?

  • Full Employment
  • Stable Prices
  • Economic Growth

The two biggest threats to a nation's "health" are unemployment and inflation.

The government tries its best to accommodate its citizens. The government...

  • lower taxes
  • offer tax breaks/credits to any new businesses
  • job training programs to help the unemployed people
  • increase gov't spending
  • FRS
  • Minimum wages increase
  • Less money printed
  • Encourage innovation by accommodating patents and copyright laws
  • Promote research through grants

When the economy is under a recession, the government reduces spending and raises taxes.

Unemployment

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The unemployment rate is the percentage of the labor force who are not currently working and are actively trying to find work. Unemployment is negative to a country's health as countries are not able to produce as much as it should [with employment].

Full employment is harmful to the economy of a nation because:

  • A shortage of people to hire --> Employers have to increase wages to keep their workers.
  • This results in increases in prices of goods/services --> money's value reduces and purchasing power declines (inflation).

Types

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Unemployment Description
Cyclical
  • Associated with ups/downs of the business cycle
  • Increases during recessions and depressions; Decreases during recoveries and booms
Structural
  • Caused by changes in the economy, such as technological advances and an increase in natural resources
  • Structural jobs will never return to the labor force as they are not necessary anymore.
Seasonal
  • Caused by changes in weather
  • Ex.: Construction/Migrant workers
Frictional
  • Fired
  • Temporary unemployment during a job transition
  • Ongoing and is only for a short time

Inflation

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A safe unemployment rate: 4-6%.

Inflation means that the consumers' purchasing power significantly decreases, which takes more dollars off the same goods/services. Consumers experience a bad standard of living, especially for the consumers who depend upon fixed incomes. If the:

  • Interest rates for savings are lower than the inflation rate (3% --> Inflation of 5%)...
  • ...saving accounts lose value!

Business Cycle

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The business cycle is the pattern of alternating periods of growth and decrease in an economy.

Types

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Phase Description
Expansionary
  • Increase in employment, production, sales, income.
  • Prices, CC [Consumer Confidence], Investments, Stock Values, and possibly inflation increase.
Peak
  • Low unemployment and inflation.
  • Demand over supply.
  • Economy overheats.
Contractionary
  • Decrease in employment, production, sales, income, prices, demand/spending, CC, stock values.
  • Inflation increases.
Trough
  • Slow growth
  • Low prices
  • Unemployment
Recession
  • Contraction that goes on for 6-18 months.
Depression

Money

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Money is an item that is widely accepted as a payment for goods and services.

Functions

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  1. Medium of exchange: An item buyer gives to a seller.
  2. Unit of Account: The method that people use to post prices/record debts.
  3. Store of Value: Must retain its value over time.

Types

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Commodity Money
  • Has value even if it is wasn't being used as money. This is like gold and silver.
Fiat Money
  • Has value because the government declared it acceptable, an example being the US Dollar

Characteristics

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  1. Durability: Objects used as money must withstand physical wear and tear.
  2. Portability: People need to be able to carry it.
  3. Divisibility: Easy mathematics.
  4. Uniformity: Has to be BOTH same.
  5. Limited supply: Only in limited quantities.
  6. Acceptability: Must be the same value as the goods and services in an exchange.

The Federal Reserve

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When would the Federal Reserve expand the economy?

  • When there are a slow growth period and high unemployment.
  • The government would increase federal spending and/or reduce taxes.

The risk that exists is prices rise up and interest rates increase.

When would the Federal Reserve contract the economy?

  • When inflation is evident.
  • The government would decrease federal funding and/or increase taxes to lower the prices and interest rates.

The current chairman of the Board of Governors (see below) is Jerome Powell.

  • Created in 1913.
  • Relugates and monitors financial institutions, like banks.
  • Provide services to depository institutions, the federal government, and the public.
  • Monitors interest rates.
  • Makes sure that inflation is low.
  • Supplies paper money and coins to banks.

Structure

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  • 12 regional banks
  • Board of Governors: This is made up of 7 governors who each serve 14-year terms. They're appointed by the president and are confirmed by the Senate.

Price Elasticity

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What affects price elasticity?

  1. Proportion of income spent.
  2. Substitutes.
  3. Time
  4. Necessities (lower) and Luxuries (higher)

Elasticity is the measurement of the change in demand for a good when its price changes.

Elastic Good

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Consumers and producers are sensitive to price changes

  • If the price of an elastic good increases, people will buy less.
  • If the price of an elastic good decreases, people will buy more.

^This is for luxury items and non-necessities.

Represented by a flatter demand curve.

Inelastic good

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These are essential goods.

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