American History

To insert your company logo on this slide • From the Insert Menu • Select “Picture” • Locate your logo file • Click OK • To resize the logo • Click anywhere inside the logo. The boxes that appear outside the logo are known as “resize handles.” • Use these to resize the object. • If you hold down the shift key before using the resize handles, you will maintain the proportions of the object you wish to resize. American History Unit IV- U.S. Economic History Introduction to Economics

Handy Dandy Guide to Economic Thinking • 1. People chooseto do the things they think are best for them. • 2. People’s choices have costs. • 3. People choose to do the things for which they are rewarded. (People respond to incentives)- such as money. • 4. People create rules that affect their choices and how they act. (People create ECONOMIC SYSTEMS that influence individual choices and incentives.) • 5. People gain when they freely decide to trade with one another. Free trade creates wealth. • 6. People’s choices today have future results.People often live for tomorrow.

Economic Questions • What is economics? • Economics:The study of choice and decision-making in a world with limited resources. • Economic Growth: A sustained increase in total output or output per person for an economy over a long period of time. • Economics is based on two facts: • 1. Society's material wants are virtually unlimited or insatiableUtility is the economist's term for pleasure or satisfaction. Society has insatiable utility • 2. Economic resources are scarce • Economic resources are all natural, human, and manufactured resources that go into the production of goods and services: • 1. Land and all "gifts of nature" (arable land, forests, mineral deposits) • 2. Capital: all manufactured aids to production (tools, machinery) • 3. Labor: all physical and mental talents of men and women. • 4. Entrepreneurial Ability: entrepreneurs have initiative, make basic business-policy decisions, be innovative, and take risks

Economic Questions • What is economics? • Economic Systems -The way a society organizes the production, consumption, and distribution of goods and services. • Market Economy -An economic system where most goods and services are exchanged through private transactions by private households and businesses. Prices are determined by buyers and sellers making exchanges in private markets.

Economic Questions • What are goods, services and resources? • Goods-Objects that can be held or touched that can satisfy people’s wants. • Services- Activities that can satisfy people’s wants. • Resources-All natural, human and human-made aids to the production of goods and services. Also called productive resources. • Natural Resources-"Gifts of nature" that are present without human intervention (also called land). Human Resources-The quantity and quality of human effort directed toward producing goods and services (also called labor). Capital Resources-Goods made by people and used to produce other goods and services (also called intermediate goods).

Economic Questions • What is supply and demand? • Demand - A schedule of how much consumers are willing and able to buy at all possible prices during some time period. • Supply - A schedule of how much producers are willing and able to produce and sell at all possible prices during some time period. • Equilibrium Price - The market clearing price at which the quantity demanded by buyers equals the quantity supplied by sellers.

Economic Questions • What are unemployment, shortages and surpluses? • Unemployment - The situation in which people are willing and able to work at current wages but do not have jobs. • Shortages- The situation resulting when the quantity demanded exceeds the quantity supplied of a good, service, or resource. • Surpluses -The situation resulting when the quantity supplied exceeds the quantity demanded of a good, service, or resource, usually because the price is for some reason above the equilibrium price in the market

Economic Questions • What are producers, consumers and markets? • Production/Producers- People who use resources to make goods and services, also called workers. • Consumers-People whose wants are satisfied by using goods and services. • Markets-Any setting where buyers and sellers exchange goods, services, resources, and currencies.

Economic Questions • What are stocks, bull markets and bear markets? • Stocks- Ownership of a corporation represented by shares that are a claim on the corporation's earnings and assets. • Bull Markets-prolonged period in which investment prices rise faster than their historical average. Bull markets can happen as a result of an economicrecovery, an economic boom, or investor psychology. The longest and most famous bull market is the one that began in the early 1990s in which the U.S. equity markets grew at their fastest pace ever • Bear Markets-A prolonged period in which investment prices fall, accompanied by widespread pessimism. Bear markets usually occur when the economy is in a recession and unemployment is high, or when inflation is rising quickly. The most famous bear market in U.S. history was the Great Depression of the 1930s

Economic Questions • What is Money? • Medium of Exchange: Money allows people to avoid the complications of barter. For example, a bookseller does not want to be paid in bagels because others may not accept bagels as a means of trade. Money is convenient because it is accepted by all. • What gives money it's value? • Everybody accepts it • Legal Tender - currency has been designated as legal tender by government, which means it must be accepted as payment • Relative Scarcity - money derives its value from it's scarcity relative to utility

What is the Federal Reserve? It manages the countries money system;regulates the banking system;is a bankers bank; and is the government’s bank.

Economic Questions • What is profit? • Profit - The difference between the total revenue and total cost of a business; entrepreneurial income- (The human resource that assumes the risk of organizing other productive resources to produce goods and services.)

Economic Questions • What is GDP? • GDP is Gross domestic product. For a region, the GDP is “the market value of all the goods and services produced by labor and property located in the region, usually a country”. • GDP measures the market value of annual output • It is a monetary measure • GDP includes only market value of final goods and ignores transactions involving intermediate goods to avoid double counting. Intermediate sales of goods are all the steps before the final selling of the good. For an example the cotton to make a shirt may be sold to the shirt manufacturer but it is not counted in the GDP because the cotton was an intermediate good…the final good is the shirt.

Economic Questions • What is inflation? • Inflation: Inflation is a sustained increase in the average price level, or general rise in the price of the entire economy. • Tight Money Policy:This policy is exercised in times of inflation. • Components:1). Selling securities to banks and the public. 2). Increase the Federal Funds Rate. 3). Increasing the Discount Rate. 4). Increase the Reserve Ratio • Easy Money Policy: This monetary policy is used when the economy is faced with recession and unemployment. • Components: 1.) Buy Securities from commercial banks and public. 2.) Reduce the Federal Funds Rate. 3.) Lowering the Discount Rate. 4.) Reduce the Reserve Ratio

Economic Questions • What are Taxes? • Taxes- Required payments of money made to governments by households and business firms. • Income Taxes - Taxes paid by households and business firms on the income they receive. • Property Taxes - Taxes paid by households and businesses on land and buildings. • Sales Taxes - Taxes paid on the goods and services people buy.

Economic Questions • What is a depression? • There’s an old joke among economists that states: A recession is when your neighbor loses his job. A depression is when you lose your job. • The difference between the two terms is not very well understood for one simple reason: There isn’t a universally agreed upon definition. If you ask 100 different economists to define the terms recession and depression, you’d get at least 100 different answers. • A depression is any economic downturn where real GDP declines by more than 10 percent. A recession is an economic downturn that is less severe. By this yardstick, the last depression in the United States was from May 1937 to June 1938, where real GDP declined by 18.2 percent. A time of economic crisis or bad times in commerce, finance, and industry, characterized by falling prices, restriction of credit, low output and investment, many bankruptcies, and a high level of unemployment (many people without jobs). • A recession could be defined as the time when business activity has reached its peak and starts to fall until the time when business activity bottoms out. When the business activity starts to rise again it’s called an expansionary period. By this definition, the average recession lasts about a year.

Economic Questions • What precisely is the national debt? • It's the total amount of funds that the federal government has borrowed over the years and not yet repaid. • And what about the deficit? That's the amount that the government spends each year in excess of what its tax, tariff, and fee revenues bring in. The government then must borrow to make up the difference. It's the accumulation of deficits year after year that makes up the total national debt. • Why do we have deficits? Because the government makes commitments to spending programs without raising enough revenue to pay for them. Therefore, the government has to borrow. • How does the government borrow money? Does it just go to the bank? No. The U.S. Treasury issues securities, or IOUs, such as savings bonds and Treasury bills, notes, and bonds. Lenders buy these securities and the money goes to the government. In return, the government pays interest to the owners of the securities.

Economic Questions • National • Debt?

Economic Questions • The National debt • How large is the debt? As of Jan. 13, 2005, the gross federal debt was $7,607.526,534,472.54 trillion. The estimated population of the United States is 295,313,752 so each citizen's share of this debt is $25,760.83. The National Debt has continued to increase an average of $2.17 billion per day since September 30, 2004 • Wow! When did the debt get so big? Well, for the past two decades the net debt has risen very rapidly. At the end of fiscal 1973, it was about a third of a trillion dollars; in 1983, a little over $1 trillion; and in 1993, it was more than $3 trillion. The government has been increasing its spending ––particularly on such items as Social Security, Medicare, and, for a time, national defense –– at a rate faster than revenues have been growing. Also, there is a snowball effect resulting from each increase in the debt: as the debt expands, so do the interest payments. • Anything else? In addition, the inflation and high interest rates of the 1970s and early 1980s contributed to the rapidly growing debt. Even with inflation and interest rates declining in recent years, the debt has not been reduced, because spending has continued to outpace revenues. • Has the debt always been rising? The first great surge in the national debt was caused by U.S. participation in World War I. By the time the war ended in 1918, the debt had increased from a little over $1billion to about $15 billion. The second surge took place during the Great Depression. There was high unemployment and, therefore, less taxable income. New social programs meant that the government had to borrow in order to finance increased spending. As a result, the debt climbed to almost $50 billion by the start of World War II. • What does "fiscal" mean? For budget purposes, the government year runs from October 1 to September 30; this is a called a fiscal year. For example, the 1996 fiscal year starts October 1, 1995, and ends September 30, 1996.

Test your economic IQ How much do you know about our how our economy works and how it affects you? According to the National Council on Economic Education, the average graduating H.S. student should be able to score 100% on the following quiz. Can you?

#1 The town of Bedford Falls wants to buy four new police cars. The opportunity cost of buying the police cars is the: (a) cost of buying the cars now vs. buying them later. (b) ability to make more arrests and reduce the total annual crime rate. (c) other desirable goods or services that must be given up to buy the cars. (d) dollar cost of the new cars.

Answer for #1 C Opportunity Cost: the next best alternative that must be given up when a choice is made.

#2 The best measure of the economy’s performance is: (a) the unemployment rate. (b) gross domestic product. (c) consumer price index. (d) Dow Jones industrial Average.

Answer for #2 B Gross Domestic Product (GDP): The market value of all final goods and services produced in the economy in a given period of time.

#3 The best definition of profit is: (a) total assets minus total liabilities. (b) total sales minus total taxes. (c) total revenues minus total costs. (d) total sales minus total wages.

Answer for #3 C Profits: total revenues from exchange minus total costs associated with production of a good or service. Profits are the resource payment to the entrepreneur or the owners of a business enterprise.

#4 Gross Domestic Product is a measure of: (a) total market value of all final goods and services produced in one year. (b) the price level of goods and services sold in one year. (c) the total amount of refrigerators, washing machines and other household appliances produced in one year. (d) the total amount of goods and services produced by private companies in one year.

Answer for #4 A Gross Domestic Product (GDP): The market value of all final goods and services produced in the economy in a given period of time.

#5 Who would benefit from an unexpected 10% inflation rate? (a) Sam, who has $5,000 in a savings account. (b) Maria, who has a $5,000 life insurance policy. (c) John, who loaned Bonnie $5,000 last year. (d) Bonnie, who borrowed $5,000 from John and must pay it back this year.

Answer for #5 D Bonnie would benefit. Inflation is a sustained increase in the average price level, or general rise in the price of the entire economy. She benefits because even though prices go up, her loan rate and amount will remain the same. Cheap money.

#6 Who would benefit if the U.S. dollar becomes stronger against the Japanese Yen? (a) a Japanese company selling products in the U.S. (b) a U.S. company buying a building in Japan. (c) a U.S. tourist taking a two week vacation in Japan. (d) all of the above. (e) none of the above.

Answer for #6 D They all benefit. This has to do with exchange rates: the price of a nation’s currency in terms of the currency of another nation.

#7 The limit of the economy’s real output at any time is set by: (a) the quantity and quality of human and natural resources and capital goods. (b) the total amount of money, stocks, and bonds in circulation. (c) business demand for goods and services. (d) the amount of government spending and taxes.

Answer for #7 A Economic resources: land, labor, capital goods and entrepreneurs.

#8 If your annual money income goes up 10%, while the prices of what you buy go up 20% then: (a) your real income has risen. (b) your real income is unchanged. (c) your real income has fallen. (d) you’re shopping in the wrong stores.

Answer for #8 C Real Income: money income adjusted to compensate for inflation.

#9 Three major productive resources are natural and human resources and capital goods. Which best illustrates these three productive resources? (a) rent, workers and money. (b) iron ore, taxi drivers and bonds. (c) farmers, importers, and exporters. (d) oil, engineers, and drills.

Answer for #9 D Economic resources: land, labor, capital goods and entrepreneurs.

#10 Nation A grows bananas and Nation B produces cheese. If they exchange bananas and cheese: (a) Nation A gains and Nation B loses. (b) Nation B gains and Nation A loses. (c) Both Nations lose. (d) Both Nations gain.

Answer for #10 D They both benefit. This has to do with international trade: the exchange of goods and services between people and institutions in different countries.

#11 True or False: Most millionaires are college graduates

Answer for #11 True Four of five millionaires are college graduates. Eighteen percent have Master’s degrees, eight percent law degrees, six percent medical degrees and six percent Ph.D.’s.

#12 Most millionaires work fewer than 40 hours a week.

Answer for #12 False About 2/3 of millionaires work 45-55 hours a week.

#13 More than half of all millionaires never received money from a trust fund or estate.

Answer for #13 True Only 19% of millionaires received any income or wealth of any kind from a trust fund or an estate. Fewer than 10 % of millionaires inherited 10% or more of their wealth.

#14 Most millionaires work in glamorous jobs, such as sports, entertainment, or high tech.

Answer for #14 False A majority of millionaires are in ordinary industries and jobs. They are proficient in targeting marketing opportunities.

#15 Many poor people become millionaires by winning the lottery.

Answer for #15 False Few people get rich the easy way. If you play the lottery, the chances of winning are about 1 in 12 million. The average person who plays the lottery every day would have to live about 33,000 years to win once. In contrast, you have a 1 in 9 million chance of being struck by lightning. A pregnant woman has one chance in 750,000 births to have quadruplets. How many sets of quadruplets do you know?

American History