Can you turn all of this into a concise and detailed review?
1. What is economics? 2. What does it mean to think like an economist? ● Write down the first 10 words that come to mind when you see the word “economics.” ● How would you define economics right now with the information you know? A ECONOMICS IS A WAY OF THINKING B ● You can see ordinary events and “everyday puzzles” in a new way by applying economic principles. Examples: 1. Why are motorists who receive costly speeding tickets typically granted large fine reductions just for appearing in court, even though they oǪer no evidence of special circumstances when they appear in court? 2. Why are some professional athletes who have not graduated from college paid so much money for playing games when college graduates who perform worthy services -- nurses, police, teachers, etc. -- receive much smaller salaries? C ECONOMICS IS A WAY OF THINKING Economics: The study of how people choose to use their limited resources to satisfy their unlimited wants. THIS QUESTION WILL BE ON AN EXAM! D The Fundamental Economic Problem: Scarcity: The condition in which our wants are greater than the resources available to satisfy them. E Activity: Windfall ● Imagine you have just been given $100,000 dollars. Create a written list of things you would do with this money and estimate the monetary cost of each item. You must spend it all. You cannot put any in “savings.” ● Unfortunately, the situation has changed and you are only going to receive $20,000. Make a new list of things you would do with this money and estimate the monetary cost of each item. F As the Windfall Activity shows… SCARCITY FORCES CHOICES Scarcity is at the center of the science of economics because scarcity forces choices. Our wants are unlimited, and our resources are limited, so scarcity exists and people must therefore make choices. We must choose how to use our limited resources. We must choose which wants we will try to satisfy and which we will leave unsatisfied. Economics is all about studying the choices that people make as a result of scarcity. G H ECONOMICS AS A WAY OF THINKING ● Economics is also the science of decision making. ○ Develops decision-making skills. ○ Helps predict the choices people will make. I POSITIVE ECONOMICS NORMATIVE ECONOMICS Describes how things are and why; involves analyzing how economies work Determines the “best choice” based on specific criteria; involves making policy recommendations ECONOMICS AS A WAY OF THINKING J
LN 2 - Principles of Economics PT1 Scarcity, Costs & Benefits, Incentives and Future Consequences Review 1. What is the fundamental economic problem? Why is this a problem? 2. What is the difference between positive economics and normative economics? A ● Money, taxes, banking, and trade are economics, but economics principles apply to much more. ● Economics is a way of thinking about the wider world → seeing ordinary events in a new way Review Cont’d B Principle 1: Scarcity Forces Choices Our wants are unlimited, and our resources are limited, so scarcity exists and we must make choices about how to use our resources. C Some examples of scarcity forcing choices are obvious: ● You only have enough money to buy a snowboard or a bike, but not both. ● You can earn overtime by working on Fourth of July or you could spend the day with your family. Principle 1: Scarcity Forces Choices D But some examples are less obvious: ● Even accepting a “free lunch” involves scarcity and choices ○ The No-Free Lunch Principle: The lunch was free to you, but someone had to pay in some way. When YOU accept a free lunch, someone else has to give something up ■ Examples of this? Principle 1: Scarcity Forces Choices E Principle 2: Choices Have Costs and Benefits How do we decide which option to choose? COST-BENEFIT ANALYSIS! ● Cost: Negatives / what you lose (IE: money, time, effort, other sacrifices. ● Benefit: Positives/what you gain. ● People choose something when the benefits of doing so are greater than the costs. F Principle 2: Choices Have Costs and Benefits Do Now: Make a list of the costs and benefits of going to college: BENEFITS COSTS G Thinking-at-the-margin principle: Most choices involve thinking in terms of a little more or a little less of something, rather than all or nothing ● Examples: Study one more hour, buy one more pair of shoes, eat one more slice of pizza, etc. Principle 2: Choices Have Costs and Benefits H So, we often engage in a comparison of marginal costs and benefits. ● Marginal cost—what you give up to add one more unit of something ● Marginal benefit—what you gain by adding one more unit Principle 2: Choices Have Costs and Benefits I Example: You’ve spent 2 hrs studying for a test. Should you study another hour or go to bed? The answer depends on whether the benefit of an extra hour of studying outweighs the cost of losing an hour of sleep and therefore being less well-rested during a test. Principle 2: Choices Have Costs and Benefits J Principle 3: Incentives Matter ● An incentive is something that motivates a person to take a particular course of action. ○ Costs and benefits act as incentives ● When economists want to understand why people do what they do, they start looking for incentives K “Incentives are the cornerstone of modern life and understanding them—or often, ferreting them out—is the key to solving just about any riddle, from violent crime to sports cheating to online dating.” - Steven D. Levitt and Stephen J. Dubner, Freakonomics Principle 3: Incentives Matter L ● Incentives come in many forms, both positive and negative ○ A positive incentive is used to encourage a behavior ○ A negative incentive is used to discourage a behavior ● What are some examples of positive incentives? ○ Teachers use points/grades to encourage students to complete assignments ○ Schools use awards to motivate students ○ Workplaces use awards and financial bonuses to motivate workers Principle 3: Incentives Matter M ● What are some examples of negative incentives? ○ Parents use threat of punishment, such as loss of privileges, to discourage bad behavior ○ Governments use jail/fines to discourage law-breaking (ie, speeding ticket → reduction in future speeding) Principle 3: Incentives Matter N Principle 3: Incentives Matter But incentives often do not function as intended! O Principle 3: Incentives Matter Q More examples of incentives gone wrong: ● Farwell’s Farbuck Loophole of 2019 Law of Unintended Consequences: The actions of people and governments often have effects that are unexpected (a reasonable person would not have anticipated them) So think carefully when you set up incentives! Principle 3: Incentives Matter R Principle 4: Future Consequences Count S ● In general, when people make decisions, they are “short-sighted” and tend to be most concerned with immediate costs/benefits. ● Future-Consequences-Count Principle: Decisions made today have consequences not only for today but also in the future Principle 4: Future Consequences Count T Part of thinking like an economist = trying to imagine all the possible consequences of a decision, including long-term consequences “The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences…The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy.” -Henry Hazlitt, Economics in One Lesson Principle 4: Future Consequences Count U
LN 3 - Principles of Economics - Part 2 Trade and Markets Review (don’t look at your notes) ● According to economists, why is there “no free lunch”? ● You’ve had two ice cream sandwiches, and you’re trying to decide whether to eat another. What is the “marginal cost” and “marginal benefit” in this scenario? ● What is an incentive? A Principle 5: Trade Makes People Better Off ● Trade is the voluntary exchange of goods and services B Principle 5: Trade Makes People Better Off C What you learned in the simulation: ○ Since trade is a voluntary exchange, people trade when the exchange is in the self-interest of each person involved ○ People won’t trade if it won’t benefit them. So… trade makes people better off as long as they have accurate information Principle 5: Trade Makes People Better Off D Adam Smith observed the world around him and developed many economic theories, including theories about why trade makes people better off. Adam Smith (1723 - 1790): ● a Scottish economist and philosopher ● considered the “father of economics” ● in 1776, published The Wealth of Nations, which became the basis of modern free-market economic theories Principle 5: Trade Makes People Better Off E Why doesn’t your family make its own clothes? Build its own furniture? Grow all its own food? Produce its own medicine? Principle 5: Trade Makes People Better Off F “It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. The taylor [tailor] does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a taylor.” Principle 5: Trade Makes People Better Off G Trade-Makes-People-Better-Off Principle: By focusing on what we do well and then trading with others for what they do well, we will end up with more and better choices than by trying to do everything ourselves. This principle is strongly connected to the ideas of specialization and division of labor. Principle 5: Trade Makes People Better Off H Specialization – doing one task/job very well • Leads to division of labor – breaking up production into specialized tasks for increased productivity • Increases how fast things are created • Increases the quality of things created Consider Adam Smith’s description of a pin factory in The Wealth of Nations: I “One man draws out the wire, another straightens it up, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations… I have seen a small factory of this kind where ten men only were employed… who could, when they exerted themselves, make among them… upwards of 48,000 pins in a day… But if they had all worked separately and independently… they certainly could not each of them have made twenty… in a day.” Specialization Encourages Trade • When people specialize, they no longer produce everything for themselves. They focus on what they do best. • Encourages trade because they must trade to obtain things they do not produce • Levels of specialization depend on population • Highly populated areas can be highly specialized due to lots of people doing different jobs • Rural areas forced to be less specialized (population not big enough to support a range of specialists) J Trade Can Make Us Wealthier Wealth: total value of all of the things a person owns Trade promotes wealth in 3 ways: 1. Gets goods to those who value them • Example: Garage sale 2. Increases the quantity and variety of goods 3. Lowers the cost of goods • Opens people to cheaper products from different markets • Example: cheaper labor in Bangladesh = lower prices • Also opens to larger markets – allowing mass production (large-scale manufacturing) • Example: Large bread company buys flour at low bulk prices → savings passed to consumers in form of lower bread prices K Specialization Improves Standard of Living Societies that rely on specialization have a higher standard of living than those that don’t specialize • Standard of living refers to the degree of wealth and material comfort available to a person or community • Can be measured many different ways: life expectancy at birth, school enrollment, adult literacy, and more L M Principle 6: Markets Coordinate Trade N Principle 6: Markets Coordinate Trade O ● What is a market? A supermarket? A farmer’s market? Economists view markets broadly. ● Market—any arrangement that brings buyers and sellers together to do business with each other ● can be an actual physical place (ie, farmer’s market) ● can be a non-physical space (ie, the Internet) Principle 6: Markets Coordinate Trade P Free Market—a market with little or no government interference. Buyers and sellers trade until satisfied. ● Economists believe that a free market is the most efficient type of market Principle 6: Markets Coordinate Trade Q ● Markets-Coordinate-Trade Principle: Markets usually do better than anyone or anything else at coordinating exchanges between buyers and sellers. ● So… according to this principle, what should governments do about the economy? Principle 6: Markets Coordinate Trade R Adam Smith used “invisible hand” metaphor to describe the efficiency of a free market Explain the invisible hand metaphor in your own words. ● According to this metaphor, an individual’s pursuit of economic self-interest can promote the well-being of society as a whole Principle 6: Markets Coordinate Trade S According to the video, what should governments do about the economy? ● Leave it alone! According to the video, why do governments sometimes need to intervene? ● Under the invisible hand, economies sometimes are too slow to adjust to changing conditions, and people suffer in the meantime Principle 6: Markets Coordinate Trade T Economists usually assume that people will act rationally. Rational behavior model: People behave rationally by making self-interested decisions that they think will fulfill their wants and needs to the greatest extent possible. • Usually, this model assumes that people do not take into account the well-being of others when they act Principle 6: Markets Coordinate Trade U Potential pitfalls of the rational behavior model: 1. Does not deal with social values, such as charity, that might curb self-interest 2. Does not account for decisions based on limited or false information When we study supply and demand, you will gain a better understanding of how free markets coordinate trade. Two More Principles... V We will discuss two more principles in this course, but not until later on. Write these in your notes: 7. Skills and Knowledge Influence Income 8. Government Policies Have Benefits and Costs Your group will be assigned 1 principle from our 6 covered in detail. Your poster must have the following: ● Write the principle in large lettering ● Provide a subtitle that conveys how the principle affects our daily lives, etc. (insightful, clever, humorous) ● Provide a large primary focus visual that illustrates the principle ● Write one short, compelling, memorable example that conveys how this principle works and why it matters to our lives ● One poster per principle (across all classes combined) will be hung on the wall. Members will receive Farbucks. Principle Poster Project Project Team Members Group Number Principle for Poster 1 vs 7 Scarcity Forces Choices 2 vs 8 Costs & Benefits 3 vs 9 Incentives Matter 4 vs 10 Future Consequences Count 5 vs 11 Trade Makes People Better Off 6 vs 12 Markets Coordinate Trade
Unit 2 - Fundamentals of Economics LN 1 - Scarcity and the Production Equation ● Microeconomics: The part of economic theory that deals with behavior and decision-making by small units such as individuals and firms. ● Macroeconomics: The part of economic theory dealing with the economy as a whole and decision-making by large units such as governments and unions. Some important terminology: A ● Some of our wants are necessary for survival (food, water, shelter) ● Beyond the necessities, what we desire to own or experience in our lives is limited only by our imaginations. ● Our ability to satisfy our wants is limited (time, money). Unlimited Wants + Limited Resources = Scarcity Review: Our wants always exceed our resources D Review: Scarcity is Unavoidable Scarcity would exist even if everyone in the world was a billionaire. Scarcity will always exist because labor, raw materials, tools and time are in limited supply. E Shortage: When there is not enough of a good or service available to satisfy all of the willing buyers at the current price. ● Why do shortages occur? ○ Fads/trends ○ War ○ Natural disasters ● Shortages are temporary ○ Ends once production is resumed or a new source of supply is found. Don’t confuse “shortages” with the concept of scarcity. Shortages are temporary , but scarcity is forever F Big Idea: Scarcity forces us to make choices about what we produce ● Because of scarcity, we have to make decisions about the way that our limited resources will be used. ● Three basics questions: 1. What to produce 2. How to produce it 3. For whom to produce G WHAT to produce: Guns vs. Butter EXAMPLE 1: Housing allocation towards various socioeconomic groups. EXAMPLE 2: H Items that are produced can be divided into two broad categories: 1. Services: Tasks that people pay others to perform for them. IE: Dog groomer, doctor, mechanic, lawyer 2. Goods: Physical objects made for sale. Much of economics is concerned with economic products - goods and services (g/s) that are useful, relatively scarce, and transferable to others. I How to produce: Mass production w/ automation vs manual labor? EXAMPLE 1: Expensive green energy vs cost efficient fossil fuels? EXAMPLE 2: J For whom to produce: ● Based on who can afford to buy them? ● Based on need? ● “First-come, first serve?” EXAMPLE : How are products distributed? K The Factors Of Production ● One reason people cannot satisfy all their wants and needs is the scarcity of productive resources. ● The factors of production are the resources required to produce the goods and services that we want. L The Factors Of Production Economists divide the factors of production into three basic categories: ● Land - natural resources ● Labor - the time and effort people devote to producing g/s in exchange for wages ● Physical Capital - goods that are used as resources for further production; the tools, machines, and buildings used in the production process. We will elaborate on these next time we meet. M The Production Equation Production Equation: Land + Labor + Capital = Goods and Services ● Inputs: The scarce resources that go into the production process ● Outputs: The goods and services produced using the factors of production N The Production Equation What about entrepreneurship? ● Sometimes considered the fourth factor of production. ● Entrepreneurs combine land, labor and capital in NEW ways to produce goods and services. ● Often involve being willing to take risks when starting a new business. O Inputs, Outputs, and the Production Equation Production Equation: (Land + Labor + Capital) + Entrepreneurship = New Goods and Services P.1 Key Term Check-In Consumer: A person who uses goods and services to satisfy wants and needs. Consumer Goods: Physical goods that are intended for final use by individuals; OUTPUTS Services: Refers to tasks that consumers pay others to perform for them; OUTPUTS Capital Goods: Goods that are used in the production process (aka physical capital); INPUTS Labor: Refers to tasks producers pay others to perform as part of the production process; INPUTS P.2 Test Your Understanding Which of the following BEST describes an example of a service? a. Purchasing shoes from a sales person b. Purchasing a purse at the mall c. A painter is hired to paint Warriors bobbleheads in a bobblehead factory d. Purchasing a manicure from the local nail salon P.3 Productivity: The measure of the amount of output produced by a given amount of inputs during a specific period of time. Productivity is stated as a ratio of output per unit of input. Productivity = Output/Input Q Productivity: 1. When we increase productivity, we get more output from the same inputs. ● Example: Finding a way to get more out of every tree harvest (input) would leads to more board feet of lumber (output) per week. Brainstorm: How can producers increase productivity? Remember, you can’t change the inputs. R Increased productivity = greater economic efficiency ● Because the factors of production are scarce, we can’t produce all of the goods and services people might want. But by using these inputs more efficiently, we can produce MORE goods and services. ● So…increasing productivity promotes economic efficiency, which refers to using resources in a way that produces the maximum amount of goods and services. SLN 2 - The Factors of Production: Land, Labor, and Capital B Review Answer the following on your NG, and be prepared to share. 1. What is the difference between a “shortage” and “scarcity”? 2. What is the production equation? 3. What are the 3 factors of production? 4. What are inputs and outputs? 5. What is the productivity ratio? 6. Why do economists want to increase productivity? A DO NOW: • Brainstorm all of the types of land (natural resources), labor (people working for wages), and capital (tools, machines, and buildings used in the production process) involved in making a pencil. C As you watch the video, note the different types of land, labor, and capital involved in making a pencil. D Land E Land Resources: The “Gifts of Nature” • Land Resources = Natural resources •Air, soil, minerals, water, forests, plants, animals, fish, birds, solar energy, wind, geothermal energy, electromagnetic spectrum used to transmit communication signals F Land Resources: The “Gifts of Nature” What land resources are used to make a pencil? H Land Resources: The “Gifts of Nature” Natural resources vary in abundance & availability • Perpetual resources: widely available, and in no danger of being used up, i.e. sunlight and wind •Renewable resources: resources that can, with careful planning, be replaced as they are used •ie, forests, fresh water, and fish •ie, metals that can be recycled • Nonrenewable resources: resources that cannot be replaced by natural means; once they are gone, they are gone forever • i.e. oil, coal, and natural gas G Land Resources: The “Gifts of Nature” The value of natural resources depends on someone knowing how to plug them into the production process • ie, oil lay unused under the earth for millions of years I Labor J Labor Resources • Labor: The time and effort people devote to producing g/s in exchange for wages • Can be physical or mental • Quantity of labor available in a country depends on size of population and willingness of people to work • Quality of labor depends on how skilled the workers are (ie, their level of education, training, etc.) K We will study specifics of the “labor market” later in this course! Capital L Capital Resources • Physical capital: The tools, equipment, machinery, and factories/buildings used in the production of goods and services •Also known as capital goods •In the production equation M Examples: Tools (hammer, supercomputer, etc.), factories, office towers, warehouses, bakeries, airports, power plants, and the Internet Capital Resources Don’t confuse physical capital with other types of capital that are not part of the production equation: • Financial capital: The money used to buy the tools, equipment, etc. used in production • “Human capital ,” which we will discuss later in this course. N Capital Resources We tend to think of cars as consumer goods. But can a car be a capital good? YES! If you buy a car to deliver groceries for your grocery delivery business, then it is a capital good. (Why?) → DO NOW: Brainstorm other examples of goods that can be both a capital good and a consumer good O HOW to produce: Capital Resources vs. Labor Since the beginning of the Industrial Revolution, capital has replaced labor in one area after another. •Examples: • Textiles: Mechanical looms replace weavers • ATMs replace services of bank tellers • Robots replace assembly-line workers P.1 HOW to produce: Capital Resources vs. Labor Historically, however, technological advances in physical capital have also created new needs for labor • Examples: • Workers needed to design, produce, and maintain the new machines • Output increases and so more marketers/distributors are needed P.2 HOW to produce: Capital Resources vs. Labor Will this trend continue, or will new technologies of the 21st century lead to a major economic disruption in which AI and automation lead to massive worldwide job loss? In other words... Q Will robots or AI take your job? Putting it all together: Entrepreneurship • Sometimes considered a fourth factor of production • Entrepreneurs combine land, labor and capital in NEW ways to produce goods and services R Putting it all together: Entrepreneurship Entrepreneurs perform the following roles in the production process: 1. Innovation: Thinking of new inventions, ways to use technology and techniques to create goods and services people will want. 2. Strategies: Having a vision and making key decisions that create new businesses. 3. Risk taker: Investing time, energy, and abilities along with money… one’s own own money as well as other people’s money. 4. Spark: Energy, drive, and enthusiasm that it takes to turn ideas into reality. SLN 3 - Economic Decision Making: What do we give up when we make a choice? Opportunity costs and tradeoffs A Review: 1. Write the production equation out (include the 4th factor) 2. List the three types of “capital.” Circle the type that is in the production equation. 3. What is an example of a good that is sometimes a consumer good and sometimes a capital good? B Think about it… Some decisions are easy. You probably didn’t fret about what to eat for breakfast in the morning. Other decisions are agonizing. Talk with your neighbor about a difficult decision you had to make: ● This can be about school, work, extracurricular activities, personal life…whatever you choose to share. ● Be prepared to share with the class. c Maximizing utility Maximizing utility Economists believe that people seek to make themselves as well off as possible by maximizing the utility of their decisions. Utility: The pleasure, satisfaction, or benefit that one receives from consuming a product or service or from taking an action. We gain utility from making decisions that are likely to improve our lives. d Maximizing utility Can you think of an examples or actions that are not pleasurable that improve our lives, and therefore have utility? ● Getting a vaccination ● Studying for a test ● Ending an unhealthy relationship e Maximizing utility Sometimes maximizing utility can be difficult. ▸ When we make a choice, we often don’t have enough information to know which option will improve our lives the most. f Tradeoffs: what we give up when we choose ● Scarcity forces tradeoffs ○ Every decision we make involves giving up at least one thing for another. ○ Tradeoffs: The alternative options that you give up when you make choice. g Let’s practice Farwell has to decide which online game he will buy this month. Each game costs $60, he cannot afford more than one. His options are: 1. Battlefield 2042 2. Call of Duty Vanguard 3. Halo Infinite Farwell chooses Halo Infinite, what were his tradeoffs? h Businesses face tradeoffs as they try to maximize the utility of their land, labor, and capital. Example: California has raised its minimum wage. Joe’s Restaurant faces a choice: 1. Keep all current employees and accept lower profits; or 2. Layoff two employees but maintain current profit levels. Joe decides to keep all his employees. What is the tradeoff? i Societies face tradeoffs as well ● What to produce (ie, guns vs butter) ● How to produce (ie, “green” practices vs traditional) ● For whom to produce (ie, can people access basic health services if they can’t pay?) j Opportunity cost: The best thing we give up when we make a choice When you choose one course if action, you lose the utility, or benefits, of the alternatives you did not choose. Opportunity Cost: The value of the next best alternative you could have chosen instead. ▸ Note the word “value.” The opportunity cost is not “the thing” you give up; it’s the value of that thing to you. ▸ So opportunity costs are stated in terms of money, utility, or happiness. k Tradeoffs and opportunity costs l Tradeoffs & opportunity costs More Practice: ● How will you use your time afterschool? What is the best option (the one you will choose)? Why? What is the value of the next best option you are giving up? ● Understanding the opportunity costs of your choices can help you make better decisions. m Review: Do you remember the “thinking at the margin principle?” ▸ Thinking-at-the-margin principle: Most choices involve thinking in terms of a little more or a little less of something, rather than all or nothing. ▸ Decisions involving “how much” questions = “thinking at the margin” n Making “How much” decisions at the margin ● Marginal utility: The extra pleasure/benefit you will get from an increase of one additional unit of a good or service. ○ Amount of benefit we get from something usually depends on how much of that something we already have. Example: Post workout thirst 1st glass of water - high level of satisfaction. 2nd glass of water - still satisfying, but lower marginal utility than the first because you are not as thirsty 3rd glass of water - even lower marginal utility because you are less thirsty and your stomach is filling up. o Negative Utility: A lack of satisfaction or from consuming a product or service or taking an action. ▸ Consuming a fifth glass of water after your workout may have a negative utility by making you feel sick. Making “How much” decisions at the margin p Law of Diminishing Marginal Utility: As the quantity of a good consumed increases, the marginal utility of each additional unit decreases. ● Thirsty after a workout example illustrates this ● The value of a dollar compared to you versus Warren Buffett Making “How much” decisions at the margin qLN 4 : Economic Systems Who or what decides what you get? WHO GETS WHAT? HOW DO SOCIETIES DECIDE? The choices boil down to three fundamental questions: ▸ What will be produced? ▸ How will it be produced? ▸ For whom will it be produced? The larger and more advanced a society is, the more complex the choices may be. 1 EXAMPLES OF DILEMMAS What to produce: ▸ SUVs or electric cars? ▸ Cigarettes? How to produce: ▸ Ok to pollute? ▸ Long hours, low pay, child labor ok? For whom to produce: ▸ People who can pay $? ▸ First come, first served? ▸ Equal distribution? ▸ Need-based distribution? 2 DO NOW! Rank order these goals on your note guide in the “your priority” column. There are no right or wrong answers -- this is an opinion/values-based task ! 3 A Society’s Answers to “Who Gets What” Depends on its Economic and Social Goals Six Major Economic Goals ▸ Economic Freedom ▸ Economic Efficiency ▸ Economic Equity ▸ Economic Growth ▸ Economic Security ▸ Economic Stability Societies must weigh the tradeoffs and opportunity costs of pursuing any particular set of economic goals. Every society develops an economic system based on its economic goals 3-4TRADITIONAL ECONOMIES COMMAND ECONOMIES MARKET ECONOMIES Economic system: the way a society provides for the wants and needs of its people To Do on your Note Guide: As we progress through this presentation, mark an “X” next to the social goals that are most valued by each type of economic system. TRADITIONAL ECONOMIES: DECISION MAKING BY CUSTOM ▸ First and oldest economic system ▸ Custom and tradition dictate what to produce, how to produce it, and for whom ▸ Developed by the first clans of hunter-gatherers, today survive among indigenous peoples ▸ The highest goals of people in a traditional economy are economic stability and security 5 COMMAND ECONOMIES (EARLY): DECISION MAKING BY POWERFUL RULERS ▸ Also known as “Planned Economies” ▸ The second economic system developed by humans ▸ A powerful ruler makes decisions about what, how, and for whom to produce ▹ Examples: thousands of people conscripted to build a pyramid, irrigation wall, temple, or road ▹ Primary goal: Accumulate wealth and goods for the ruling class while preserving economic stability ▹ Earliest command economies originated in Mesopotamia, Egypt, China, and India 5,000 years ago 6 COMMAND ECONOMIES (MODERN): DECISION MAKING BY POWERFUL RULERS Later command economies emerged in nations striving for socialism/communism. Economic equity emerges as an important economic goal. 7A ▸ Socialism: A political and economic philosophy that calls for private property and the free market to be replaced with national ownership of industry and more equal distribution of income ▸ Communism: A political and economic system in which all property and wealth are owned by all members of society. Class differences disappear, and once this happens, the government is no longer needed to keep order. BTW: These ideas led to the Russian Revolution and ultimately the emergence of the first modern command economy in the Soviet Union. 7BCOMMAND ECONOMIES (MODERN): DECISION MAKING BY POWERFUL RULERS Problems with modern command economies: 8 COMMAND ECONOMIES (MODERN): DECISION MAKING BY POWERFUL RULERS ▸ Poor-quality goods ▸ Frequent shortages ▸ Limited options for consumers ▸ Lack of innovation ▸ Lack of incentives for workers All of the above makes it difficult for command economies to compete in the global marketplace MARKET ECONOMIES: DECISION MAKING BY INDIVIDUALS The newest economic system Free market economy: Workings of the market are not planned or directed ▸ Economic decisions are made voluntarily by millions of individuals guided by self interest ▸ Highest Goals: economic freedom and efficiency ▸ Guided by competition and consumer choice ▹ Producers must compete for your dollars, leaving the consumer with many choices ▹ Producers must use resources efficiently to keep prices down ▸ Capitalism is an economic and political system based on free market ideas; factors of production are privately owned. 9 MARKET ECONOMIES: THE FREE MARKET The Invisible Hand: “Every individual… neither intends to promote the public interest, nor knows how much he is promoting it… He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention… By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.” – Adam Smith, The Wealth of Nations, 1776 10 YO REMEMBER! Markets-Coordinate-TradePrinciple: Free markets usually do the best job of efficiently coordinating exchanges between buyers and sellers. 11 DO NOW! Look at the figure and summarize in your own words how the circular flow model works. THE FLOW OF MONEY AND GOODS IN A FREE MARKET ECONOMY: ▸ Three things are flowing: Factors of Production, Products (G&S), and Money ▸ These things are flowing between two entities: Households and Businesses ▸ The reason markets work so well is because one person’s output always becomes another person’s input. This flow keeps the economy running. This circular flow is driven by self-interest. 12 HOW DO MIXED ECONOMIES DIVIDE DECISION MAKING? ▸ Traditional, Market, and Command economies are theoretical extremes ▸ Socialism and Capitalism are also theoretical extremes ▸ In reality, nearly all countries today have mixed economies that fall somewhere between these extremes ▸ Mixed economy: Both government and individuals play important roles in determining the WHAT, HOW and TO WHOM of the economy. 13 Economic system ▸ Traditional ▸ Command ▸ Market ▸ Mixed COMPARING ECONOMIC SYSTEMS Who Answers the 3 ?’s ▸ Customs ▸ Central Gov. ▸ Individuals ▸ Individuals with some gov. involvement 14 17 ECONOMIC SYSTEMS Infographic or Skit 18 You have the option today of how to share your knowledge of the economic systems. You may choose one of the following: 1. Work independently and create an infographic on each of the economic systems. 2. Work in a group of THREE - FOUR, create a screenplay of a skit relating to ONE economic system. You will be submitting a screenplay of your script and your groups must: a. Perform the skit live in front of the class (opportunity for Farbucks) b. Record the skit, and let Mr. Farwell show it to class (opportunity for Farbucks) c. Record the skit, and submit to Mr. Farwell and opt out of showing it You will find the directions for each submission type here.LN 5.0 : Mixed Market Economies & The U.S. Economic System Review 1. What are the 3 fundamental economic questions that each society must answer? 2. What is meant by “economic system”? 3. What are the three basic types of economic systems? 4. Who owns the factors of production in a: ● socialist system? ● communist system: ● capitalist system: 5. What have been some major problems with modern command economies? 6. What is a “free market economy”? 7. How does the circular flow model work in a free market economy? 8. What is a “mixed economy”? 9. Most countries today have ____________________ A Review 1. What to produce, how to produce, for whom? 2. How a society chooses to answer above 3 Q’s 3. Traditional, Command (Planned), Market 4. Who owns the factors of production in a: ● socialist system: The state ● communist system: The people (collectively) ● capitalist system: Private ownership 5. Inferior products, shortages 6. Where the invisible hand coordinates trade, private citizens own the means of production 7. Circular flow moves money, goods/services and the FoP between firms and households 8. Where both individuals and the government play a role in answering the 3 Q’s 9. Most countries today have mixed economies A How Do Mixed Economies Divide Decision Making? ◇ Traditional, Market, and Command economies are theoretical extremes ◇ In reality, nearly all countries today have mixed economies that fall somewhere between these extremes ◇ Mixed economy: Both governments and individuals play important roles in determining the WHAT, the HOW, and the TO WHOM of the economy. B How Do Mixed Economies Divide Decision Making? Role of the government in mixed economies ◇ Establish institutions that enable markets to operate ￭ Legal system, stable currency system ◇ Step in when the market operates in a way society finds unacceptable, which varies by country. ￭ Child labor, anti-pollution laws, regulation of food and drugs ◇ Provide goods and services that markets do not provide or do not provide enough of ￭ Public works - Government financed projects such as dams, highways, sewer systems ￭ Fire and police protection ￭ Some governments provide free healthcare (Canada, much of Europe) or free college education C The Flow of Goods and Money in a Mixed Economy ◇ What do you notice is different about this circular flow model compared to the one for a free market economy? ◇ Involves households, firms, AND THE GOVERNMENT E F The Mixed Economy Continuum: From Free to Repressed ◇ The “mix” varies greatly from one nation to the next ￭ Most Free Countries: Hong Kong, Singapore, NZ, Switzerland and Australia G The Mixed Economy Continuum: From Free to Repressed H What are the Key Characteristics of the US Economic System? The US has a mixed market economy. The type of mixed market economy in the U.S. is often referred to as a free enterprise system. ◇ Free enterprise system: Individuals own the factors of production and make decisions about how to use those resources within the framework of the law. Seven key characteristics: 1. Economic Freedom 2. Competition 3. Equal Opportunity 4. Binding Contracts 5. Property Rights 6. Profit Motive 7. Limited Government I What are the Key Characteristics of the US Economic System? Economic freedom: Ability for individuals to act in their own best interests in the free market. ◇ We are free to work where we want, buy what we want, and sell what we want. ◇ Laissez-faire (LAY-Say Faire): a market economy that is relatively free from government intervention ￭ means “let them do” in French J What are the Key Characteristics of the US Economic System? Competition: the hallmark of the free enterprise system ◇ Creates incentives for businesses to create new and better products and ways of serving customers ◇ Encourages producers to use resources efficiently ◇ More goods and services for consumers to choose among K What are the Key Characteristics of the US Economic System? Equal Opportunity: The idea that we are born equal in terms of our rights, freedoms, and the opportunity to make the best of our talents and abilities ◇ But… women, African Americans, and other minority groups have had to fight discrimination in education and employment ◇ Despite government regulations aimed at equal employment opportunities, inequities still exist today L What are the Key Characteristics of the US Economic System? Binding Contracts: Agreements between a buyer and sellers that are enforced by the legal system ◇ Free to decide what contracts to enter into ◇ Once entered into, both sides have to fulfill their ends of the deal M What are the Key Characteristics of the US Economic System? Property Rights: the rights of those who own land, buildings, or other goods to use or dispose of them as they choose ◇ Protects against government abuse of power (historically, rulers often would seize private property for their own use) ◇ Protects physical property and intellectual property ◇ Provides incentives for people to take good care of their property and to use it efficiently N What are the Key Characteristics of the US Economic System? Intellectual property: creations of the mind that have commercial value ◇ Patent: gives an inventor the sole rights to make, use, or sell his or her invention for 20 years ◇ Copyright: gives creator of a literary or artistic work the sole right to reproduce, distribute, perform, or display the copyrighted work. ￭ Current copyrights last for 70 years beyond the life of the author. ◇ Why do we need intellectual property laws? ￭ Encourage creativity and innovation O What are the Key Characteristics of the US Economic System? Profit Motive: the desire to make a profit ◇ Profit: the money earned by a business after subtracting its costs of operation ◇ What economic principle is this closely tied to? ￭ Incentives Matter ◇ Does profit motive conflict with the goals of economic security and equity? M What are the Key Characteristics of the US Economic System? Limited Government: relatively limited role for government in the economy; government laws and agencies regulate, but do not operate, U.S. businesses Government intervention generally limited to five areas: 1. Protecting property rights and contracts 2. Promoting the general welfare 3. Preserving a competitive marketplace 4. Protecting consumers, workers, and the environment 5. Stabilizing the economy (government works to keep the economy growing steadily rather than alternating between periods of boom and bust) QLN 1 - Money & Inflation What is money? What is inflation? What causes it? A Warm-Up 1. What is money? 2. What is your understanding of inflation? 3. In what ways do you think we’re experiencing inflation today? B What is Money? ● Money is a common medium of exchange within a market. ● Clearly communicates the price of goods. ● Facilitates the storing of wealth over a long term period. C The Qualities of Money 01 Fungible 03 Portable 02 Durable 04 Recognizable 05 Stable D 01 Fungible ● Think About It: Could we replace money with diamonds and use diamonds as a form of currency? The answer is going to be no, because with diamonds we have different cuts, colors, grades, and sizes. Money must be fungible: items that are interchangeable because they are identical to each other for practical purposes. Economies need fungibility in order to work efficiently, otherwise every transaction would take ages as value is assessed for each transaction. If you’re thinking about NFT’s, that’s great! We’ll talk more about these in “LN 3 - Crypto” E 02 Durable Money needs to be durable. Durability is essential so that the currency can be reused multiple times. Currency would not hold value if it deteriorated quickly. F 03 Portable Money should be not only portable, but divisible into small quantities. ● Portable = ease of use, spread across larger areas. ● Divisible into smaller units. Brainstorm! How has money’s portability changed over time? ● Money has changed from gold > paper bills > plastic > digital G 04 Recognizable Money is recognizable. ● Easy to determine a variety of values with recognizable currency. ○ ex: $100 is a recognizable amount of money which we can identify a variety of goods and services that we could purchase with that amount of money. We also know that $100 = $100, and know that it is authentic. H 05 Stable Money has to to be stable. Instability in money causes the following issues: ● Prices varying widely both high and low. ● Inflation or deflation of the currency (more on that in a moment). ● The currency loses its value. Ideally a currency remains stable, or slowly increases over time. I J What is Inflation? Inflation is the rising of prices over time. Inflation reduces the purchase power of currency and money. Examples: ● It takes $2 today to buy what $1 would have bought in 1982. ● It takes $6 today to buy what $1 would have bought in 1962. When inflation occurs, each dollar of income will buy fewer products than before. K Inflation Affects People Differently DO NOW! On your note-guide categorize each of the following situations as either “helped” or “hurt” by inflation. 1. A man who lent out $500 to his friend in 2018 and is still waiting to be paid back. 2. A tenant who is charged $2100 in rent each year. 3. An elderly couple living off fixed retirement payments of $2000/month. 4. A man that borrowed $1,000 in 2020 and paid it back in 2022. 5. A woman who saved a paycheck from 2014 by putting it under her mattress. L Hurt or Help? Hurt by Inflation Helped by Inflation ● The man from #1 who LENT the money. ● The elderly couple living on fixed income from #3. ● The woman who stored her paycheck under her mattress. ● The man from #1 who BORROWED the money. ● The tenant from #2 ● The man from #4 who borrowed money and paid it back later. M Hurt or Help? Hurt by Inflation Helped by Inflation 1. Lenders (who lend money @ fixed interest rates) 2. People who live on fixed incomes 3. Savers 1. Debtors (people who borrow money). 2. Firms where product prices rise faster than input prices Note: Some people are unaffected by inflation who have salaries and pensions protected by a COLA (Cost of Living Adjustment). N Calculating Inflation The government tracks the prices of the same goods and services annually in what’s called a market basket. The inflation rate is the percentage change in prices over one year. MB Now - MB Base Year ________________ Base Year Market Basket Value Inflation Rate = X 100 O So What Causes Inflation? 01 The Quantity Theory Situation: The government prints too much money ● Governments that keep printing money to pay debts and stimulate consumerism end up with hyperinflation. ● Hyperinflation is when there are more “rich” people in the economy, but the same quantity of products. ● Think about it, if everyone at this very moment received a billion dollars, did we all just become wealthy? Result: Banks refuse to lend money, GDP falls. ex: Germany after WW1 Q 02 Demand - Pull Inflation Too many dollars are chasing too few goods. ● Demand has increased for goods and services, driving prices up for the entire economy. ● With a greater quantity supplied at inflated prices, firms are happy to produce more. ● Why? Because if you’re a business, you want to INCREASE supply when prices are high. Result: An overheated economy due to excessive spending. ex: 1920s America R 03 Cost-Push Inflation Higher production costs drive up prices. ● Input prices increase. ● Increasing prices at every quantity supplied (we’ll learn more about this soon). ● Can come as a result of natural market forces or taxes. ex: We experienced this in 2020-2022 S Deflation Deflation occurs when the overall prices in an economy decrease, causing an increase in the purchasing power of the currency. ● Deflation = prices falling / inflation = prices increasing ● Can be caused by: ○ Increased productivity ○ Decreased demand ○ Decrease in volume of credit in economy T How do I protect myself against inflation? LN 2 - Investing Your Savings What is investing? Investing is using money you have saved to A earn even more money What do people invest their money in? ⊳ Rare coins ⊳ Real estate ⊳ Savings Account ⊳ Stocks ⊳ Bonds ⊳ Mutual funds & ETF’s ⊳ Cryptocurrency (we will study this soon) Goal: Get back the amount you invested + interest or some other form of “return on investment” (gain) B Investing Offers Rewards – And Poses Risks ⊳ Most investments involve some sort of risk ▸ Price of rare coins or houses can go up or down… ⊳ Generally… Higher potential reward = Higher risk of losses C Investment Basics: The Power of Compounding ⊳ Compounding – ability of an investment to generate earnings that can be reinvested to earn more Compound vs. Simple Interest - Compound interest is interest paid not only on the original amount deposited in the savings account, but also on all interest earned by those savings - Simple interest is interest paid only on the original amount deposited D Example of Compound Interest ⊳ $1,000 deposited in savings account earning 6% compound interest annually ⊳ 1st year: interest = $60 ($1,000 x .06) ⊳ 2nd year: interest = $63.60 ($1060 x .06) ⊳ Total after 2 years = $1,123.60 ⊳ (vs. simple interest after 2 years = $1,120) E Doubling Your Money: The Rule of 72 ⊳ Using rule of 72 – it would take 12 years to double your initial $1,000 deposit at 6% compound interest ⊳ In another 12 years you would have $4,000 ⊳ If you started at age 20, by time you reached 68 you would have $16,000 ⊳ Compare to simple interest – you would have earned $60/year for 48 years for a total of $3,880 ⊳ Reinvesting year after year with compound interest can grow your investments surprisingly fast F Bonds Bonds: a loan in which the borrower promises to pay the lender a fixed rate of interest over a specific time period When you buy a bond, you are lending money to the issuer of the bond considered a “debt-related” security “Bond market” - for buying and selling bonds G Types of Bonds Types of Bonds: ⊳ Treasury Bonds – issued when the Federal government needs to borrow money - Treasury “bills” and “notes” are issued for shorter terms than bonds but general concept is the same ⊳ Municipal Bonds -- state & local governments issue to pay for public projects – schools, roads etc… ⊳ Corporate Bonds – corporations issue to raise money to do business H Comparing Risks and Rewards ⊳ FDIC-insured savings up to $250,000 per account - risk free, low return ⊳ Treasury bonds, bills, notes - risk free, low return ⊳ Municipal bonds - a bit riskier than Treasury bonds, but interest earned is exempt from federal and state income taxes ⊳ Corporate bonds - riskier because you lose money if corporation fails, but higher return ▸ To help investors assess risk, bonds are rated - AAA to BBB - low risk (but lower yield) - BB to C - junk bonds - high risk, high yield I Stocks ⊳ Stock represents ownership in a company ⊳ Historically the highest returns ⊳ Companies are not borrowing money – they are selling ownership ⊳ Shareholders – people who own stock ⊳ Dividend – portion of companies profits issued to shareholders - Some companies don’t pay dividends; instead, they invest profits back into company - Investors can receive cash dividends, or can choose to reinvest by buying additional shares J Comparing Risks and Rewards K Stocks: Bear vs. Bull Market L ⊳ Prices march steadily upward = Bull Market ⊳ Prices drop steadily = Bear Market ⊳ Since 1899, Bull Markets have outnumbered Bear Markets Investing in the Stock Market ⊳ Brokerage - a company that buys and sells stocks and bonds for investors - Employ stockbrokers to help investors make can carry out investment decisions ⊳ Actual buying and selling of stocks takes place in a stock market ▸ New York Stock Exchange (NYSE) - Most famous, located on Wall Street and largest. ▸ NASDAQ - Primarily composed of technology stocks ⊳ Securities and Exchange Commission: federal agency that makes sure all investors have access to the same financial information about firms issuing stock M Investing in the Stock Market N Investing in the Stock Market: IPO’s ⊳ Which companies are in stock market? Companies that have had an “initial public offering” (IPO) by offering part ownership in the company to the public via selling of stocks/shares - Some companies will not be on the exchange because they have not gone “public” - Companies must meet NYSE’s strict standards in order to participate - have at least 400 shareholders, be profitable, meet certain earnings requirements (many millions $$) - Each stock/share will have a listing price that will fluctuate each minute/hour/day P Q Investing in the Stock Market: Diversification Diversification -- investing in a wide variety of financial assets ⊳ reduces risk because poor performance by any one asset won’t wipe out your savings ▸ mutual funds are one popular way to diversify But is this the only strategy to implement in an investment portfolio? R Investing: Spreading Risk Through Asset Allocation ⊳ Financial planners advise not to invest all savings in just stocks, just bonds, or any other single type of investment S Market Index How can an investor tell how well a mutual fund is doing? ⊳ Compare the fund’s performance against a broad market index ⊳ Market index measures changes in the value of a group of stocks, bonds, or other investments ▸ Dow Jones Industrial Average (1896) - tracks stock prices of 30 large US corporations ▸ S&P – Standard & Poor tracks 500 large firms (1957) T U How to Read a Stock Table Company Name: The name of the company Stock Symbol: This is a symbol that the stock goes by on the market, you can search stocks by name or symbol. Market Exchange: This is the market exchange that the stock is traded on. Current Price: This is the current price of the stock to purchase one share. Change: The first number is the raw price difference between the current price and previous close. The number in parentheses is the percentage change. Previous Close: The last regular market price of the stock. Open: Price of the stock at the start of the current market day. Days Range: The lowest and highest price of the stock during the current trading day. 52-Week Range: The lowest and highest price of the stock within the last year. Volume: A sum of all shares bought and sold within a trading day. Market Cap: The total of all outstanding shares multiplied by the price of one sare. PE Ratio: Price-to-earnings ratio. Used to compare companies in similar industries to determine if they are undervalued vs. overvalued. Forward Dividend & Yield: The dollar amount that shareholders are paid each dividend date (usually yearly) per share. Followed by the yield which shows what percent the dividend is of one share. 1yr Target Est: An analyst prediction of what the price per share could be in the next year. Investing: Spreading Risk Through Asset Allocation ⊳ Asset allocation is a type of diversification ▸ Goal: reduce risk while maximize returns ▸ Balance stocks, bonds, cash ▸ Cash refers to high liquidity assets, such as savings deposits, cds, etc. - Depends on age (higher risk okay if you have a long time before you need the funds) V Stock Market Project Poster Requirements ⊳ Sector name at the top center ⊳ List any potential downsides of the sector (negative outlooks) ⊳ List any potential growth opportunities (positive outlooks) ⊳ What are 5 of the larger companies in your sector? ⊳ Create a graphic on your poster that represents the sector. ⊳ At the bottom of the poster, divide it into thirds and list: ▸ Company name & draw the logo ▸ What is the YTD (year to date) % change? (find this on the YTD chart of Yahoo Finance) ▸ What is a recent story about the company? ▸ Are you bullish or bearish on this company’s stock? Explain why. Gallery Walk Instructions Setup: Develop with your group a 2-3 minute elevator pitch to describe how your sector and listed stocks are doing. You want to be able to explain to your potential investors if they should invest in your sector (and stocks) or not. Use your poster information as a reference. Investors, as you change from poster to poster, ask the financial analyst “Hello, what can you tell me about ______ (their sector)? ” Gallery Walk Instructions Step 1: Sectors: Industrials, Consumer Discretionary, Consumer Staples, Energy, Utilities, and Financials. Pick TWO member to stay with the poster (the financial analyst), the REMAINING group members will be investors for this round. If you are not in those sectors, you will pick ONE member to stay with the poster, and TWO to roam as investors. Step 2: Investors, you will spend 2-3 minutes at each poster, filling out your SMP Task 2. You must visit EVERY poster. When you have visited every poster, and filled out your boxes, take a seat in the room. Gallery Walk Instructions Step 3: Swap roles! If you were an investor, now you will be a financial analyst and stand by your poster. If you were a financial analyst, you will now be an investor and roam the room. Repeat step 2. Step 4: Once the second round has completed, you will regroup by your poster, take it off the wall and return it to the front table. Find a place to sit with your group and complete the questions in SMP Section 2. You should be speaking with your group members and working together to complete this! See how your information and impressions of the sectors compares with each other. LN 2 - Investing Your Savings What is investing? Investing is using money you have saved to A earn even more money What do people invest their money in? ⊳ Rare coins ⊳ Real estate ⊳ Savings Account ⊳ Stocks ⊳ Bonds ⊳ Mutual funds & ETF’s ⊳ Cryptocurrency (we will study this soon) Goal: Get back the amount you invested + interest or some other form of “return on investment” (gain) B Investing Offers Rewards – And Poses Risks ⊳ Most investments involve some sort of risk ▸ Price of rare coins or houses can go up or down… ⊳ Generally… Higher potential reward = Higher risk of losses C Investment Basics: The Power of Compounding ⊳ Compounding – ability of an investment to generate earnings that can be reinvested to earn more Compound vs. Simple Interest - Compound interest is interest paid not only on the original amount deposited in the savings account, but also on all interest earned by those savings - Simple interest is interest paid only on the original amount deposited D Example of Compound Interest ⊳ $1,000 deposited in savings account earning 6% compound interest annually ⊳ 1st year: interest = $60 ($1,000 x .06) ⊳ 2nd year: interest = $63.60 ($1060 x .06) ⊳ Total after 2 years = $1,123.60 ⊳ (vs. simple interest after 2 years = $1,120) E Doubling Your Money: The Rule of 72 ⊳ Using rule of 72 – it would take 12 years to double your initial $1,000 deposit at 6% compound interest ⊳ In another 12 years you would have $4,000 ⊳ If you started at age 20, by time you reached 68 you would have $16,000 ⊳ Compare to simple interest – you would have earned $60/year for 48 years for a total of $3,880 ⊳ Reinvesting year after year with compound interest can grow your investments surprisingly fast F Bonds Bonds: a loan in which the borrower promises to pay the lender a fixed rate of interest over a specific time period When you buy a bond, you are lending money to the issuer of the bond considered a “debt-related” security “Bond market” - for buying and selling bonds G Types of Bonds Types of Bonds: ⊳ Treasury Bonds – issued when the Federal government needs to borrow money - Treasury “bills” and “notes” are issued for shorter terms than bonds but general concept is the same ⊳ Municipal Bonds -- state & local governments issue to pay for public projects – schools, roads etc… ⊳ Corporate Bonds – corporations issue to raise money to do business H Comparing Risks and Rewards ⊳ FDIC-insured savings up to $250,000 per account - risk free, low return ⊳ Treasury bonds, bills, notes - risk free, low return ⊳ Municipal bonds - a bit riskier than Treasury bonds, but interest earned is exempt from federal and state income taxes ⊳ Corporate bonds - riskier because you lose money if corporation fails, but higher return ▸ To help investors assess risk, bonds are rated - AAA to BBB - low risk (but lower yield) - BB to C - junk bonds - high risk, high yield I Stocks ⊳ Stock represents ownership in a company ⊳ Historically the highest returns ⊳ Companies are not borrowing money – they are selling ownership ⊳ Shareholders – people who own stock ⊳ Dividend – portion of companies profits issued to shareholders - Some companies don’t pay dividends; instead, they invest profits back into company - Investors can receive cash dividends, or can choose to reinvest by buying additional shares J Comparing Risks and Rewards K Stocks: Bear vs. Bull Market L ⊳ Prices march steadily upward = Bull Market ⊳ Prices drop steadily = Bear Market ⊳ Since 1899, Bull Markets have outnumbered Bear Markets Investing in the Stock Market ⊳ Brokerage - a company that buys and sells stocks and bonds for investors - Employ stockbrokers to help investors make can carry out investment decisions ⊳ Actual buying and selling of stocks takes place in a stock market ▸ New York Stock Exchange (NYSE) - Most famous, located on Wall Street and largest. ▸ NASDAQ - Primarily composed of technology stocks ⊳ Securities and Exchange Commission: federal agency that makes sure all investors have access to the same financial information about firms issuing stock M Investing in the Stock Market N Investing in the Stock Market: IPO’s ⊳ Which companies are in stock market? Companies that have had an “initial public offering” (IPO) by offering part ownership in the company to the public via selling of stocks/shares - Some companies will not be on the exchange because they have not gone “public” - Companies must meet NYSE’s strict standards in order to participate - have at least 400 shareholders, be profitable, meet certain earnings requirements (many millions $$) - Each stock/share will have a listing price that will fluctuate each minute/hour/day P Q Investing in the Stock Market: Diversification Diversification -- investing in a wide variety of financial assets ⊳ reduces risk because poor performance by any one asset won’t wipe out your savings ▸ mutual funds are one popular way to diversify But is this the only strategy to implement in an investment portfolio? R Investing: Spreading Risk Through Asset Allocation ⊳ Financial planners advise not to invest all savings in just stocks, just bonds, or any other single type of investment S Market Index How can an investor tell how well a mutual fund is doing? ⊳ Compare the fund’s performance against a broad market index ⊳ Market index measures changes in the value of a group of stocks, bonds, or other investments ▸ Dow Jones Industrial Average (1896) - tracks stock prices of 30 large US corporations ▸ S&P – Standard & Poor tracks 500 large firms (1957) T U How to Read a Stock Table Company Name: The name of the company Stock Symbol: This is a symbol that the stock goes by on the market, you can search stocks by name or symbol. Market Exchange: This is the market exchange that the stock is traded on. Current Price: This is the current price of the stock to purchase one share. Change: The first number is the raw price difference between the current price and previous close. The number in parentheses is the percentage change. Previous Close: The last regular market price of the stock. Open: Price of the stock at the start of the current market day. Days Range: The lowest and highest price of the stock during the current trading day. 52-Week Range: The lowest and highest price of the stock within the last year. Volume: A sum of all shares bought and sold within a trading day. Market Cap: The total of all outstanding shares multiplied by the price of one sare. PE Ratio: Price-to-earnings ratio. Used to compare companies in similar industries to determine if they are undervalued vs. overvalued. Forward Dividend & Yield: The dollar amount that shareholders are paid each dividend date (usually yearly) per share. Followed by the yield which shows what percent the dividend is of one share. 1yr Target Est: An analyst prediction of what the price per share could be in the next year. Investing: Spreading Risk Through Asset Allocation ⊳ Asset allocation is a type of diversification ▸ Goal: reduce risk while maximize returns ▸ Balance stocks, bonds, cash ▸ Cash refers to high liquidity assets, such as savings deposits, cds, etc. - Depends on age (higher risk okay if you have a long time before you need the funds) V Stock Market Project Poster Requirements ⊳ Sector name at the top center ⊳ List any potential downsides of the sector (negative outlooks) ⊳ List any potential growth opportunities (positive outlooks) ⊳ What are 5 of the larger companies in your sector? ⊳ Create a graphic on your poster that represents the sector. ⊳ At the bottom of the poster, divide it into thirds and list: ▸ Company name & draw the logo ▸ What is the YTD (year to date) % change? (find this on the YTD chart of Yahoo Finance) ▸ What is a recent story about the company? ▸ Are you bullish or bearish on this company’s stock? Explain why. Gallery Walk Instructions Setup: Develop with your group a 2-3 minute elevator pitch to describe how your sector and listed stocks are doing. You want to be able to explain to your potential investors if they should invest in your sector (and stocks) or not. Use your poster information as a reference. Investors, as you change from poster to poster, ask the financial analyst “Hello, what can you tell me about ______ (their sector)? ” Gallery Walk Instructions Step 1: Sectors: Industrials, Consumer Discretionary, Consumer Staples, Energy, Utilities, and Financials. Pick TWO member to stay with the poster (the financial analyst), the REMAINING group members will be investors for this round. If you are not in those sectors, you will pick ONE member to stay with the poster, and TWO to roam as investors. Step 2: Investors, you will spend 2-3 minutes at each poster, filling out your SMP Task 2. You must visit EVERY poster. When you have visited every poster, and filled out your boxes, take a seat in the room. Gallery Walk Instructions Step 3: Swap roles! If you were an investor, now you will be a financial analyst and stand by your poster. If you were a financial analyst, you will now be an investor and roam the room. Repeat step 2. Step 4: Once the second round has completed, you will regroup by your poster, take it off the wall and return it to the front table. Find a place to sit with your group and complete the questions in SMP Section 2. You should be speaking with your group members and working together to complete this! See how your information and impressions of the sectors compares with each other. LN 3 - Cryptocurrency Warm-Up 1. Have you heard of crypto before? Where did you hear about it from? 2. Are there any crypto projects/coins you have heard of? If so, which ones? 3. What questions do you have about crypto? A What is Cryptocurrency? Cryptocurrency is a digital / virtual currency that is secured by cryptography. Cryptography is the field of securing communications from outside (unintended) individuals. Cryptocurrency is focused on a decentralized blockchain network. ● Decentralized meaning it is not controlled by a central authority (such as a company, exchange, or government). ● Blockchain meaning a database of ledgers that is publicly accessible. B 5-Levels of Cryptocurrency C Why Do We Need Crypto? ● Cryptocurrency has many use cases, varying by each token and the utility it brings. ○ To determine a tokens utility, you should read what is called the white paper. ● Bitcoin: Currency & store of value ● Ethereum: Decentralized application platform (dApps for short) ● Additional cryptocurrencies exist, each either solving a unique problem, competing with others to solve similar problems or enhancing an existing crypto platform. D Snapshot: Bitcoin ● Bitcoin was developed to send electronic payments on the internet between individuals in an open source ledger, that is decentralized and quick. ○ Bitcoin has a fixed number of blocks that can be mined. ○ The number of available blocks decreases every 4 years. ● The way in which BTC was coded means that no one person or authority can control it (decentralized). ○ There can only ever be 21 million BTC’s in existence. ○ Bitcoin is incredibly divisible. ■ IE: You do not need to buy 1 BTC. You can buy a fraction of a BTC. DO NOW! Because Bitcoin has a fixed supply, and the distribution of BTC decreases every 4 years. How do you think this may affect price? E itcoin Simplified F Snapshot: Ethereum ● Ethereum was developed to work as a decentralized network that powers specialized digital applications. ○ These applications are enhanced by what are called “smart contracts.” ■ Smart contracts allow two parties to agree to conditions. These conditions are hard-coded into Ethereum, meaning that Ethereum is incredibly secure. ● Unlike Bitcoin, Ethereum is NOT mined, but has a shared pool that “generates” more Eth. ● Unlike Bitcoin, Ethereum has a public founder: Vitalik Buterin. ● Unlike Bitcoin, Ethereum is still under active development and currently employs the largest amount of developers within the industry. G Crypto Scams & Fraud 3rd largest cryptocurrency by market cap at the time it collapsed which stands as the largest crypto crash in history. ● Created to compete with BTC and Ethereum ● Also had a “sister-coin” meant to be a stable-coin ● Red Flag! This stable coin was NOT backed by the dollar ● $2billion worth of UST was unstaked, caused liquidation of more UST, which caused the algorithm to try and keep up, reducing the price of UST to below $1 ● Panic followed, resulting in $60billion wiped out Tera Luna H FTX was formerly a centralized cryptocurrency exchange who rather than backed their holdings with stable coins pegged to the dollar, they used their own native token FTT (sound familiar?) ● Article reports that FTX was not backed by stablecoins, leads to panic ● Other institutions, and investors begin to pull crypto holdings of FTX which causes a liquidity crisis ● FTX seeks bailout help from rival exchange Binance, Binance initially agreed before backing out several days later ● FTX is hacked, losing even more assets ● SBF resigns from FTX and files for Chapter 11 bankruptcy ● Lawsuit against many celebrities who promoted FTX on TV (Steph Curry, Shaquille O’Neal, Shohei Ohtani, Naomi Osaka, Larry David, and Kevin O’Leary) ● SBF arrested in the Bahamas (FTX HQ) on fraud charges, extradited to the U.S., released on bail of $250 million. Is on house arrest in Palo Alto. Sam Bankman Fried & FTX I Investing in Crypto ● Can purchase crypto on centralized exchanges such as Coinbase, Gemini, Kraken and more. ● Additional security can be taken with crypto to put assets on to a “cold wallet” ● What is the irony of a centralized exchange within the field of cryptocurrency? K Still Feeling Lost? ● Cryptocurrency is an emerging field. ○ Can be confusing due to technical terms, and the fluid nature of the industry. ● How can you bridge the gap between confusion and understanding? 1. Invest yourself into the crypto project. Explore your classmates’ projects to learn more about emerging technologies within crypto. 2. Conduct outside research from sources. a. Be aware that crypto resources are scarce. I recommend the following for academic purposes only: CoinBureu via Youtube Coindesk News Articles Cointelegraph News Articles L LN 3 - Cryptocurrency Warm-Up 1. Have you heard of crypto before? Where did you hear about it from? 2. Are there any crypto projects/coins you have heard of? If so, which ones? 3. What questions do you have about crypto? A What is Cryptocurrency? Cryptocurrency is a digital / virtual currency that is secured by cryptography. Cryptography is the field of securing communications from outside (unintended) individuals. Cryptocurrency is focused on a decentralized blockchain network. ● Decentralized meaning it is not controlled by a central authority (such as a company, exchange, or government). ● Blockchain meaning a database of ledgers that is publicly accessible. B 5-Levels of Cryptocurrency C Why Do We Need Crypto? ● Cryptocurrency has many use cases, varying by each token and the utility it brings. ○ To determine a tokens utility, you should read what is called the white paper. ● Bitcoin: Currency & store of value ● Ethereum: Decentralized application platform (dApps for short) ● Additional cryptocurrencies exist, each either solving a unique problem, competing with others to solve similar problems or enhancing an existing crypto platform. D Snapshot: Bitcoin ● Bitcoin was developed to send electronic payments on the internet between individuals in an open source ledger, that is decentralized and quick. ○ Bitcoin has a fixed number of blocks that can be mined. ○ The number of available blocks decreases every 4 years. ● The way in which BTC was coded means that no one person or authority can control it (decentralized). ○ There can only ever be 21 million BTC’s in existence. ○ Bitcoin is incredibly divisible. ■ IE: You do not need to buy 1 BTC. You can buy a fraction of a BTC. DO NOW! Because Bitcoin has a fixed supply, and the distribution of BTC decreases every 4 years. How do you think this may affect price? E itcoin Simplified F Snapshot: Ethereum ● Ethereum was developed to work as a decentralized network that powers specialized digital applications. ○ These applications are enhanced by what are called “smart contracts.” ■ Smart contracts allow two parties to agree to conditions. These conditions are hard-coded into Ethereum, meaning that Ethereum is incredibly secure. ● Unlike Bitcoin, Ethereum is NOT mined, but has a shared pool that “generates” more Eth. ● Unlike Bitcoin, Ethereum has a public founder: Vitalik Buterin. ● Unlike Bitcoin, Ethereum is still under active development and currently employs the largest amount of developers within the industry. G Crypto Scams & Fraud 3rd largest cryptocurrency by market cap at the time it collapsed which stands as the largest crypto crash in history. ● Created to compete with BTC and Ethereum ● Also had a “sister-coin” meant to be a stable-coin ● Red Flag! This stable coin was NOT backed by the dollar ● $2billion worth of UST was unstaked, caused liquidation of more UST, which caused the algorithm to try and keep up, reducing the price of UST to below $1 ● Panic followed, resulting in $60billion wiped out Tera Luna H FTX was formerly a centralized cryptocurrency exchange who rather than backed their holdings with stable coins pegged to the dollar, they used their own native token FTT (sound familiar?) ● Article reports that FTX was not backed by stablecoins, leads to panic ● Other institutions, and investors begin to pull crypto holdings of FTX which causes a liquidity crisis ● FTX seeks bailout help from rival exchange Binance, Binance initially agreed before backing out several days later ● FTX is hacked, losing even more assets ● SBF resigns from FTX and files for Chapter 11 bankruptcy ● Lawsuit against many celebrities who promoted FTX on TV (Steph Curry, Shaquille O’Neal, Shohei Ohtani, Naomi Osaka, Larry David, and Kevin O’Leary) ● SBF arrested in the Bahamas (FTX HQ) on fraud charges, extradited to the U.S., released on bail of $250 million. Is on house arrest in Palo Alto. Sam Bankman Fried & FTX I Investing in Crypto ● Can purchase crypto on centralized exchanges such as Coinbase, Gemini, Kraken and more. ● Additional security can be taken with crypto to put assets on to a “cold wallet” ● What is the irony of a centralized exchange within the field of cryptocurrency? K Still Feeling Lost? ● Cryptocurrency is an emerging field. ○ Can be confusing due to technical terms, and the fluid nature of the industry. ● How can you bridge the gap between confusion and understanding? 1. Invest yourself into the crypto project. Explore your classmates’ projects to learn more about emerging technologies within crypto. 2. Conduct outside research from sources. a. Be aware that crypto resources are scarce. I recommend the following for academic purposes only: CoinBureu via Youtube Coindesk News Articles Cointelegraph News Articles L ↗ What goes up must come down Business Cycles What is a Business Cycle? Business Cycle - the natural rise and fall of economic growth that occurs over time in an economy. ● The cycle is a useful tool for analyzing the economy. ● It can also help you make better financial decisions. A The Four Phases of the Business Cycle: ● Expansion - period of time when economic activity generally increases from month to month ○ typically lasts 3 - 5 years ○ stock market prices are climbing ● Peak - the point where expansion transitions into contraction; economic activity reaches its highest level and starts to decline B The Four Phases of the Business Cycle: ● Contraction - period of general economic decline marked by a falling economic output and rising unemployment ○ average 10 months (but Great Depression was 43 months) ○ stock market prices are falling ● Trough - lowest point of a contraction; marks a turning point where new expansion begins C It’s USEFUL! If you understand where we are in the business cycle, you can make smarter decisions about how to invest your money. For example, some people view bonds as a safer investment than stocks during an economic crisis. D Is this just academic knowledge, or is it useful to understand business cycles? Let’s Focus On… Contractions Some contractions last longer than others. We have special terms for contractions that last for a longer period of time. Recession ● often described as a decline in economic activity lasting at least two quarters (there are 4 economic quarters in each year: Jan-Mar, Apr-Jun, Jul-Sep, Oct-Dec) ● BUT a committee of 8 economists (“Business Cycle Dating Committee”) actually has to look at the economy as a whole and decide whether to declare a recession when there is an economic slowdown. They look at the duration of the decline as well as how severe and widespread it has been. Bottom line: ● recessions vary in severity ● no “set rules” but usually involves a drop in consumer income, employment, manufacturing, retail sales & overall economic output E.1 Let’s Focus On… Contractions Depression - more severe than a recession; prolonged economic downturn characterized by a plunging economic output and extremely high unemployment E. 2 What Causes Contractions? In general, why does an expanding economy stop growing and start shrinking? No single answer, but some possible triggers are: ● a loss of consumer confidence that decreases demand ● a negative shock to the economy, such as a terrorist attack, a trade war or a pandemic ● a rise in interest rates, which makes it harder for consumers and firms to borrow money ● a shortage of raw materials, which can cause price increases F Recessions Explained This video does a good job of showing how recessions happen in simple, visual terms. G As you view the video, jot down answers to the following questions on your note guide: 1. What does the narrator mean when he refers to the “fear fairy”? 2. How, specifically, do consumers, producers, and lenders behave when the fear fairy strikes? 3. What does the narrator mean when he refers to the “confidence fairy”? Video is 5:17 Remember the circular flow of the economy? Simply put, recessions disrupt the flow. When money and g/s start flowing more slowly in one part of the economy, there is a domino effect to other parts of the economy because of the circular flow. H Example: after the initial event that triggers the contraction, consumers react by cutting back on spending → sales slow, businesses begin to see profits fall → firms cut back production and lay off workers → those workers now have less money and cut back on spending → and so on... What is the role of government in all of this? The U.S. government strives to promote economic stability and economic growth through fiscal policy and monetary policy Fiscal policy: the federal government’s attempt to stabilize the economy through taxing and spending ○ Example: During the 2008 recession, the government tried to use tax rebates to encourage consumers to spend more money. The IRS mailed $600+ to 130 million households. The nation’s leaders encouraged Americans to spend their stimulus checks on consumer g/s in order to “jump start” the circular flow. ○ Example: During the New Deal in the 1940s, the government tried to stabilize the economy by spending on huge government projects, which created lots of new jobs and thereby pumped money into the economy I So if that’s fiscal policy, then what is monetary policy? Monetary Policy: refers to how the government’s central bank manages the supply of money and interest rates in an economy in order to influence economic output, employment, and prices ● The central bank in the U.S. is the Federal Reserve System J Where are we in the business cycle right now? K.1 From June 2009 through February 2020, the U.S. experienced the longest period of economic expansion in history: 128 months. Then the economy started contracting… SHARPLY. Where are we in the business cycle right now? K.2-A Most economists agree that a contraction began in February 2020, the economy hit its trough in April 2020. Then it started to expand again. Two-month recession. Shortest on record! However, this doesn’t mean our economy was healthy because the trough was so low compared to other historical economic downturns. (Real GDP measures economic growth over time) Where are we in the business cycle right now? According to traditional definitions, we are in an expansion phase because our economic output continues to increase. The growth trend depicted below continued in the third quarter of 2023. (GDP is a measure of economic output) K.2-B However, there are some issues with our economy right now (ie, high interest rates, concerns about the labor market) and experts still worry that a recession could happen in the next 12 months. Case Study: COVID-19 Recession Watch this video to learn how these economic concepts played out during the COVID-19 crisis. (The video was made in March 2020, but the ideas in it have held true over the months.) L As you view the video, jot down answers to the following questions: 1. What is a “demand shock”? 2. What is a “supply” shock”? 3. What is a “financial shock”? 4. Which type of shock(s) is the U.S. economy experiencing due to COVID-19? 5. Usually the government uses fiscal and monetary policy to boost the economy in times of recession. Why are those tools less likely to be effective in this pandemic situation? Video is 3:39 Case Study: COVID-19 Recession Watch this video to learn how these economic concepts played out during the COVID-19 crisis. (The video was made in March 2020, but the ideas in it have held true over the months.) L 5. Usually the government uses fiscal and monetary policy to boost the economy in times of recession. Why are those tools less likely to be effective in this pandemic situation? Video is 3:39 Fiscal Policy Response to COVID-19 Fiscal Policy Response (taxing and spending) by U.S. Government included the following (across 4 COVID relief laws): ● $784 billion to individuals, including unemployment benefits, paid leave, and direct cash payments (including the $1400 cash payment to many Americans in the most recent aid package) ● $810 billion in aid to small businesses ● $532 billion to big corporations, much in the form of loans that are expected to be repaid ● $513 billion in tax breaks and tax changes intended to help all businesses M Monetary Policy Response to COVID-19 Monetary Policy Response by U.S. Government included: ● Lower interest rates ● Steps to improve flow of credit/loans ● Assistance to people with federal loans, including suspending foreclosures and evictions, accepting late payments, and waiving late fees N LN 2 -Taxes & Taxation Taxes: The Price of Civilization ● A tax is a mandatory payment to the government ● Taxes have been around since the earliest civilizations ○ Taxes are the “price of civilization” -- Oliver Wendell Holmes, Jr. ○ “In this world, nothing is certain but death & taxes” -- Ben Franklin A Americans are wary of taxes ● Our nation was founded on resentment of British taxes ● The Articles of the Confederation (the first U.S. constitution) did not give any taxing power to the federal government. This did not go well. ● Ultimately, the U.S. Constitution embraced the necessity of taxes. Our federal government collects taxes, including a federal income tax B How Are Taxes Used? ● Governments use the money they gain from taxes (“tax revenue”) to fund government activities ● Taxes can also be used to influence behavior ○ Example: The U.S. government taxes the purchase of cigarettes and alcohol (“sin taxes”), which may discourage use of those products ● Taxes can be used as a form of “income redistribution” ○ Example: Our government taxes the income of the wealthy and then uses some of that tax revenue to provide financial assistance to people living in poverty C Principles of Taxation In The Wealth of Nations, Adam Smith established four guiding principles of taxation: ● Equity: Taxes should be fair. ● Certainty: Time, manner, and quantity of tax should be “clear and plain” ● Convenience: Tax system should not be complicated ● Efficiency: Produce maximum gain for government with minimal possible loss to taxpayers D Principles of Taxation... Of course, the idea of equity is … complicated. Economists agree that the tax system should be fair, but they disagree over how to achieve fairness. People often reference the following principles when discussing the equity issue: ● Ability to Pay Principle: People with higher incomes should pay more tax (ie, the federal income tax follows this principle) ● Benefits Received Principle: People who benefit from a particular government program should pay for it (ie, highway and bridge tolls) E “Nuts & Bolts” of Taxation Two Important Tax Terms: ● Tax Base: the monetary value of the thing that is taxed ○ Example: The government levies a property tax on Talia’s home. The home is valued at $100,000. So, the tax base is $100,000. ● Tax Rate: the percentage of the tax base that is paid in tax. ○ Example: Talia pays $1,000 in property tax. Her tax rate is 1%. F “Nuts & Bolts” of Taxation Three Basic Tax Structures: ● Proportional ● Progressive ● Regressive Watch this video to learn the basics, then we’ll review the details on subsequent slides. G.1 9 The Proportional Tax Structure is also known as a “Flat Tax” ● Critics argue that it’s unfair for rich and poor to pay the same rate. Example: John has only $40,000 in income leftover after paying $10,000, but Jane has $160,000 in income leftover after paying her $40,000. ● Advocates say (1) it’s inherently fair, and (2) it’s easy to calculate G.2 ● Example: 10% sales tax on a car purchase of $50,000 G.3 ● The idea here is that wealthy people have more money leftover after paying for necessities, so they can afford to pay more taxes. ● Example: Federal income tax G.4 Types of Taxes 13 There are many types of taxes, and many ways to categorize them. ● Most taxes can be divided into 1 of 3 buckets: taxes on your earnings, taxes on goods or services that you purchase, or taxes on your property ● Which level of government imposes the tax: federal, state, and/or local? ● Is the tax structure progressive, proportional, or regressive? H The Many Types of Taxes Here are 8 of the most common taxes: Individual Income Tax Payroll Tax Corporate Income Tax Property Tax Sales Tax Excise Tax Luxury Tax User Fees and Taxes Estate and Inheritance Tax I 15 Do Now: Finish your note guide using the slides in Schoology. 16 Individual Income Taxes This taxes the earnings of individuals Federal and state income tax is withheld from each paycheck ● When you are hired, you fill out IRS Form W-4 so that your employer can estimate how much to withhold from each paycheck We will take a closer look at federal income tax in our next slide presentation. What is Taxed: Earnings of Individuals Levied by: Federal, state & local governments Structure: Progressive -- rates rise with income J.1 17 J.2 (“Progressive”) 18 J.3 J.4 Payroll Taxes If you are employed, then some of these taxes will be taken from your earnings and your employer will pay some of them. Your portion will be taken directly from your paycheck. Federal payroll taxes include Medicare and Social Security. These are listed as “FICA” on your pay stub. For most people, these 2 taxes take a total of more than 7% of their earnings. We will learn more about these in our next slide presentation. In California, one payroll tax is State Disability Insurance, which can take as much as $1539 of your earnings (depending on your income) What is Taxed: Earnings of Individuals Levied by: Federal & state governments Structure: Varies. Medicare is progressive. Social Security is regressive. K Corporate Income Tax This taxes the earnings of businesses. Corporate income tax is the largest business tax ● Federal income tax reform of 2017 cut the corporate income tax rate from 35% to 21% (HUGE reduction!) Often the cost of corporate taxes are passed on to consumers in the form of higher prices and to employees in the form of lower wages What is Taxed: Earnings of Corporations Levied by: Federal, state & local governments Structure: Progressive -- rates rise with income. L.1 22 L.2 Property Tax This is a huge source of revenue for state and local governments. The tax is levied on “real property” (land and buildings). ● Usually taxed as a fixed percentage of the value of the property (about 1% in Contra Costa County). ● This can really add up… you would pay $9000 per year in tax on a house that is worth $900,000; this averages to $750 per month The value of the property is calculated by an assessor (a public official) each year. Assessed value changes as the market changes. What is Taxed: Property Levied by: State and local governments Structure: Regressive M.1 24 M.2 Sales Tax ● This is a major source of state and local revenue. ● Sales tax rate in CA: 7.25% ● Sales tax rate in San Ramon: 8.25% ● Sale of food for home consumption (groceries) and prescription medications are often exempted from sales tax since those are necessities What is Taxed: Purchases of certain goods and services Levied by: State and local governments Structure: Regressive -- the poor pay a larger fraction of their income in sales taxes than do the wealthy N.1 26 N.2 27 N.3 Excise and Luxury Taxes ● Taxes the sale of certain goods and services ● Called “sin taxes” when applied to alcohol, cigarettes, gambling, soda, etc. ○ This can be a way for government to discourage behaviors that can impose costs on society ● Luxury purchases that may be taxed are fur coats, yachts, private jets, etc. This is based on the ability-to-pay principle. What is Taxed: Purchases of certain goods and services Levied by: Federal, state and local governments Structure: Excise tax -- regressive. Luxury tax -- progressive. O User Fees & Tolls ● Fixed charges for the use of certain public facilities and services, as well as for certain permits and licenses ○ Examples: national parks entrance fees, public highway tolls, bridge tolls, public pools ● Follows the benefits-received principle What is Taxed: Certain goods and services Levied by: Federal, state and local governments Structure: Proportional -- rates are the same for all. P Estate and Inheritance Taxes ● This tax is imposed on assets left to heirs by someone who dies. ● For 2022, federal estate tax is only imposed on estates greater than $12,060,000. What is Taxed: Property Levied by: Federal and state governments Structure: Proportional -- rates are the same for all. Q Wow , that’s a lot of taxes! So how much does the average American pay in taxes each year? This is hard to estimate due to progressive tax policies (people paying different rates), and varying amounts of state taxation. However, here are few facts to mull over: ● The average single American contributed 29.8% of their earnings to 3 taxes in 2019 -- federal income tax, Social Security tax, and Medicare tax. ● Considering this doesn’t include state income tax, property tax, or sales tax… most Americans are paying a lot more than 29.8% of their income to taxes! R LN 3 - Credit What is a credit score and why is it important? Is credit card debt a problem for Americans? How can I successfully manage credit card debt? Warm-Up Do you think Credit Cards are something important to have? Why or why not? Think about the costs and benefits. Bank Services: Loans to Borrowers Credit = Buy Now, Pay Later ● Bank loans to borrowers are a form of credit ● Credit cards are a form of credit Payments on credit are divided into 2 parts: ● Principal: the amount you are borrowing ● Interest: additional money paid regularly at a particular rate in exchange for the use of the borrowed money Who Gives Credit? Various financial institutions, including: ● commercial banks ● savings and loans associations ● credit unions ● finance companies (“last chance,” high interest rates) B How does credit work? • You must fill out an application • Banks will only loan to you if you have a good credit score – a number, typically between 300 and 850, intended to help potential lenders assess whether you are likely to repay a loan – based on information contained in your credit report, which summarizes your credit history • 3 companies are the primary providers of credit reports: Equifax, Experian, Transunion – they collect this information about you without your permission – take a moment to view these sample credit reports. What types of information appear on the reports? C What Affects Your Credit Score? D.1 Factors that affect credit scores: ● Payment History: late or missed payments negatively impact credit scores ● Credit utilization rate: lenders like to see that you are only using about 30% of the credit that you have available ● Number of accounts: lenders like to see a demonstrated history of managing multiple credit accounts; they don’t like to see a lot of new accounts opened in a short period of time. ● Negative information: bankruptcies, foreclosures, civil court judgments, collection accounts, etc. negatively affect your credit score How to Establish a Credit History D. 2 ● Open a joint account with someone who has good credit. This is a good way to build credit history. ● Open a credit card and use it to make purchases you can repay immediately. Pay the balance in full every month. It’s okay to start with a card that has a low credit limit. You can request a higher credit limit after a few months. ● Become an authorized user on the credit card of someone who already has good credit. This won’t establish your credit history as quickly as the methods above, but it’s still a step in the right direction. Protecting your credit score E.1 Identity theft occurs when someone uses your personally identifying information, like your name, Social Security number, or credit card number, without your permission in order to commit fraud or other crimes. Identity theft can have major, negative impacts on your credit score and on your ability to obtain credit. Protecting your credit score E.2 Tips for Preventing and Detecting Identity Theft: 1. Read credit card and bank statements carefully and often 2. Shred any documents with personal and financial information 3. Try not to post your full name and email address on social media 4. Only give out your social security number when filling out government documents, applying for a job, or applying for a loan 5. Review each of your 3 credit bureau reports at least once a year Protecting your credit score E.3 You can also ask one of the three credit bureaus to place a free fraud alert on your account. They have to put the alert on your credit report and ask the other two credit bureaus to do so. The alert lasts one year. The alert makes it harder for an identity thief to open more accounts in your name, and a business must verify your identity before issuing credit. Some people pay for special identity theft protection services that monitor your credit and alert you when there may be an issue, and that help you recover from any issues that arise. How do credit cards work? • Use the card for purchases • Receive a monthly statement from your credit card – Balance: what you owe • If you pay the full balance by the due date, then you will be charged no interest!! • If you don’t pay the full balance, then you will be charged interest on the portion of your balance that you carry over to next month. This interest will be added to your balance for next month. – Minimum payment: the minimum $ amount you MUST pay this month • If you don’t pay at least the minimum payment, then you will be charged a penalty and your interest rate may go up; you may also be charged a late fee (usually around $35) • The average annual rate of interest on credit cards is around 17% for existing accounts. It’s higher for new accounts. F How Credit Card Debt Adds Up G.2 If you make only the minimum monthly payment suggested by your credit card statement on a $1000 purchase, by the time you pay off your $1,000.00 balance, you will have made 58 payments over 4.83 years and you will have paid $460.81 in interest charges! Credit: The Good, The Bad, The Ugly... Good Debt vs. Bad Debt Good debt: low-interest debt that increases your net worth and/or helps generate more wealth. Bad debt: high-interest debt that doesn’t increase wealth or is used to purchase goods and services that have no lasting value H Would you classify credit card debt as good debt or bad debt? Sources: USA Today (2017) and Nerdwallet (2019) I ● The average U.S. household credit card debt is over $16,000 ● Average individual credit card debt has increased by 9.5% since 2014 ● 10% of Americans with credit card debt say it will take them longer than 10 years to pay it off J K Please Watch This Video! It’s 3 minutes and there is a line in this video that has become the “most quoted” Econ phrase in my course! L “If you live like a professional while in college, then you’ll live like a student when you get out.” Nuts & Bolts: Some Important Credit Card Terms Interest Rates • APR: This stands for “annual percentage rate.” This is the annual interest rate that you will be charged on any balances that you carry. • Monthly Interest Rate: Divide your APR by 12 to calculate your monthly interest rate. Example: if your APR is 24%, then your monthly interest rate is 2%. • Cash Advance APR: If you use your credit card to take out cash (ie, you go to an ATM and withdraw cash using your credit card), you may be charged a special interest rate that is higher than your APR. Bottom line: Try to avoid taking out cash with your credit card. • Cash Advance Fee: You will be charged a special fee for using your credit card to take out cash, usually around 3 to 5% of the cash your withdraw. This is in addition to the higher interest rate on cash advances. Bottom line: Try to avoid taking out cash with your credit card. N Nuts & Bolts: Some Important Credit Card Terms • Penalty APR: If you miss a credit card payment, you may be charged a Penalty APR that is higher than your normal APR. This Penalty APR can be in effect for several months or indefinitely. Bottom line: Don’t miss payments. • Intro 0% Period: Some credit cards offer an introductory period of several months where you pay no interest on your purchases. • Credit Limit: The maximum amount of money you can charge on your credit card. • Autopay: Have your credit card account linked to your bank account and have payments automatically withdrawn every month; this is a great way to avoid late or missed payments. • Rewards: Many credit cards offer reward programs that can earn cash back, points and miles for purchases. O Directions Decide: A. Work solo and do it on a piece of paper B. Work in a group of 2-3 max and do it on a poster 1. View action items in google classroom 2. Look at your action cards, and rank them on your poster from “most important to do to least important.” Categorize these under “DO” (KEEP IT TO 10 cards) Cont’d Directions Cont’d 3. Some cards SHOULD NOT be used. Put these in a separate category named “DON’T” (KEEP IT TO 5) 4. Once you have decided on a ranking and categorization with your group, you will do the following: a. Title your poster “x’s (x being the name of an fictional character of your choice) credit scenario. b. Illustrate this individual on your poster respectfully. c. Make your two categories “DO” and “DON’T” d. Write your action cards appropriately by rank in each category. e. Feel free to add any additional visuals to your poster if you have extra time. Directions Cont’d 5. On the back of the poster respond to the following questions with your group: A. Why did you prioritize the first 3 cards as your top priority? B. Explain your group’s reasoning to the first 3 cards as your DON’T category.