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Credit_and_Credit_Cards.asfCredit_and_Credit_Cards.asf

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•Credit refers to the ability to borrow money.

•Some forms of credit commonly used by consumers are car loans, home mortgage

loans and credit cards.

•Firms also use credit regularly, either by borrowing from a bank or issuing corporate bonds.

•Government also uses credit when it needs to borrow money to finance a budget deficit.

•Those who can borrow moderate or large sums of money at a reasonable rate of interest are sometimes said to have good credit, while those who cannot borrow such amounts at such rates are said to have bad credit.

•Credit is extremely useful to the economy.

•Most people would have great difficulty in buying a house if they couldn't borrow the money.

•Many people also use credit to further their education.

•Many firms would be unable to build new factories if they had to save all the money first.

•In addition, short-term credit is often used by people (through credit cards) and firms as a simple and

convenient method of paying for purchases.

Example_3__Varying_Algorithms____Investing_.asf

•However, excessive borrowing can be a problem for households, firms and government.

•Making interest payments because you borrowed money for the house that you live in, a car that you drive or a factory that produces goods can make good economic sense.

•But credit should not be used to pay for goods or consumption in the present that were completely consumed in the past.

•Be careful if the loan lasts longer than the item you bought with it.

•Econ Disk for Credit

•Income - Payments earned by households for selling or renting their productive resources. •May include salaries, wages, interest and dividends.

Example_2__Applying_Algorithms____Saving_.asf

Example_3__Varying_Algorithms____Investing_.asf

•Broadly speaking, an individual has only two

choices about what to do with (after-tax)

income: spending on

current consumption or

saving for the future.

The_Stock_Market.asf

•From an individual point of view, saving typically becomes a form of investing, since the saving is put into a bank account, stock, bond or mutual fund that pays a rate of return.

•In general, investing refers to postponing current consumption or rewards to pursue an activity with expectations of greater benefits in the future.

•Financial investment refers to the decisions by individuals and firms to invest money in financial assets such as bank accounts, certificates of deposit, stocks, bonds and mutual funds.

•Financial investment is crucial to accumulating personal wealth.

•END Fri

•Real investment or physical capital investment is the component of aggregate demand that refers to the decisions by firms to

purchase equipment and physical plant, and also the purchases of new

homes by consumers.

•The amount of real investment is critical to economic growth.

•Financial investment and real investment are connected, but they are not the same.

•Thus, when you hear a casual reference to "investment," be clear in your own mind on whether it is financial investment or real investment. ECON DISK – invest & save

The_Free_Market_Economy__Supply_and_Demand.asf

•Consumers purchase goods and services to satisfy their economic wants.

•Goods are tangible items that can be held or touched like clothes and cars.

•Services are actions that give economic benefit, such as a repaired kitchen sink or a package delivered.

•A demand schedule describes the behavior of consumers and illustrates the amount of a good or service that will be purchased at various prices during a specific time period.

•Generally, the lower the price of something, the more of it will be purchased--and vice versa. EconD - Consumers

Credit_and_Compound_Interest.asf

•Imagine that last year you invested $100 and receive a rate of return after one year of 10 percent, so that you have a gain of $10.

•You now invest your total, the $110, and receive a rate of return of 10 percent, but at the end of this year your gain is not $10, but rather $11.

•The rate of return hasn't changed, so why was the gain $10 last year and $11 this year?

•The answer is that when you reinvest past earnings, then in the future you will earn interest not only on the original investment, but also on the past accumulated returns; this is called compound interest.

•Thus, making a one-time investment of $1,000 and letting an 8 percent annual return on this investment compound for 40 years would give a future value of $1,000(1 + .08)^40 = $21,724.

•One lesson of compound interest is to try to save relatively early in life for retirement, because saving in your 20s and 30s allows much more time to

accumulate and thus to let the power of compound interest

work than saving done in your 50s or 60s. Econ Disk – C.I.

•Financial markets are those markets that exist for buying and selling

financial assets. •The most important financial assets for individual investors are bonds, stocks and mutual funds.•A bond is issued by a corporation or government as a way of borrowing money. •An individual who purchases a bond gives money to the corporation or government that issued the bond, and in return, receives repayment of the money with interest over time. •Many bonds promise a fixed rate of interest. •Investors in long-term bonds must be concerned that if inflation is unexpectedly high or nominal interest rates rise, they may be locked into a bond that pays an undesirably low rate of return.

•A stock is a share of ownership in a business.

•If a firm has 100,000 shares of stock, and you own 1,000 shares, then you own 1 percent of the company.

•Owners of stock receive a return in two ways.

•The firm may pay dividends to its shareholders out of the profits that it earns. Also, investors may profit by selling their shares of stock for more than they paid for them; this is called a capital gain.

•However, if a company goes bankrupt, the stock is worth nothing.

• Thus, stocks are a riskier investment than many bonds.

•Many individual investors want to diversify, that is, own a wide range of stocks and/or bonds from different firms and different levels of government, so that they don't have to worry too much about what happens with any individual firm.

• A mutual fund is an investment company that raises money from investors; purchases a range of stocks, bonds and other financial investments; and pays a return to shareholders according to the overall return of the entire fund.

•A mutual fund that seeks to mimic the average performance of the stock market as a whole is called an index fund.

•However, a mutual fund may focus on stocks or bonds from a particular industry or particular country or those that the mutual fund manager believes will perform well in the future. (Go to Econ Disk for demonstration) (end Wed)

•Human capital refers to the combination of a person's education, knowledge, experience, health, habits, training and talent.

•A person who has acquired more human capital will be able to produce more.

•At the individual level, additions to human capital are closely connected to earning higher wages and income.

•At the level of the national economy, gains in the average level of human capital for the population are a primary source of productivity growth and economic growth.

•People improve their human capital by investing in themselves in thousands of ways, but most of the ways involve study, practice and self-discipline. (Econ Disk)

•The purchase of insurance involves paying an amount called a premiumpremium at regular intervals, with the understanding that if negative events occur, the insurance company will pay

certain costs.

•For example, health insurance provides payments to health-care providers if you are sick.

•Life insurance provides a payment to your descendants if you die.

•Car insurance provides payments for damages caused in an auto accident.

•Homeowner's insurance pays for home repairs in the case of fire or storm damage.

•Insurance works on the principle that in a large group of people historical experience allows one to predict with some accuracy how many of them will suffer a negative event each year--but no one can say in advance exactly who in the group will suffer the negative events.

•Individuals who are averse to taking risks prefer to pay an insurance premium, and be protected against the high costs of negative events, instead of waiting to find out if they are unlucky enough to suffer the negative events.

•The great irony of insurance is that it is a purchase one hopes never to

benefit from--since that would mean that the negative event has occurred.

•(Econ disk presentation)

•Budgeting refers to drawing up a plan for how available funds will be spent.

•A typical approach is to write down the total income that you

expect to have available to spend, and then to write down how you plan to spend it.

•Budgeting helps you know where your money is actually going, which in turn helps you to make more informed decisions about how you would prefer to spend your money.

•Budgeting helps make clear that cutbacks in one area of spending might be worth making, because they can pay for increases in other more desired areas. (Econ Disk)