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The Modern Economy

Introduction to Economics - Desert Ridge Middle School
by

Gian Gieri

on 27 January 2014

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Transcript of The Modern Economy

Definition:
The Economy – An economy consists of the economic system of a country or area, the labor, the capital and land resources, and the economic agents that socially participate in the production, exchange, distribution, and consumption of goods and services of that area.
Economics
What is the economy and how does it affect you?
Money and the Importance of Numbers
Important Terms - Inflation
Inflation: A general increase in prices and fall in the purchasing value of money.
Government Debt
The final way to pay for the programs that the government can't afford is to borrow now and pay later.
Mr. Gieri
The Economy
Easy Right??
NOT SO MUCH!!!!
You can view the economy as a circular flow of goods from the producer to the consumer and the corresponding flow of labor and capital into the production process…
Consider this definition!
Taxes
Government
Labor
Employees
Wages
Happy Consumer
Stock
Investor
Key Players of an Economy
Operating
Environment
Producer of Goods
Product
Money
Money
Now Do You Understand The Economy?
You can view the economy as a circular flow of goods from the producer to the consumer and the corresponding flow of labor and capital into the production process…
Maybe we should study a diagram of this definition to better understand it!
This happy customer has purchased a computer with an Intel chip inside. He has helped “stimulate” or boost the economy by purchasing the computer with his hard earned money.
Intel will use the money from the sale to pay employees, pay taxes, improve factories, and the remainder will be a “PROFIT.”
Happy Consumer
Money
Producer of Goods
Consumer Relationship
Employees who work at Intel trade their time and labor for wages. With these wages the employees are able to fulfill their “needs” and “wants” as consumers.
Intel employs workers that are skilled in creating and manufacturing computer chips. Without the creativity of their employees Intel would not be able to develop new technology.
Labor
Employees
Wages
Producer of Goods
Employee Relationship
VS.
Consumer Wants – items purchased by a consumer to fill those desires that are not necessary for ordinary life
…. something you would like to have
Consumer Needs – items purchased by a consumer to fill basic needs of life…..
something you have to have!
Needs Vs. Wants
From the investment funds Intel can hire more employees, purchase more machinery, or invest in new technology. When Intel makes a profit it increases the value of the stock certificate.
The investor can invest in stock to receive a certificate of ownership. This certificate entitles the investor to a fraction of ownership in the company.
Money – Investment Dollars
Investor
Producer of Goods
Investor Relationship
Stock Certificate
of Ownership
Intel is owned by many investors. The stock certificate entitles the owner to a fraction of ownership in Intel.
Investments
After converting the percentage to a decimal and multiplying you can
determine the value of the investments
Lets say that this year Intel is valued at $100,000.
Investments
If they do poorly they may loose their investment.
If the company does well they stand a chance to profit.
Investors are betting on the companies that they invest in.
Investments
Product
Profit - The amount of money that a company makes after it pays for all of its expenses. One of the main goals for every company is to make a profit.
Intel
Okay... so what does it mean to own a fraction of ownership?
Investments
Investor 15 - Owns 30% of all Intel Shares
Investor 12 - Owns 2.5 % of all Intel Shares
Lets study two of these investors to find out more!
Investor 12's Investment
Investor 15's Investment
INTEL's VALUE
$100,000
$100,000
Percent of
Shares Owned
2.5%
30%
Value of
Investment
$2,500
$30,000
Notice how both investors doubled the value of their investments when Intel doubled in value.
Now lets say that it is year two and Intel makes a $100,000 profit... increasing the value to $200,000
Investments
Investor 12's Investment
Investor 15's Investment
INTEL's VALUE
$200,000
$200,000
Percent of
Shares Owned
2.5%
30%
Value of
Investment
$5,000
$60,000
Taxes
Operating Environment
The Government provides companies with a stable operating environment. This may include laws that prohibit thieves from stealing products and ideas and a judicial system that upholds those laws.
Intel pays the government taxes that are based on how well the company does. These taxes are used to build schools, pay government employees, pave roads, etc.
Taxes
Government
Labor
Employees
Wages
Happy Consumer
Stock
Investor
Key Players of an Economy
Operating
Environment
Producer of Goods
Product
Money
Money
As we get back to our
original diagram.... what
is the one common element
in each relationship that you
observe?
Notice -money is involved in each relationship!
Money is an important factor in nearly every facet of today's economy. It is also the main difference between our modern economy and the economy of the old world.
MONEY
Lets learn how money became such an important part of our life
Currency
Smart Cards
ATMs
Another video to help us understand inflation.
Let's see how inflation works on a small scale!
Start by imagining the library as an island. Our island is closed off and everybody in here represents the citizens who live within the economy.
Now assume that we all only have one possession, a pencil and that we all only have one penny.
Since the currency represents the value of the goods in circulation within our economy.... we can say that each pencil is worth one penny.
Now lets assume that Mr. G. representing the federal reserve.... creates one additional penny for each student.
Question 1: How many pennies does each person now have?
Question 2: How many pencils does each person now have?
Question 3: How much is each person's pencil now worth?
Question 4: How did creating more money impact the value of the pencils?
National Debt: The total amount of money that a country's government has borrowed, by various means. See print-out
How does government pay for what it needs?
Government Spending
Taxes
Debt
What is the controversy?
Government Spending
Deficit
Budget
Tax Reform
Entitlement Programs
Budget Cuts
Taxes
National Debt
Government Spending
Why do governments need to spend money?
What are they spending on?
What is the controversy?
We know that Americans pay for government spending with the taxes that we collect.
However, when our expenses are greater than the taxes that we collect we have a big problem.
We can address this problem in three different ways:
1. We can raise the amount of taxes that we pay.
2. We can cut the amount of money that we spend.
3. We can borrow the money today and promise to repay it later.
Lets look into these choices a little further!
Many Americans disagree on which of these options are the best choice.
This is a
budget
of what the government expects to spend money on in 2013.
RAISING TAXES
Current Tax System
Tax Brackets - The more you make the more you pay!
Individual 1
Individual 2
Individual 3
Income:
Tax Percentage:
Taxes Paid:
Income Remaining:
$8,000
$100,000
$500,000
10%
28%
39.6%
$800
$28,000
$198,000
$7,200
$72,000
$302,000
Who are you going to increase the taxes on?
Notice this individual
can't afford to pay more!
Notice how much this person has already paid!
Budget Cuts
Another option is to reduce the amount that the government is spending.
That's a great idea.... but how do you decide what to reduce spending on?
Military
Education
Health
Care
We may not
be as safe!
How much will our
education will be
impacted?
Will people have access to basic health care?
Tax Reform - When a government makes changes to the existing tax system.
Budget Cut - when the government reduces the amount of spending in a specified category (i.e. education, etc.)
Deficit - when government spending exceeds the taxes brought in
If today's generation borrows to pay for what we can't afford... and then passes away... who pays the debt?
How do you feel about this?
The numbering system that we have today was essential to the creation of money.... without numbers money would be impossible.
Consider the efficiency of our numbering system:

Whereas the Egyptians needed six marks to indicate the number six.

The Romans needed two characters in indicate the number six.

The Hindu system that we use requires only one numeral to indicate the number six.
IIIIII
IV
6
Currency
What gives the currency that we use today its value?
Currency stimulates "trade" because it allows for exchanges that may not have taken place in the old world barter system.
A: The value is based upon a promise of recognized value from the United States Government. Much like the value of currency is recognized in a monopoly game by the participants.
Smart Cards and Credit Cards
Smart and credit cards have taken trade into the modern era. Now with the swipe of a card people can conduct a transaction that sends money directly to the other party's bank in exchange for the goods being purchased.
While some people still prefer cash... as it is something physical (i.e. tangible) that they can protect... it is these same characteristics that make cash a burden. Cash can also be bulky to carry around and can be easily stolen.
Credit Cards solve the problem of cash by sending money directly to the other party in exchange for a promise to repay the balance later. This creates debt for the purchaser.
Smart Cards are pre-loaded with money and once swiped take the users balance down.
ATMs
ATMs simply allow users to access their money at any time using a debit card with a pre-assigned pin code. Debit cards have since evolved so that people can use them to purchase merchandise directly from a store using the same pin code.
Electronic Transactions
Pros & Cons
Credit Cards
Smart Cards
Debit Cards
Ease of use
Credit Limits = Security
Identity Theft
Debt
Ease of use
Pre-Loaded - Secure
No Personal Information
Pre-Loaded - limit on spending
If stolen - very little recourse
Uses bank funds - no debt
Pin Code = Security
If stolen with pin... thief has direct access
to your bank
Full transcript