Economics Study Guide PDF

Economics Study Guide Please document your answers on a separate sheet of paper, word document, or print this study guide and write directly on it. Once complete, send your answers back to your teacher. Feel free to contact your teacher if you have any questions as you wo...

Economics Study Guide Please document your answers on a separate sheet of paper, word document, or print this study guide and write directly on it. Once complete, send your answers back to your teacher. Feel free to contact your teacher if you have any questions as you work through the study guide or are ready for a review! 1  Section 1: Introduction to Economics Economics is all about making choices. Every day, we make decisions like how much to spend, where to go, or which job to take. But economics isn’t just about money. It’s about weighing different options and considering what works best for us. For example, deciding who does the chores at home, whether to volunteer, or whether to donate money to charity are all economic decisions, because they involve choices about how to allocate limited resources (like time or money). While many people think economics is mostly about being efficient with time and money, it also examines why we don't always make the most efficient choices. Economics is more than just the numbers or the dollars—it’s about understanding the reasoning behind our decisions. Whether looking at the economy as a whole or focusing on individual choices, economics can be seen as a blend of science, social science, and even art, as it seeks to understand human behavior and decision-making. Economists may have different opinions on policies or politics, but at its core, economics is about making informed choices and finding the balance between various factors in our lives. Whether we are making personal decisions or studying how a nation makes decisions, the principles of economics help us understand why we choose the way we do. Macroeconomics and Microeconomics Economics can be divided into two main areas: macroeconomics and microeconomics. Macroeconomics Macroeconomics looks at the big picture. It studies the overall economy and focuses on large- scale economic factors. This includes things like national income, inflation, unemployment, and economic growth. Economists in this field analyze how government policies (like fiscal policy or monetary policy) affect the economy as a whole. Example: Macroeconomics would look at how an increase in interest rates affects the economy by slowing down inflation or how a recession impacts national unemployment rates. Microeconomics Microeconomics, on the other hand, focuses on the individual choices made by consumers and businesses. It studies how these decisions impact supply and demand, prices, and the allocation of resources within specific markets. Microeconomics looks at smaller pieces of the economic puzzle. Example: Microeconomics would look at how a business decides to price its products or how a consumer decides whether to buy a new phone or save their money. Why Economics Matters Economics helps us understand how people, businesses, and governments make choices and how those choices affect our daily lives. From deciding whether to buy a coffee or save for a vacation to understanding the policies that shape national economies, economics provides tools for thinking critically about the world and making better decisions. Whether on a personal level or a global scale, economics is a key to understanding and improving our choices. 2  Scarcity and Choice Scarcity means that resources are limited, and because of this, people and societies must make choices about how to use and distribute them. In economics, scarcity is a central concept, as it shapes the decisions made by individuals, businesses, and governments. Resources are the things we use to produce goods and services, and they can be grouped into different categories. Each category has examples that illustrate how scarcity affects the way resources are used and shared. Categories of Resources 1. Natural Resources Natural resources are raw materials that come from the earth and are used to produce goods and services. They are typically divided into renewable and non-renewable resources. Renewable Resources: These are resources that can be replenished naturally and sustainably, such as sunlight, wind, and forests. Example: Wind energy can be harnessed to generate electricity, and forests can be replanted after harvesting for timber. Non-renewable Resources: These are resources that cannot be replenished within a human lifetime, such as fossil fuels, minerals, and metals. Example: Oil and coal are non-renewable resources that are used for energy and industrial processes. 2. Human Resources (Labor) Human resources refer to the people who provide labor and skills to produce goods and services. The quality of human resources can vary based on education, skills, and experience. Labor is often divided into different types, based on the level of skill required and the type of work performed. Blue-collar labor: This type of labor involves physical work or manual labor, often in industries such as manufacturing, construction, or transportation. Blue-collar workers typically perform tasks that require specific skills or training but do not always require higher education. Example: A factory worker assembling cars or a construction worker building houses. White-Collar Labor: This labor involves office-based, administrative, or managerial work. White-collar workers generally need a higher level of education or specialized knowledge. Example: A lawyer, doctor, or business executive. Pink-Collar Labor: This category includes jobs that are traditionally associated with women and typically require emotional labor or caregiving. These jobs may involve lower pay but are essential to many aspects of society. Example: Nurses, teachers, or childcare workers. Green-Collar Labor: These workers are involved in environmentally focused jobs that aim to reduce environmental impact or promote sustainability. Example: Solar panel installers, environmental scientists, or conservation workers. 3 3. Capital Resources Capital resources refer to goods made by humans that are used to produce other goods and services. These include tools, machinery, buildings, and technology. Example: A machine used to manufacture cars or a computer used in an office for designing products. 4. Entrepreneurial Resources Entrepreneurial resources are the talents and risks taken by individuals (entrepreneurs) who organize the other types of resources (land, labor, and capital) to create and run businesses. Example: A person starting a new tech company that develops software or a restaurateur opening a new restaurant. How Scarcity Affects Decisions Abundant vs. Limited Resources: Some resources, like air and water (in most places), are abundant and don’t require much thought about scarcity. Others, like time or skills, are limited, and people must make decisions about how to use them wisely. Example: An individual must decide whether to spend their time working to earn money or using that time for leisure or rest. Similarly, businesses must decide how to allocate their workers' time to maximize production. Economic Choices and Trade-offs: Scarcity forces individuals and societies to make choices, and in doing so, they must face trade-offs. Every choice comes with an opportunity cost—the value of the next best alternative that is given up when a decision is made. Example: If a government decides to spend money on healthcare, it may have less money to invest in education or infrastructure. How Scarcity Affects Prices The scarcity of resources often leads to changes in prices. When a resource becomes scarce, its price tends to rise because people are competing to obtain it. Example: If there is a shortage of a popular product, such as a new video game console, the price may increase due to high demand and limited supply. Businesses also use the concept of scarcity in marketing strategies to encourage consumer behavior, such as offering a “limited-time” sale to prompt people to buy before the offer expires. Summary of Resource Categories 1. Natural Resources: Raw materials from the earth (renewable and non-renewable). 2. Human Resources (Labor): The skills and efforts provided by workers, are divided into blue- collar, white-collar, pink-collar, and green-collar categories. 3. Capital Resources: Goods and tools used in production. 4. Entrepreneurial Resources: The ideas, risk-taking, and organization by entrepreneurs. Scarcity forces individuals, businesses, and governments to make careful decisions about how to allocate resources efficiently and fairly. Understanding the different types of resources and how they are affected by scarcity helps in understanding how economies function and how choices are made in the face of limited availability. 4  The Factors of Production The factors of production are the resources needed to create goods and services: land, labor, capital, and Key Terms: entrepreneurship. In capitalist economies, these resources are mostly controlled by business owners and investors. In Economics: The study of given socialist systems, the government often has more control ends and scarce means. over them. Scarcity: Resources are limited. Land includes natural resources like land itself, oil, and crops. Labor is the work people do, like building a house or Supply and Demand: The coding software. Capital refers to tools or equipment used economic forces that affect how to produce goods, such as machinery or computers. much of a product is available and Entrepreneurship involves taking risks to combine the other how much people are willing to factors and create products or services, like starting a pay for it. business. The way these resources are owned and used depends on the economic system. In capitalism, private businesses usually own them, while in socialism, the government may control more. Entrepreneurs are essential for economic growth, as they create new opportunities by combining land, labor, and capital. 5 PRACTICE: Read the passage below about the Great Dust Bowl and answer the reflections questions that follow. On The Great Plains, the farmers in the early 1900s did not follow advice about how to take care of the land. They needed to take care of the land they had by contour plowing, which is plowing their fields in a special way to prevent erosion. They also should have been planting a row of trees in between the fields to prevent wind from blowing away the good topsoil. Instead, farmers plowed up the grasses that grew there naturally and planted wheat everywhere in straight rows on flat lands. In 1931, a drought happened that lasted for seven years. The plains became very dry due to lack of rain. Because the land was so dry, the winds blew the topsoil into thick, dark clouds of dust that would sometimes last for days. When this happened, they called it a “dust storm.” One storm that happened in 1934, created a giant cloud of dust that went from the Great Plains to the Atlantic Ocean. That cloud was about 1,800 miles wide, and it had 350,000,000 tons of dust. To protect themselves from the dust storms, farmers would hang damp sheets over the windows of their homes. Even with the sheets hanging to catch the dust, it would still blow through the cracks of the farmhouse walls. Dust would be everywhere. They would find it in their food, their hair, their ears, and even in their pockets. The wheat crop began to fail due to the poor growing conditions created by the lack of rain and good topsoil. Conditions like this can create a scarcity of wheat. When there is not enough wheat, this makes the cost of wheat increase greatly. If someone wants to buy wheat or something made of wheat, like bread or cake, they would have to pay a lot more money than what it cost before the scarcity happened. Finally, in 1941, the drought ended. The rains came again to the plains of the Midwest States and eventually, the land was fixed so that it could grow crops again. 1. What two things caused the scarcity of wheat? __________________________________________________________ __________________________________________________________ 2. Which of these conditions might create scarcity? A. a tornado destroyed houses B. a hurricane killed most of the orange trees in Florida C. a volcano erupted in Hawaii and burned up all the pineapple fields 3. What does the word scarcity mean? 4. What affect does scarcity have on prices? 6  Section 2: Supply, Demand, and Market Structures Science shapes our world, from gravity and sound waves to electricity. We rely on scientific discoveries to improve products and create new ways of living. However, science can also have unexpected effects on society, especially in markets and economies. The COVID-19 pandemic in 2020 is a clear example. As the virus spread, many businesses shut down or reduced their operations, either to protect employees or due to government stay-at- home orders. Nearly every industry was affected. In March and April 2020, consumer spending (how much money you spend) dropped sharply—6.7% in March and 12.7% in April. Meanwhile, unemployment surged from 3.5% in February to 14.7% by April, the highest since the Great Depression. This event showed how scientific phenomena, like a virus, can disrupt economies and daily life in ways no one expected. The COVID-19 pandemic disrupted markets by impacting supply and demand, the forces that determine prices and quantities in competitive markets. According to the law of demand, when the price of a good rises, people buy less of it, and when prices fall, people buy more. For example, if the price of your favorite snack goes up, you’ll likely buy less. This relationship is shown by a downward-sloping demand curve—as the price rises from P1 to P2, the quantity demanded falls from Q1 to Q2. 7 On the other hand, the law of supply describes how sellers react to prices. When prices rise, sellers are willing to supply more, and when prices drop, they supply less. For example, if your snack becomes more expensive, companies will produce more. This relationship is shown by an upward-sloping supply curve—as the price increases from P1 to P2, the quantity supplied rises from Q1 to Q2. The market’s equilibrium price is where supply and demand meet, balancing what buyers want to purchase with what sellers offer. During the pandemic, disruptions to supply and demand made it harder to maintain this balance, causing shifts in prices and availability of goods. Market Equilibrium Equilibrium is when supply and demand are balanced, leading to stable prices. If there is too much supply, prices drop, encouraging more people to buy. If there’s not enough supply, prices rise, which reduces demand. The equilibrium price is where the amount supplied equals the amount demanded. For example, if a store sells spinning tops at $10 but no one buys them, the price drops to $5, and more people start buying. At $2, demand matches the supply of 1,000 spinning tops—this is the equilibrium price. In real life, markets are constantly adjusting toward equilibrium. However, events like natural disasters or government policies can throw markets off balance, creating disequilibrium. For example, labor markets often experience disequilibrium due to laws protecting workers' pay and jobs. Equilibrium isn’t always good—during the Irish Potato Famine, food prices were stable, but they were too high for many people to afford, leading to widespread starvation. 8 Types of Market Equilibrium: - Economic Equilibrium: Balance between supply and demand. - Competitive Equilibrium: Reached through competition between buyers and sellers. - Nash Equilibrium: From game theory, where players’ strategies account for others’ actions. Market prices usually hover around equilibrium over time as businesses and consumers adjust their behaviors. PRACTICE: Answer the following reflection questions below. 5. How does price affect both supply and demand? 6. Can equilibrium always guarantee a fair outcome? Why or why not? 7. Can you describe a real-world example where demand for a product suddenly increased? How did the market respond? Types of Market Structures (Perfect Competition, Monopoly, Oligopoly) In economics, market structures refer to how much competition exists in a market. Different markets have Key Term: different characteristics, such as the number of buyers and sellers, the type of product, and whether new companies can Market: A coming together of easily enter. Here are the four main types of market the buyers and sellers, i.e. an structures: arrangement where buyers and sellers come in direct or 1. Perfect Competition indirect contact to sell/buy - Many small sellers compete with each other. goods and services. - Products are identical, and no company has market power. - There are no barriers to entry, and all firms aim to maximize profit. - Perfect competition is mostly theoretical because real-world markets rarely meet these conditions. Example: Farmers selling identical crops. 9 2. Monopolistic Competition - Many sellers offer similar but slightly different products. - Sellers have some control over prices because consumers have product preferences. - There is still competition, but companies can charge higher prices for unique features. Example: Different brands of cereal or toothpaste. 3. Oligopoly - A few large firms dominate the market. - Firms can either compete or cooperate to set prices. - Barriers to entry make it hard for new companies to join. Example: Smartphone or airline industries. 4. Monopoly - One company controls the entire market and sets the price. - Consumers have no alternatives and must accept the price given. - True monopolies are rare and often considered harmful to consumers. Example: Local utilities like electricity providers in some regions. PRACTICE: Answer the multiple choice question below about market structures. 8. The cellphone industry is an example of which of the following? A. Monopolistic Competition B. Monopoly C. Perfect Competition D. Oligopoly Section 3: Personal Finance and Money Management Budgeting Basics Budgeting is the process of creating a plan for how to spend your money. It helps you track your income and expenses, allowing you to make informed financial decisions. A budget can help you save for future goals (saving for retirement or making a big purchase), pay off debt, and manage your day-to-day expenses. Key Components of a Budget 1. Income: This is the total amount of money you earn in a given period, typically from your job, investments, or any other sources. It's important to calculate your total income accurately. 2. Fixed Expenses: These are regular expenses that do not change from month to month, such as rent or mortgage payments, insurance, and subscriptions. 10 3. Variable Expenses: These costs can fluctuate each month, such as groceries, entertainment, and dining out. Tracking these expenses can help identify areas to cut back. 4. Savings: Allocating a portion of your income to savings is essential for future needs and emergencies. Consider setting specific savings goals, such as an emergency fund or a vacation. 5. Debt Repayment: If you have any loans or credit card debt, it's crucial to include these payments in your budget. Aim to pay more than the minimum payment to reduce interest over time. Steps to Create a Budget 1. Calculate Your Income: List all sources of income and total them. 2. List Your Expenses: Write down all fixed and variable expenses. Track these for a month to get an accurate picture. 3. Set Financial Goals: Determine short-term and long-term goals, like saving for a car or retirement. 4. Create the Budget: Subtract your total expenses from your income. If your expenses exceed your income, look for areas to cut back. 5. Monitor and Adjust: Regularly review your budget to see if you're on track. Make adjustments as needed based on changing circumstances. Tips for Successful Budgeting Be Realistic: Set achievable goals and allow for flexibility in your budget. Keep it smart and simple: Sometimes writing things down is a great opportunity for you to reflect on your economic choices. Use Budgeting Tools: Consider using apps or spreadsheets to track your finances easily. Review Regularly: Check your budget monthly to stay accountable and make necessary adjustments. Stay Disciplined: Stick to your budget, but allow yourself small treats to stay motivated. Saving and Investing Saving and investing are two important financial concepts that can help you build wealth over time. While they both involve setting aside money for the future, they serve different purposes and come with different levels of risk and return. Saving Definition: Saving involves putting money aside for large purchases and short-term needs or emergencies. It typically takes place in savings accounts, money market accounts, or certificates of deposit (CDs) that offer low interest rates but provide safety and liquidity (cash that is simple and easy to get). Purpose: The primary purpose of saving is to ensure you have funds available for immediate expenses or unexpected events, like car repairs or medical bills. 11 Key Features of Saving: - Safety: Savings accounts are usually insured by the government, making them a low-risk option. - Liquidity: Money in savings accounts can be accessed quickly and easily. - Lower Returns: Savings typically earn lower interest compared to investments, which means your money may not grow significantly over time. Investing Definition: Investing involves putting money into assets with the expectation of generating a return over time. Investments can include stocks, bonds, mutual funds, real estate, and other financial instruments. Purpose: The primary goal of investing is to grow your wealth over the long term, providing security for your future, and outpace inflation, allowing your money to increase in value. Key Features of Investing: - Higher Returns: Investments have the potential to earn higher percent returns compared to savings accounts, but they also come with higher risks. - Variety of Options: Investors can choose from various asset classes based on their risk tolerance and financial goals. - Risk of Loss: Unlike savings, investments can fluctuate in value, and there's a risk of losing money (i.e. Stock Market). How to Save and Invest Wisely 1. Set Financial Goals: Determine what you’re saving or investing for—whether it’s an emergency fund, a house, retirement, or education. 2. Establish an Emergency Fund: Aim to save three to six months' worth of living expenses to cover unexpected costs. 3. Choose the Right Savings Account: Look for accounts with no fees and competitive interest rates to maximize your savings. 4. Start Investing Early: The earlier you start investing, the more time your money has to grow due to compound interest. 5. Diversify Your Investments: Spread your investments across different asset classes to reduce risk. A mix of stocks, bonds, and other assets can help balance your portfolio. 6. Regular Contributions: Make saving and investing a habit by setting aside a fixed amount regularly, such as through automatic transfers. 7. Educate Yourself: Learn about different investment options, risks, and market trends. This knowledge can help you make informed decisions. 12 PRACTICE: Answer the reflection questions below. 9. What are your short-term and long-term financial goals, and how do saving and investing play a role in achieving them? 10. Why is it important to have both savings and investments in your financial plan? 11. How can you determine the right balance between saving for immediate needs and investing for future growth? Understanding Credit and Debt Credit and debt play a significant role in personal finance, helping people make purchases they might not afford upfront. However, managing them responsibly is essential to avoid financial trouble. What is Credit? Credit allows you to borrow money or access goods and services with the promise to pay later. Lenders, such as banks or credit card companies, offer credit to consumers, usually with an interest rate attached. Common types of credit include: - Credit Cards: Allow purchases now, paid off over time with interest if not paid in full each month. - Loans: Larger sums of money borrowed for specific purposes, such as student loans, car loans, or mortgages. - Lines of Credit: Flexible borrowing with a limit, often used for emergencies or home improvements. Your ability to borrow depends on your credit score, a number reflecting your creditworthiness. Higher scores mean better chances of approval and lower interest rates. 13 What is Debt? Debt refers to the money you owe when you borrow credit. It can accumulate if not managed wisely, especially with interest. Types of debt include: - Revolving Debt: Ongoing debt, such as credit card balances, that can grow if not paid off monthly. - Installment Debt: Debt paid in regular installments over time, such as auto loans or mortgages. Debt can be good or bad depending on how it is used: - Good Debt: Helps build wealth (e.g., student loans for education, mortgages for real estate). - Bad Debt: Comes from unnecessary purchases, especially with high interest rates (e.g., credit card debt from luxury items). Managing Credit and Debt Wisely - Pay on Time: Late payments hurt your credit score and can lead to fees. - Keep Credit Utilization Low: Avoid using more than 30% of your available credit to maintain a healthy credit score. - Make More than the Minimum Payment: This helps pay off debt faster and reduces interest. - Avoid Unnecessary Debt: Only borrow what you need and can repay comfortably. Understanding credit and debt ensures you use them as tools to reach your financial goals, instead of falling into financial hardship. Understanding Types of Interest: Interest is the cost of borrowing money, and it can work in different ways depending on the type of loan, investment, or debt. Let’s break down some common types of interest, and explain how they work. 1. Simple Interest Simple interest is calculated only on the original amount borrowed or invested (called the principal). It’s straightforward and doesn’t increase based on how much you owe or how long you owe it. Example: Imagine you borrow $1,000 at a 5% simple interest rate for one year. The interest you’ll pay is 5% of $1,000, which is $50. At the end of the year, you owe $1,050 ($1,000 principal + $50 interest). This type of interest is common in short-term loans and some savings accounts. Because it’s predictable and doesn’t compound, simple interest is easier to pay off and is often viewed as fairer to the borrower. 2. Compound Interest Compound interest is calculated not only on the original amount (principal) but also on any accumulated interest. This means that interest is added to the total each period, so the amount you owe or earn grows over time. Example: Let’s say you invest $1,000 in an account with a 5% annual compound interest rate. At the end of the first year, you’ll earn $50 (5% of $1,000). In the second year, you’ll earn interest on $1,050, so you get $52.50. Over time, the amount grows faster than with simple interest. 14  This type of interest can be beneficial for investments, like savings accounts or retirement funds, where you want your money to grow over time. However, compound interest can work against borrowers in credit cards or high-interest loans, as debt grows faster and can quickly become overwhelming. 3. Fixed Interest Rate With a fixed interest rate, the interest percentage doesn’t change throughout the loan term. This makes it easier for borrowers to predict their payments. Example: You take out a $5,000 loan with a fixed interest rate of 4% for five years. Your interest cost is calculated based on 4%, and it will remain the same for the entire five years, making your monthly payments predictable. Fixed interest rates are commonly used for mortgages and personal loans. They’re generally more stable and predictable, which is a good choice for borrowers who want to budget their payments. 4. Variable (or Adjustable) Interest Rate With a variable interest rate, the percentage can change over time based on market rates. This means your payment amounts may go up or down. Example: Let’s say you get a $10,000 loan with a variable rate initially set at 3%. If market rates go up, your interest rate could increase to 5%, making your monthly payments higher. Conversely, if rates drop, your payments could go down. Variable interest rates are often used in mortgages, student loans, and credit cards. While they can start lower than fixed rates, they can also increase unpredictably, which makes them riskier if rates go up. 5. Predatory Lending and High-Interest Rates Predatory lending refers to lending practices that trap borrowers in unfair, high-cost loans with excessive interest rates and fees. These loans often target vulnerable people who may need quick cash or lack credit knowledge. Example: A payday loan may offer you $500 upfront, but it requires repayment in two weeks with an interest rate equivalent to 400% annually. This means you could end up owing far more than you initially borrowed. Predatory loans often have terms that make it almost impossible for the borrower to repay without taking on more debt. The interest is so high that payments only cover fees, not the loan balance, keeping borrowers trapped in a debt cycle. How Do You Know When Interest Rates Are Good or Bad? Compare Rates: A good interest rate depends on the type of loan, but you can start by comparing it to other offers. For example, a low-interest personal loan might be 5-10%, while credit cards often charge between 15-25%. Watch Out for Predatory Lending: Loans with very high rates (often over 36%) or terms that seem too strict are often predatory. Lenders who push you to sign quickly or offer “no credit check” loans may be taking advantage of your situation. 15  Look at Total Costs: A loan with a higher interest rate over a shorter period may cost less than a long-term loan with a slightly lower rate. Always calculate the total you’ll repay in interest to find out what’s truly affordable. Interest Rate Caps: Some types of loans have caps, or legal maximums, to protect consumers. For example, many states have interest rate caps on payday loans, but some don’t. Check your state’s laws and research if a lender seems to charge an extremely high rate. By understanding these different types of interest and looking closely at rates and terms, you can make informed choices and avoid getting stuck in costly debt. PRACTICE: Word Problems: Understanding Types of Interest 12. Simple Interest You borrow $1,200 from a bank at a simple interest rate of 6% per year for 3 years. How much interest will you pay at the end of 3 years? What is the total amount you will owe? Use the simple interest formula: Interest=Principal×Rate×Time 13. Compound Interest You invest $2,000 in an account that earns 4% compound interest annually. How much money will you have in the account after 2 years? Use the compound interest formula: Where: A is the amount of money accumulated after interest. P is the principal amount (initial investment). r is the annual interest rate (in decimal form). n is the number of times the interest is compounded per year (we'll assume annually, so n=1n = 1n=1). t is the time in years. 16 14. Predatory Lending A payday loan company offers you a loan of $300 for two weeks with an annual interest rate of 500%. How much will you owe at the end of the two weeks? Step 1: Convert the annual rate to a two-week rate. Step 2: Calculate the interest for two weeks. Step 3: Add the principal and the interest to determine the total amount you owe. Section 4: Economic Indicators and the Business Cycle Gross Domestic Product (GDP) Gross Domestic Product (GDP) measures the total value of goods and services a country produces during a specific period, like a year or a quarter. It includes everything made within the country, no matter who owns the resources. GDP is the most common way to measure a nation’s economic activity. How is GDP Calculated? One common way to calculate GDP is by adding the spending of three main groups: Consumption (C): Spending by households on goods and services Investment (I): Business spending and home purchases Government Spending (G): Government expenses on goods and services Net Exports (NX): Exports minus imports The formula is: GDP = C + I + G + NX This shows that a nation’s total production must equal the total spending by households, businesses, and the government. Tracking GDP and Economic Health In the U.S., the Bureau of Economic Analysis (BEA) publishes GDP data quarterly. Positive GDP growth signals an economic expansion (or boom - we are producing more goods and making more money), while two consecutive quarters of negative growth indicate a recession (or bust - producing less and less profit). GDP per Capita and Living Standards GDP per capita divides the total GDP by the population to estimate the average person’s share of the economy, often used to compare living standards between countries. 17 GDP vs. GNP and HDI GDP focuses on production within a country’s borders, while Gross National Product (GNP) includes goods and services made by a country’s residents, even if they are abroad. Human Development Index (HDI), created by the United Nations, goes beyond economic output to consider education, health, and quality of life, giving a fuller picture of development than GDP alone. Understanding GDP helps economists track economic trends and determine whether an economy is growing or shrinking. Inflation and Unemployment Inflation and unemployment are two key indicators of a nation’s economic health. They both influence each other and affect people’s daily lives, businesses, and government policies. What is Inflation? Inflation is the rise in prices of goods and services over time, meaning money loses purchasing power. For example, if inflation is 5%, a product that cost $100 last year will cost $105 today. Causes of Inflation: Demand-pull inflation: When demand for goods and services exceeds supply, pushing prices higher. Cost-push inflation: When the cost of production (like raw materials or wages) increases, raising prices. Built-in inflation: When businesses raise prices to keep up with workers demanding higher wages. How Inflation is Measured: The Consumer Price Index (CPI) tracks the average change in prices for essential goods like food, gas, and clothing. What is Unemployment? Unemployment occurs when people want to work but can’t find jobs. The unemployment rate measures the percentage of people in the labor force who are jobless but actively looking for work. 18 Types of Unemployment: Frictional unemployment: Temporary unemployment while people transition between jobs. Structural unemployment: Job loss due to technological changes or mismatches in skills. Cyclical unemployment: Job loss due to an economic downturn or recession. The Relationship Between Inflation and Unemployment Phillips Curve: Economists have noticed a trade-off between inflation and unemployment. When unemployment is low, inflation tends to rise because more people are working and spending. When unemployment is high, inflation tends to fall as demand drops. The Phillips Curve Explained The Phillips curve is an economic theory that suggests there is an inverse relationship between inflation and unemployment. As the economy grows, inflation rises, which should lead to more jobs and lower unemployment. The idea was introduced by economist William Phillips. How the Phillips Curve Works The theory suggests that lower unemployment leads to higher inflation because more people have jobs and demand increases. Companies raise wages to attract workers, which increases production costs. These higher costs are passed on to consumers as price increases. On a graph, the Phillips curve is downward-sloping, with inflation on the Y-axis and unemployment on the X-axis. Limitations of the Phillips Curve In the 1970s, the theory was challenged by stagflation, when both inflation and unemployment were high at the same time. This showed that the relationship between inflation and unemployment is not always stable, making economists question the reliability of the Phillips curve. Governments have since adjusted their policies, realizing that inflation and unemployment can sometimes rise together. 19  Impact on Daily Life High inflation reduces purchasing power, making it harder for families to afford essentials. High unemployment means fewer people have income, which can slow the economy. Governments and central banks use policies to manage inflation and unemployment, like raising interest rates to control inflation or increasing spending to create jobs during a recession. Understanding these two factors helps predict economic trends and guides decisions in business and government. The Business Cycle The business cycle doesn’t follow a predictable pattern like the cycles on a dishwasher. It moves through four phases, but the timing and length of each phase can vary. Let’s break down these stages: 1. Expansion: a. Economic output grows, and more goods and services are produced. b. Companies hire more workers, and employment rises. 2. Peak (boom): a. The economy hits its highest point, just before growth slows. 3. Contraction (or Recession): a. Output declines and companies produce fewer goods. b. Unemployment rises as businesses cut jobs. c. Consumers and businesses reduce spending, making the downturn worse. d. A recession officially begins when the economy shrinks for two or more consecutive quarters. 4. Trough (bust): a. The economy hits its lowest point before growth starts again, marking the beginning of the next expansion. 20 What Causes Recessions? Recessions often start with an economic shock—an unexpected event that disrupts growth. Examples include: Financial market crashes Energy price spikes International conflicts (war) Actions by the government or central banks to control inflation Pandemic Recessions are costly because businesses lose output, workers lose jobs, and consumers reduce spending. However, once prices and interest rates drop, businesses and consumers start investing and spending again, ending the recession and starting the next expansion. Why Are Recessions Hard to Predict? Every recession is different, so economists can't predict them with certainty. The National Bureau of Economic Research (NBER) monitors data to officially declare when recessions begin and end, but these cycles are often irregular and unpredictable—more like a roller coaster than a smooth ride. PRACTICE: Match the business cycle phases, causes, and key terms on the left (Column A) with the correct definitions or descriptions on the right (Column B). 15. An unexpected event that disrupts the economy, such as a financial crisis or energy price spike. ___________ 16. The official low point of the economy before growth picks up again. __________ A. Expansion B. Peak 17. A phase when economic output increases, and businesses hire more workers. ____________ C. Contraction D. Trough 18. A phase where unemployment rises, and output falls as E. Economic Shock businesses reduce spending and production. ___________ F. Recession 19. A tool used to stimulate borrowing and spending, often helping to G. NBER (National start a new expansion. ____________ Bureau of Economic Research) 20. The high point of the economy before growth slows or reverses. H. Low Interest _________ Rates 21. A period of economic decline lasting two or more consecutive quarters. ____________ 22. The group that officially determines when recessions start and end. _____________ 21  Section 5: Government and the Economy Role of Government in the Economy Governments (federal, state, and local) have several important roles in the economy: 1. Providing Legal Structure a. The government creates laws that protect property, ensure contracts are followed, and keep the economy fair. It also regulates businesses and punishes unfair practices. 2. Maintaining Competition a. Governments promote competition by preventing monopolies—when one company controls the market and sets high prices. They pass antitrust laws, like the Sherman Act, to keep markets competitive. However, for industries like electricity, where competition isn’t practical, the government regulates prices to prevent abuse. 3. Redistributing Income a. Some people earn high incomes because of their skills or inherited wealth, while others may earn much less. To reduce income inequality, the government provides: i. Transfer payments like welfare or unemployment benefits. ii. Market intervention, such as setting minimum wages. iii. Taxes that require higher-income individuals to pay more. 4. Reallocating Resources a. Sometimes markets fail, either by not producing enough public goods (like roads) or by causing harm (like pollution). Governments address this by: i. Controlling pollution through laws and taxes on polluters. ii. Encouraging positive actions, like offering subsidies for education or healthcare. 5. Public Goods and Services a. Public goods (like national defense or streetlights) benefit everyone and can’t easily exclude non-payers. Governments provide these goods because private companies wouldn’t make a profit from them. Some services, like schools or roads, are called "quasi- public goods" because they benefit both individuals and the public. 6. Promoting Stability a. Governments use policies to keep the economy stable, aiming to prevent inflation (rising prices) and unemployment. i. To fight unemployment, they increase spending or lower taxes to encourage more economic activity. ii. To fight inflation, they reduce spending or raise interest rates to slow down the economy. 7. Challenges in Government Intervention a. Politics complicate the government’s role. Decisions can be influenced by elections, special interests, or inefficiency since the government isn’t driven by profit. This can lead to overregulation, waste, or policies that benefit some groups at the expense of others. 22  U.S. Federal Reserve (“the Fed”) The U.S. Federal Reserve, often called "the Fed," was created to stabilize the economy and improve the country’s financial system. Here’s a look at how and why it was formed. Why the Federal Reserve Was Needed Before the Fed was established, the U.S. economy faced several challenges: Bank Failures: In the 1800s and early 1900s, bank failures were common. Banks would often run out of money during times of crisis, causing people to lose their savings and trust in the banking system. Economic Crises: The U.S. experienced frequent economic panics (like the Panic of 1907), where there was not enough money to go around. People would rush to withdraw their money, creating "runs" on banks. Without a central bank to provide extra funds, these panics led to severe economic downturns. Unregulated Money Supply: The money supply (the amount of money in circulation) was not well-regulated, which made it hard to control inflation (rising prices) or deflation (falling prices). The economy would swing widely from boom to bust. These issues highlighted the need for a central bank that could manage the money supply, support banks in times of crisis, and stabilize the economy. How the Federal Reserve Was Formed In response to these problems, Congress passed the Federal Reserve Act in 1913, creating the Federal Reserve System. President Woodrow Wilson signed it into law on December 23, 1913. The Fed was designed to: Stabilize the Banking System: The Fed acts as a "lender of last resort" for banks, which means it can lend money to banks in trouble to prevent them from failing. This makes the banking system more stable. Control the Money Supply: The Fed manages the money supply through policies that can increase or decrease the amount of money in circulation. This helps control inflation and keeps the economy from overheating or slowing down too much. Oversee the Financial System: The Fed was given regulatory authority over banks and financial institutions to make sure they follow safe practices. This oversight aims to protect both banks and the people who use them. Structure of the Federal Reserve The Fed was set up as an independent government agency with three main parts: 1. The Board of Governors: This group in Washington, D.C., oversees the entire system and is responsible for setting certain policies. 2. 12 Regional Federal Reserve Banks: These banks are located across the country and help implement the Fed's policies in different areas. They also work directly with local banks. 3. The Federal Open Market Committee (FOMC): This committee sets important policies, such as interest rates, to influence the economy. 23 Importance of the Federal Reserve The Fed plays a key role in keeping the U.S. economy stable. By managing interest rates, overseeing the banking system, and controlling the money supply, the Fed helps keep inflation in check, encourages employment, and prevents financial crises from getting out of control. It is still a central part of the U.S. financial system today, responding to challenges like inflation, recessions, and economic downturns. Overall, the Federal Reserve was formed to create a more reliable and resilient financial system and to respond quickly and effectively to economic problems. PRACTICE: Answer the questions below about the U.S. Federal Reserve (“the Fed”). 23. Why was the Federal Reserve created? 24. What were three major problems in the U.S. economy before the Federal Reserve was formed? Fiscal and Monetary Policy Governments and central banks use fiscal policy and monetary policy to keep the economy stable and healthy. These tools help control things like inflation, unemployment, and economic growth. Here’s what each one means: Fiscal Policy This is about how the government uses spending and taxes to influence the economy. Who is in charge? The government (Congress and the President). What does it affect? How much money people and businesses have. Why is it used? To boost the economy when it’s slow or to slow it down if inflation (rising prices) gets too high. Examples of Fiscal Policy: If the economy is struggling: The government might cut taxes so people have more money to spend, or increase spending on things like building roads and schools to create jobs. If inflation is high: The government can raise taxes or reduce spending to slow down demand and prevent prices from rising too quickly. 24 Monetary Policy This is about how the central bank (in the U.S., the Federal Reserve, or “the Fed”) controls the money supply and interest rates to guide the economy. Who is in charge? The central bank (Federal Reserve). What does it affect? How easy or hard it is to borrow and spend money. Why is it used? To keep inflation low and make sure there are enough jobs. Examples of Monetary Policy: If the economy is slow: The Fed can lower interest rates, which makes it cheaper to borrow money for big purchases like houses or cars, encouraging people and businesses to spend more. If inflation is high: The Fed can raise interest rates to make borrowing more expensive, reducing spending and slowing down the economy. Key Differences Between Fiscal and Monetary Policy Why Do Fiscal and Monetary Policy Matter? These policies are like the tools a mechanic uses to tune up a car. If the economy is running too slow (like a car engine sputtering), fiscal and monetary policies help speed it up. If the economy is running too fast and overheating (high inflation), these tools slow it down to avoid problems. By using these tools wisely, the government and the Fed try to keep things balanced—so people have jobs, prices stay stable, and the economy grows steadily. PRACTICE: Circle the correct answer the following multiple choice questions. 25. Which of the following best describes fiscal policy? A. The government controls the money supply and interest rates to influence the economy. B. The government uses taxes and spending to affect the economy. C. The central bank sets interest rates to control inflation. D. The government controls how much money banks can lend. 25 26. Who is in charge of implementing fiscal policy in the United States? A. The Federal Reserve B. Congress and the President C. State Governments D. The U.S. Treasury 27. If the economy is struggling and unemployment is high, which of the following actions would the government most likely take as part of fiscal policy? A. Raise interest rates to reduce borrowing B. Cut taxes and increase government spending C. Reduce government spending on infrastructure D. Lower the amount of money in circulation 28. Which of the following best describes monetary policy? A. The government adjusts its spending and taxes to affect the economy. B. The central bank controls the supply of money and interest rates to influence the economy. C. The government sets wages for workers. D. The central bank provides loans to businesses and citizens. Taxes and Public Goods What Are Taxes? Taxes are money people and businesses pay to the government. Governments use that money to provide services and build things that benefit everyone. Types of Taxes: Income Tax: A percentage of the money you earn from your job. Sales Tax: A small amount added to the price of things you buy (like clothes or food). Property Tax: A tax on the value of land or houses people own. Corporate Tax: A tax on the profits businesses make. Why Do We Pay Taxes? Without taxes, the government wouldn’t have enough money to: Build roads and bridges. Pay for schools, teachers, and libraries. Fund the police, fire departments, and military. Provide healthcare programs and safety nets for people in need. 26 What Are Public Goods? Public goods are things that everyone can use, and they are provided by the government because it’s hard for businesses to sell them directly. These goods have two special features: 1. Nonrivalry: One person’s use doesn’t stop someone else from using it. a. Example: If you walk through a public park, it doesn’t stop someone else from enjoying it too. 2. Nonexcludability: No one can be stopped from using it, even if they didn’t pay for it. a. Example: Everyone benefits from streetlights, even people who don’t pay taxes. Examples of Public Goods: National defense: The military protects everyone in the country. Fire departments: Firefighters respond to emergencies for everyone, not just those who pay taxes. Public parks and libraries: Anyone can use them without being charged directly. Why Does the Government Provide Public Goods? Businesses don’t usually provide public goods because: They can’t charge every person who uses them. If left to businesses, some goods (like streetlights) wouldn’t be built, even though society needs them. That’s why the government steps in to provide them using the money it collects from taxes. How Are Taxes and Public Goods Connected? The taxes we pay help fund the creation and maintenance of public goods. This ensures that everyone benefits, even people who might not be able to afford these services on their own. Without taxes, we wouldn’t have access to many things we rely on every day, like safe roads, schools, or clean parks. Summary Taxes are how the government collects money to pay for services and public goods. Public goods are things everyone can use and benefit from, even if they don’t pay for them directly. The government provides public goods because businesses can’t or won’t do it on their own. Taxes and public goods help make sure that everyone in society has access to the things they need for a good quality of life. 27  Section 6: International Trade and Global Economics Basics of International Trade What Is International Trade? International trade is when countries buy and sell goods and services from each other. Instead of trying to produce everything on their own, countries trade with others to get what they need or want. Why Do Countries Trade? Countries trade for the same reason people do: Everyone can’t make everything perfectly or affordably. Each country focuses on what it is good at producing and trades for the rest. Here are some key reasons for trade: More Choices: Trade lets people buy products from other countries, like foreign cars, electronics, or tropical fruit. Lower Prices: Countries can import goods that are cheaper to make elsewhere, saving money. Better Quality: Some countries specialize in products they make really well, like Swiss watches or Italian fashion. 28 Key Concepts in International Trade 1. Exports and Imports Exports: Goods or services a country sells to other countries. Example: The U.S. exports airplanes and computers. Imports: Goods or services a country buys from other countries. Example: The U.S. imports coffee from Colombia and cars from Japan. 2. Specialization and Comparative Advantage Specialization means a country focuses on making the things it produces best or most efficiently. Example: Saudi Arabia specializes in oil production. Comparative advantage is when a country can produce something better or cheaper than other countries. Even if a country is good at many things, it will focus on what it does best and trade for the rest. Balance of Trade Trade Surplus: When a country exports more than it imports. Trade Deficit: When a country imports more than it exports. Example: If the U.S. buys more goods from China than it sells to China, it has a trade deficit with China. How Does Trade Benefit Countries? Access to new markets: Companies can sell their products to people in other countries. More efficient production: Countries don’t waste resources making things they aren’t good at producing. Better relationships: Trade builds cooperation and reduces conflict between countries. Challenges of International Trade While trade has many benefits, it also creates challenges: Job Loss: Some industries lose jobs if a country imports too many foreign goods. Tariffs: Countries sometimes add taxes (called tariffs) on imported goods to protect their own industries. Environmental Impact: Shipping goods across the world can create pollution. Summary International trade is the exchange of goods and services between countries. Countries export what they make well and import what they need. Specialization and comparative advantage help countries focus on what they do best. Trade brings benefits like lower prices, more choices, and economic cooperation, but also has challenges like job loss and environmental costs. By understanding how trade works, you can see how connected the world is and how decisions in one country can affect economies around the globe. 29  Comparative Advantage What is Comparative Advantage? Comparative advantage is when a person, company, or country can produce a good or service at a lower opportunity cost than others. This means they give up less of other things to make that good. It explains why trade is beneficial—everyone focuses on what they’re best at and trades for the rest. How Comparative Advantage Works Opportunity Cost: This refers to what someone gives up when choosing one option over another. Example: If Michael Jordan can paint his house in 8 hours but could earn $50,000 filming a commercial instead, his opportunity cost of painting is $50,000. It makes more sense for him to hire someone else (like his neighbor Joe) to paint the house. Key Idea: Even if someone is better at everything, it’s still smarter to focus on what they do best and let others handle the rest. This allows for the most efficient use of time and resources. Comparative vs. Absolute Advantage Comparative Advantage: Being able to make something at a lower opportunity cost. Absolute Advantage: Being better at producing a good or service in every way. Example: A lawyer might be better than their assistant at typing and doing legal work (absolute advantage). But because their time is more valuable doing legal work, it makes sense to hire an assistant to handle typing (comparative advantage). Examples of Comparative Advantage in Trade Portugal and England: Portugal makes wine at a low cost, and England produces cloth cheaply. Instead of both countries trying to do both things, they specialize and **trade** for what they need. China and the U.S.: China has cheap labor and makes simple consumer goods at a low cost. The U.S. focuses on high-tech industries and finance. Both countries benefit from trading these goods and services. Pros and Cons of Comparative Advantage Pros: Higher Efficiency: Everyone focuses on what they do best. Lower Costs: Trading for cheaper goods saves money. Increased Trade: More trade leads to better relationships between countries. Cons: Resource Depletion: Over-specialization can harm natural resources. Unfair Working Conditions: Some countries may use cheap labor with poor conditions to stay competitive. Over-Dependence: Relying too much on trade can make countries vulnerable to global changes. 30  Why Trade Isn’t Always Easy Sometimes, industries try to protect themselves from foreign competition by lobbying for tariffs (taxes on imports) or other restrictions. While these measures help certain industries in the short term, they can hurt consumers by raising prices and limiting choices. Summary Comparative advantage shows how trade benefits everyone by allowing people and countries to focus on what they do best and trade for what they need. While it makes economies more efficient, it also comes with risks like resource exploitation or unfair labor practices. Understanding these trade-offs helps explain why free trade works—but also why it’s sometimes controversial. Exchange Rates and Trade Policies What Are Exchange Rates? An exchange rate is the value of one country’s currency compared to another’s. For example, if 1 U.S. dollar equals 10 Mexican pesos, that’s the exchange rate between the two currencies. Exchange rates affect the price of goods traded between countries. Stronger Currency: If the dollar becomes stronger, U.S. goods become more expensive in other countries. Weaker Currency: If the dollar weakens, U.S. goods become cheaper for other countries to buy. Example: If the U.S. dollar weakens against the euro, American tourists find things more expensive in Europe, but European goods become cheaper in the U.S. Why Do Exchange Rates Matter for Trade? Exchange rates affect imports and exports: Weaker currency: Boosts exports (other countries buy more of your goods). Stronger currency: Increases imports (you can buy more from other countries). Governments sometimes adjust their currency's value to make their exports cheaper. This can help local businesses sell more products abroad. 31 Trade Policies: What Are They? Trade policies are the rules and guidelines that governments use to manage trade with other countries. These policies can encourage or limit trade, depending on the country's goals to protect domestic industries, promote economic growth, or secure a competitive advantage in the global market. Here are the most common types of trade policies: 1. Tariffs A tariff is a tax placed on imported goods to make them more expensive. This helps protect domestic industries by making foreign products less competitive in price. How is the increase in cost transferred? The increased cost due to tariffs is typically passed on to consumers. For example, if a country imposes a tariff on imported steel, the price of goods made from steel (like cars or appliances) may rise because manufacturers have to pay more for the imported steel and pass that cost onto buyers. Example: The U.S. might impose a tariff on imported steel to protect American steelworkers and ensure that U.S. steel manufacturers remain competitive. As a result, consumers may pay higher prices for products like cars or buildings that use steel. 2. Quotas A quota is a limit on the amount of a specific product that can be imported from another country. Quotas are often used to protect domestic industries and control the supply of foreign goods in a market. By limiting imports, quotas help ensure that there is a stable market demand for domestic goods and services, allowing local producers to thrive. Why are quotas used? Quotas are used to support the demand for domestic goods and services by limiting the competition from foreign products. When a country restricts the number of imported goods, it can create a larger market for its own industries to sell to. This encourages local businesses to produce more, supports jobs, and ensures the country can maintain its economic stability. Example: A country may set a quota that only allows 10,000 cars from Japan to be sold each year. Once the limit is reached, no more cars from Japan can be imported, which helps local car manufacturers sell their products without competing with a large number of cheaper imported cars. 3. Free Trade Agreements (FTAs) Free Trade Agreements are agreements between countries that remove tariffs, quotas, and other trade barriers to encourage the free flow of goods and services. By eliminating these restrictions, countries can trade more easily, which often leads to lower prices for consumers and increased market access for businesses. Example: The North American Free Trade Agreement (NAFTA), which involves the U.S., Canada, and Mexico, removed many tariffs and quotas between these countries. As a result, businesses in all three countries can export products to each other more easily and at lower costs, benefiting consumers with lower prices. 32 4. Subsidies A subsidy is a government payment or financial support given to local businesses to help them compete with foreign products. Subsidies can lower production costs, reduce prices, or help businesses remain profitable when they face competition from abroad. Example: The U.S. government might provide subsidies to farmers to help them reduce their production costs and keep their prices competitive with foreign agricultural products. This helps domestic farmers stay in business and ensures there is enough supply of local food products. Summary of Trade Policies: Tariffs: Taxes on imports that make foreign goods more expensive, helping protect local industries. The increased costs are usually passed onto consumers. Quotas: Limits on the amount of a product that can be imported, used to protect domestic industries by controlling the supply of foreign goods. Free Trade Agreements (FTAs): Agreements between countries to remove tariffs and quotas, making trade easier and cheaper. Subsidies: Government support to help domestic businesses compete with foreign products by reducing their production costs. These tools—tariffs, quotas, free trade agreements, and subsidies—are used by governments to regulate the flow of goods and services between countries. By using these policies, governments aim to protect local industries, ensure fair competition, and maintain a healthy economy. 33 How Exchange Rates and Trade Policies Affect You If a country’s exchange rate changes, prices in stores may go up or down for imported goods like electronics or clothing. Trade policies can influence which products are available. If a tariff is added to foreign goods, local products may be more common in stores, but prices could be higher. The Pros and Cons of Trade Policies Pros: Protects Local Jobs: Tariffs help industries compete with foreign companies. Encourages Local Production: Quotas make people buy more from domestic businesses. Cons: Higher Prices: Import taxes raise the cost of foreign goods. Fewer Choices: Quotas limit the variety of products available to consumers. Summary Exchange rates and trade policies play a big role in how countries buy and sell goods with each other. While exchange rates affect the price of imports and exports, trade policies like tariffs and quotas help protect local industries but can also raise prices for consumers. Understanding these concepts helps explain the complex connections between different economies worldwide. PRACTICE: Circle the correct answer for the questions below. 29. What is the main idea behind comparative advantage? A. Producing a product at the highest possible quality B. Making a product faster than competitors C. Producing a good at a lower opportunity cost than others D. Avoiding all international trade 30. Which of the following is an example of opportunity cost? A. A lawyer earning more money by typing instead of practicing law B. A person paying more for imported goods due to tariffs C. Michael Jordan earning $50,000 filming a commercial instead of painting his house D. A government using quotas to limit imported cars 34 31. How does comparative advantage differ from absolute advantage? A. Comparative advantage focuses on lower opportunity costs, while absolute advantage focuses on producing more efficiently. B. Absolute advantage applies only to international trade. C. Comparative advantage always requires hiring additional workers. D. Absolute advantage prevents companies from outsourcing tasks. 32. What is one potential downside of relying on comparative advantage in trade? A. Countries may focus on too many industries at once. B. It encourages all industries to use expensive labor. C. Specialization can lead to resource depletion and unfair working conditions. D. Tariffs will always increase when comparative advantage is applied. 35