ECONOMIC VOCAB TERMS

WHAT IS AN ECONOMY? An economy is a system which tries to balance the available resources of a country (land, labor, capital, and enterprise) against the wants and needs of consumers. It deals with three key issues: -What is produced -How it is produced -Who gets what is produced

DEPRESSION V RECESSION Depression – a long period where the economy goes downhill; usually has high unemployment, lots of bankruptcies, less trade, and sometimes devaluation Recession – a shorter, less extreme depression (technically, when a country’s GDP falls for two straight quarters)

GDP? GDP (gross domestic product) is basically the ultimate measure of a country’s economy GDP is the monetary value of all final goods, services, and structures produced within a country’s national borders during a one-year period. The formula is: GDP = exports –imports + consumption + investments + government spending

GDP CONTINUED... Exports = stuff we sell to other countries (exit) Imports = stuff we buy from other countries (in) Consumption = food, rent, clothing, medical expenses, etc. Investments = NOT money put into stocks or savings banks… money spent by businesses to try to get more business (such as a new warehouse, new computer programs, a new ride at Six Flags) Government spending = money spent by government on salaries, supplies, war, etc.

GDP CHART

STOCK MARKET Stock market – a system for buying and selling stocks in corporations Let’s say you own a factory that makes really cool cell phones You make a profit of about $100,000 a year To make even more money, you want to build a second factory, but it will cost you $1 million Your options: 1. Save up to buy the second factory 2. Borrow money from a bank, at a high interest rate 3. Divide your company into shares of stock, and sell them

STOCK MARKET CONTINUED... Let’s say your company is worth about $2 million now, based on your equipment, supplies, etc. If you divide into shares of stock, you could probably sell them for a total of about $3 million Why? People who buy stock are investing that you’ll be worth more later And if you sell for $3 million, you can buy that new factory right away

STOCK MARKET CONTINUED... Two downsides to “going public” (dividing your company into stock shares) You have to disclose all your financial info to all your stockholders Each share of stock allows its holder to have a vote on what the company does For this reason, most companies make sure to buy back 51 percent of their shares if they “go public” Why do people buy stock? Investment or gambling (depending on your point of view)

THE ANIMALS OF THE STOCK MARKET Bull market – a long period of rising stock prices Bear market – a long period of falling stock prices

OTHER TERMS Margin – buying a stock by paying only a fraction of the stock price and borrowing the rest Speculation – investing money at great risk with the anticipation that the price will rise Installment plan – buying an item on credit with a monthly payment plan Foreclosure – when a creditor takes possession of a property because someone did not pay the mortgage payments

“How the Economy Really Works”