Personal Finance Economics Unit 5: Chapters 8-11 Personal Finance Economics Unit 2: Chapters 10-11

Essential Questions 1) How will varying degrees of knowledge, skills and abilities affect earnings? 2) How are banks and financial institutions important to the economy? 3) How do changes in tax rates and interest rates respectively affect individual’s spending and saving behavior? 4) How can the use of credit impact personal financial health? 5) Why do individuals carry different types of insurance?

Labor Civilian Labor Force (CLF) Men and women 16 and up not in the military, prison, or otherwise institutionalized who are working or actively looking for a job. Who does this not include? The number of people in the CLF is determined by the Bureau of Labor Statistics (BLS) They also determine the unemployment rate Good rate = 4-6% Current Rate? http://www.bls.gov/cps/

Types of Labor Unskilled Semi-Skilled Skilled Professional Lack training to operate specialized machines “ditch diggers” Semi-Skilled Workers with some mechanical skills Floor polisher, cashier Skilled Operate complex equipment Carpenters, computer technicians, crane operators Professional Higher level skills Doctors, lawyers, engineers, teachers No level competes with any other People tend to stay at the same level their whole lives Cost of education and training Lack of opportunities Lack of initiative

Supply and demand of each level determines wages Could also be caused by Learning Effect Education increases productivity, leading to higher wages Screening Effect College degree means that employee must be intelligent or hard working. Thus, he/she should receive a higher wage

Wage Determination Theories Traditional Theory of Wage Determination Based on supply and demand People will be paid the equilibrium wage rate Exceptions: racism, sexism, uninformed buyers and sellers Theory of Negotiated Wages Good negotiators may get better than equilibrium price Unions Strikes, pickets, and boycotts Employer strategies: lockout or a company union

Wage Determination cont. Regional wage differences Higher supply or demand in certain regions Cost of living Location: attractive? Wage between genders and race “Glass Ceiling” Barrier that prevents minorities and women from advancing Ways to get around it Comparable Worth The idea that some jobs in society have equal value and should receive equal pay Set Aside Contracts The government can give a certain percentage of contracts to businesses owned by women and minorities. Both the problems and the solutions violate laws of economics and lead to inefficiencies in the market for labor. Gender gap reading

Savings Disposable Income = Consumption + Savings The absence of spending For investment to occur, people must save Investing The act of redirecting resources from being consumed today so that they may create benefits in the future. Saving = Investing How does a bank make money? Banks lend saved funds and charge a higher interest rate on loans that they do on savings.

Financial System The financial system is a way to transfer savers’ dollars to investors. When you save, you receive a receipt called a financial asset. Ex. Bond, bank statement Financial assets are claims on the property and income of the borrower. Savers use these to prove a payment is expected if the borrower defaults on a loan. Households and businesses provide some funds directly to borrowers through bonds, but mostly they supply funds through financial intermediaries. Financial intermediaries are institutions such as banks, life insurance companies, and pension funds. Financial intermediaries Handout Money is then loaned to borrowers

The Financial System The financial system matches one person’s saving with another person’s investment. It moves the economy’s scarce resources from savers to borrowers. We must have savers in order to borrow

FINANCIAL INSTITUTIONS IN THE U.S. ECONOMY The financial system is made up of financial institutions that coordinate the actions of savers and borrowers. Helps address 3 problems Transaction costs Makes it easier for savers to find borrowers Risk Reduces risk by making it easier to diversify Provides liquidity Provides access to cash for borrowers Assets VS Liabilities Financial institutions can be grouped into two different categories: financial markets and financial intermediaries.

FINANCIAL INSTITUTIONS IN THE U.S. ECONOMY Financial Markets Stock Market Bond Market Financial Intermediaries Banks Mutual Funds

FINANCIAL INSTITUTIONS IN THE U.S. ECONOMY Financial markets are the institutions through which savers can directly provide funds to borrowers. Financial intermediaries are financial institutions through which savers can indirectly provide funds to borrowers.

Financial Markets IOU The Bond Market A bond is a certificate of indebtedness that specifies obligations of the borrower to the holder of the bond. Characteristics of a Bond Term: The length of time until the bond matures. Credit Risk: The probability that the borrower will fail to pay some of the interest or principal. Tax Treatment: The way in which the tax laws treat the interest on the bond. Municipal bonds are federal tax exempt.

Financial Markets Federal Bonds Bond Prices Issued by the US government to finance debt Loans to the US government Bond Prices Interest rates and prices go in opposite directions.

Financial Markets The Stock Market Stock represents a claim to partial ownership in a firm and is therefore, a claim to the profits that the firm makes. The sale of stock to raise money is called equity financing. Compared to bonds, stocks offer both higher risk and potentially higher returns. The most important stock exchanges in the United States are the New York Stock Exchange, the American Stock Exchange, and NASDAQ.

Financial Intermediaries Banks take deposits from people who want to save and use the deposits to make loans to people who want to borrow. pay depositors interest on their deposits and charge borrowers slightly higher interest on their loans. Banks help create a medium of exchange by allowing people to write checks against their deposits. A medium of exchanges is an item that people can easily use to engage in transactions.

Financial Intermediaries Mutual Funds A mutual fund is an institution that sells shares to the public and uses the proceeds to buy a portfolio, of various types of stocks, bonds, or both. They allow people with small amounts of money to easily diversify.

Financial Intermediaries Other Financial Institutions Credit unions Pension funds Insurance companies