1. Foundations of Personal Finance Ch. 3

2. Foundations of Personal Finance Ch. 3
Consumers in the Economy: An Overview 2

3. Chapter Objectives
Relate your consumer economic activities to your financial well-being and to the state of the overall economy.
Explain how economic conditions affect job opportunities and standard of living.
Summarize how consumer spending influences overall economic conditions in a market economy.
continued

4. Chapter Objectives
Describe the impact of consumer and government borrowing on the economy.
Give examples of ways consumer economic problems arise from market characteristics.
Outline consumer economic problems that result from consumer mistakes.

5. Economic Activities of Consumers
Economic activities of consumers include
earning
spending
saving
borrowing
insuring
investing
paying taxes

6. Foundations of Personal Finance Ch. 3
Earning Your Way
You can choose
the field in which you work
your level of education
how much training you attain
continued

7. Earning Your Way Ability to find work depends on your
job skills
experience
education
career choice
demand for workers in your chosen field
Ability to stay employed and advance depends on your job performance
continued

8. Earning Your Way
Your earning power and job performance determine your personal standard of living
A higher standard of living means a higher quality of life for most people
Your standard of living and income should rise as you advance on the job

9. Earnings and the Economy
Earning activities of consumers contribute to a country’s wealth
The national standard of living is the level of prosperity in the country
continued

10. Earnings and the Economy
Foundations of Personal Finance Ch. 3
Earnings and the Economy
The U.S. has one of the highest standards of living in the world
continued

11. Earnings and the Economy
Measures of a nation’s prosperity
GDP per capita—the national GDP divided by the population of a country
Labor productivity

12. GDP Per Capita High or rising GDP per capita means
incomes are high or rising
more goods and services are available to each person
people are consuming more
standards of living are high or rising
continued

13. GDP Per Capita Low or falling GDP per capita means
incomes are low or falling
fewer goods and services are available to each person
people are consuming less
standards of living are low or falling
continued

14. GDP Per Capita
There are problems with using GDP per capita as a measure of national prosperity
It assumes everyone gets an equal share of goods and services produced
It disregards unpaid work, such as housework, child care, and volunteer work

15. Labor Productivity High labor productivity indicates a healthy economy
Productive workers produce more and can increase their earnings
continued

16. Labor Productivity
To raise labor productivity, businesses and governments invest in
capital, such as factories and machinery
research and technology
transportation, communication, and energy
education and training of the workforce
continued

17. Labor Productivity
By raising the productivity of its workforce, a nation can raise its GDP and create wealth
State of the economy determines job opportunities and earnings of workers

18. Spending and the Economy
Foundations of Personal Finance Ch. 3
Spending and the Economy
Consumers in a market economy make their own spending choices
continued

19. Spending and the Economy
Spending decisions of consumers create demand for goods and services they buy
As a group, consumers determine the success or failure of specific goods, services, and businesses
continued

20. Spending and the Economy
Optimistic consumers tend to spend and borrow more, which creates
greater demand for goods and services
growth of businesses to meet increased demand
more jobs
a sense of prosperity
continued

21. Spending and the Economy
Pessimistic consumers tend to spend and borrow less, which
lowers demand for goods and services
lowers sales and slows business growth
makes jobs harder to find
can lead to a recession

22. Foundations of Personal Finance Ch. 3
Saving Your Money
Savings is anything that improves a person’s financial position
continued

23. Saving Your Money Savings include cash investments home improvements
cash value of insurance policies
durable goods

24. Saving and the Economy Savings are put into financial institutions
Financial institutions loan money to businesses and other consumers
Loans pay for business growth, building construction, home purchases, and more

25. Borrowing to Spend Consumer credit lets you buy now and pay later
Credit helps consumers pay for major and unexpected purchases
Credit is costly; use of credit reduces future income

26. Borrowing and the Economy
Foundations of Personal Finance Ch. 3
Borrowing and the Economy
Borrowing increases money in circulation and demand for goods and services
continued

27. Borrowing and the Economy
Borrowing can
cause prices to rise, resulting in inflation
decrease future demand
threaten long-term economic prosperity

28. In Your Opinion
Does using credit do more harm than good to the economy? to individuals?

29. Insuring Against Financial Risks
Insurance is a risk-management tool
Policyholders join others in insurance pools and make payments to insurance companies
Insurance companies invest payments in business enterprises
Payments and their earnings pay the bills of policyholders who suffer losses

30. Insurance and the Economy
Insurance contributes to overall economic stability by
spreading financial risks
stabilizing incomes of people who suffer serious financial losses
Insurance company investments contribute to growth

31. Investing for the Future
Foundations of Personal Finance Ch. 3
Investing for the Future
An investment is an asset that increases wealth over time
Investments also carry risk of loss
continued

32. Investing for the Future
Types of investments include
securities (stocks, bonds, mutual funds)
real estate
business ownership
certain insurance policies
valuable items

33. Investment and the Economy
Investments pay for
business growth and activity
research and development of new technology
marketing of new products and services
Benefits of investments ripple through the economy

34. Paying Taxes for Government Services
Tax revenues pay for goods and services that government provides
Voters indirectly decide the level of taxes and what they want to “buy” from government
Types of taxes include income tax, sales tax, property tax

35. Taxes, Government Spending, and the Economy
Foundations of Personal Finance Ch. 3
Taxes, Government Spending, and the Economy
Positives of government spending
It creates demand for goods and services
It stimulates the economy
continued

36. Taxes, Government Spending, and the Economy
Negatives of government spending:
It can drive up prices and cause inflation
It can drive up the national debt (deficit spending)

37. Economic Problems of Consumers in a Market Economy
A confusing variety of products
Some questionable selling methods
Conflict of interest between consumers and sellers

38. Confusing Variety of Products
The marketplace contains many sellers
There are many new products and services created each day
Consumers have many options and choices to make

39. Questionable Selling Methods
Foundations of Personal Finance Ch. 3
Questionable Selling Methods
High-pressure selling
False advertising
Contests
“Free” offers

40. Conflict of Interest
Sellers want to charge the highest price they can get
Consumers want the best quality at the lowest price
Forces of supply and demand balance the needs of sellers and consumers

41. Consumer Mistakes Leading to Problems
Lack of planning
Failure to use information
Impulse buying and overspending
Poor communication

42. Lack of Planning When consumers fail to plan, it can be
difficult to pay bills
hard to save for big expenses and future needs
difficult to use credit wisely
easy to buy things that do not fulfill your needs and goals

43. Failure to Use Information
Foundations of Personal Finance Ch. 3
Failure to Use Information
Consumers sometimes fail to investigate, ask questions, and know exactly what they are buying
continued

44. Failure to Use Information
Failure to use information can be costly, disappointing, and even dangerous
Information sources include salespeople, the Internet, and consumer magazines

45. Impulse Buying and Overspending
Consumers sometimes buy without thinking about needs, goals, and consequences
Impulse buying can result in overspending and thoughtless spending, especially among credit card users

46. Poor Communication Includes the failure to complain when necessary
Can be costly

47. Central Ideas of the Chapter
The economic decisions of consumers impact the overall economy.
Smart consumers avoid the pitfalls that a market economy can create.

48. Foundations of Personal Finance Ch. 3
Glossary of Key Terms
Back
asset. An item of value that a person owns, such as cash, stocks, bonds, real estate, and personal possessions.
durable goods. Products that have lasting value, such as furniture, appliances, and cars.
GDP per capita. The market value of final goods and services produced per person.
income tax. A tax on the earnings of individuals and corporations. 48

49. Foundations of Personal Finance Ch. 3
Glossary of Key Terms
Back
investment. An asset bought to increase wealth over time, but that carries the risk of loss.
labor productivity. The value of the goods and services a worker creates in a given time.
property tax. Tax paid on real estate owned by individuals and corporations.
prosperity. A time period of growth and financial well-being. 49

50. Foundations of Personal Finance Ch. 3
Glossary of Key Terms
Back
sales tax. Tax added to the price of goods and services you buy.
standard of living. The overall level of comfort of a person, household, or population as measured by the amount of goods and services consumed 50