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CHAPTER 2
Economics and the Global
Economy
DO NOW:
Why do you need to be concerned about the views
of those running for government offices?
 What is the role of money in the economy?



Trading, saving, investing, lending
What are some benefits and drawbacks of
government involvement in the economy?
Main Idea-Chapter 2:
The more you know about how an economy operates and
the government’s role in the economy, the better
educated you will be when making life decisions about the
use of your financial resources, voting for government
officials, and planning your future career.
FUNCTIONS OF MONEY
 Medium
of
Exchange
 Unit of Value

Compare prices on
goods and services
 Store
of Value
Accumulate & save
$$$
 Retrieve at later time
 Loss of value


High inflation

Fiat Money

Legal tender
CHARACTERISTICS OF MONEY

Divisible
is ¼ of a


Usable

Stable

Use = amounts of $$$$ from week to week
MONEY SUPPLY

Total amount of $$$$ in circulation

Effect on prices

Inflation
$$$ supply increases more than production (more money
than goods)
 Cause: borrowed money in circulation


Deflation
Lots of productivity and low money supply
 Prices decrease

DEFLATION
WHAT TYPES OF SERVICES ARE FUNDED
WITH THIS MONEY?
ROLE OF GOVERNMENT IN THE
ECONOMY
Do Now: Read page 36, 37, 39, 40.
 What is a budget deficit, budget surplus?
 How does a budget deficit add to the national
debt?
 What three roles does the Government serve to
the economy? List one example for each role
 Explain why the government spends money on
various assistance programs. How does this
assistance affect the economy?
 Choose 3 of the assistance programs and explain
what they do. Are the programs worth the
opportunity cost? Explain!

ROLE OF GOVERNMENT IN THE ECONOMY:
REGULATION


Regulatory Agencies
Investors
Securities and Exchange
Commission
 Federal Reserve System


Workers

Occupational Safety and
Health Administration
(OSHA)


Guidelines for worker
safety
Equal Employment
Opportunity Commission


Regulates hiring, firing,
promotions
Purpose- equal
treatment based on
ability
ROLE OF GOVERNMENT IN THE ECONOMY

Consumers
Food and Drug Administration
 Federal Trade Commission
 Consumer Product Commission


Environment

EPA
ROLE OF GOVERNMENT IN THE ECONOMY:
PROTECTION

Protection of business

Patents


Copyrights


Must get permission to use intellectual property
Trademarks


Protects inventors
Protects company name and reputation
Protection of Citizens
Military, police, CIA, etc…
 Lawyers, doctors, hair stylists, etc….

ROLE OF GOVERNMENT IN ECONOMY:
ASSISTANCE







Education
Disaster relief
Energy
Food
Housing
Insurance
Health care

Assistance Programs:
FICA
 Food stamps
 FEMA

DO NOW

What is the government’s role in supporting and
stabilizing the economy? How do these actions
impact your personal finances?

govt. controls the federal rate. If govt raises the rate,
rates on loans will increase.
FEDERAL RESERVE SYSTEM

12 Fed Reserve Banks
Interest Rates
The Federal
Reserve
System is the
Central Bank
of the United
States
Guides
Monetary
Policy
Regulates the
U.S. Banking
System
Foreign
Exchange Rates
ECONOMIC INDICATORS AND YOU
 Economic
Goals
Growth, stable
prices, and full
employment
 Indicators
 Study state of
the economy to
measure goals

ECONOMIC INDICATORS

Gross Domestic
Product (GDP)
Value of all goods and
services produced
inside a country
 Consumer Spendinglargest % of GDP


Consumer Price Index
(CPI)
Measure cost of goods
& services for urban
family (food, medical,
transportation)
 Purpose


Determine inflation,
deflation, stability
ECONOMIC INDICATORS

Unemployment Rate
% of workforce ACTIVELY looking for work
 5% is acceptable rate

BUSINESS CYCLES

Expansion

Positive economic
indicators
 Decrease unemployment
 Peak- then begins to
decline
Low point in business
cycle
 Between recession &
recovery phase
 Economic indicators
slowly become positive



Recession
Economic downturn
 Increase unemployment
 Decrease consumer
demand
 Govt- loss of revenue

Trough

Recovery
Business invest in more
capital, hire more
workers
 Decrease unemployment
 Stable prices

Roles of Trade
Individuals
Organizations
Nations
Trade skills for wages
Trade goods and
services for revenue
Trade with other
nations for resources
ROLE OF TRADE: EVERYONE GAINS

Division of Labor and
Specialization
Division of tasks
 Increase productivity


International Trade
Imports, Exportscreate global
marketplace
 Benefit- increase
competition

WHY NATIONS TRADE
Scarcity of
resources
 Absolute Advantage



Produce more of a
product than any
other nation
Comparative
Advantage

Produce products
more efficiently than
other nations
BALANCE OF TRADE
Difference between
value of a country’s
imports and exports
during a specific
period
 Trade Deficit

Not always a bad
thing
 Opportunity for
foreign investors
 Ex-Japanese cars

FREE TRADE VS. PROTECTIONISM

Free Trade
No regulations
amongst global trade
 Output, competition
increase

NAFTA, EU
 World Trade
Organization (WTO)


Protectionism
Barriers to free trade
 Protect domestic
industries

Tariffs
 Quota
 embargo
