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Consumers, Savers, and Investors GDP and Circular Flow of Money GDP is the final value of all goods and services produced in the country in one year. Circular flow of money: Consumer (buys products, provides labor) Business and manufactures ( sells products and pays employees) Consumption as a Percent of GDP (2004) Sources of Income Income from work Wages Salary Income from wealth Possessions, bank accounts, saving, investments Rent and interest Income is not equal to wealth Assets 100,000 Net worth=10,000 (wealth) Liabilities 90,000 Factors that influence wealth accumulation Income Expectations Current Interest Rates Taxes Budget Your Self Set financial Goals (PYF) Estimating income Planning Expenditures Importance of Investing Saving Low risk, short term Investments Higher risk, long term Investment risks Market risk rise and fall due to the economy Inflation risk Dollar today is worthless tomorrow Saving and investments Rate of Return • percent of interest rate • amount of dividends paid REMEMBER: THE GREATER THE RATE OF RETURN THE RISKIER THE INVESTMENT. Principal and Compound Interest Principal Initial amount of money you put in Compound interest Interest calculated on the principal and the accumulated interest. Rule of 72 72 Interest rate =years to double investment Or 72_____________ Years to double investment= Interest Rate Required Liquidity Ease with which any asset, can be converted to cash easily More liquidity Savings Savings bonds CD’s Bonds US saving bonds Mutual funds Stocks Collectibles Commodities Less liquidity (Low risk) (High risk) Savings accounts Safety and liquidity Low rate of interest Low minimum balance Money Market deposit accounts Write limited number of checks in a defined time period Your money participates in a money market fund Certificate of Deposit (CD) Fixed rate of interest for a specific period of time Pays higher rate of interest Fairly liquid but pay penalty for early withdrawal Corporate Stocks Shared OWNERSHIP in a corporation Profits are distributed to stockholders in forms of dividends. Capital appreciation You share the profits and losses Market risks, the potential decrease in the value of a stock in the stock market Inflation risks, general rise on overall prices Corporate Bonds You are a LOANER Bonds will pay you back a fixed rate of interest at a specific time U.S. savings bonds Debt of the federal government Issued at a discount rate and redeemed at face value of bond Mutual Funds Pool of money in a portfolio Company diversifies its investments to take an advantage of the highs and lows of the stock market Pension and Retirement Funds Tax deferment Payment of taxes on interest after the interest is earned. • 401 K Plan Usually maintained by employer Employer and /or employee may pay into fund (PERA) vs Social Security • Employee stock ownership plan (ESOP) Allows employees to purchase the employer’s stock at a reduced stock price Individual retirement accounts IRA Roth IRA Advertising benefits and costs BENEFITS Gives consumers information about costs, new products and improvement Increases competition among sellers Pays most magazine, newspaper,TV, radio costs Disadvantage Advertising costs are passed on to the consumer Lead to impulse buying Media which is supported by advertising are reluctant to criticize products