101 Things Everyone Should Know About Economics

A Down and Dirty Guide to Everything from Securities and Derivatives to Interest Rates and Hedge Funds - And What They Mean For You

Peter Sander

• Publisher: Adams Media
• Year: 2009
• ISBN:
  9781440513435
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

Economics, demystified! From the collapse of housing prices to the thousand-point drops in the stock market, the past has been full of economic crises. These changes not only affect the overall market—they can also drastically influence your personal finances and day-to-day life. In this easy-to-understand guide, Peter Sander explains how the financial system works, as well as the most important concepts, terms, and programs in economics. Using simple language, he details how the evolving climate will affect world economies—and what kind of shifts you are going to see in your finances as a result.In this updated edition, Sander also includes valuable information on: -The housing market and what it may do in the future-The impact of Obamacare on the economy-The scope of the Great Recession and how the U.S. is still struggling to recover-How to take advantage of the economy as it begins to rise againAn essential guide, 101 Things Everyone Should Know about Economics, 2nd Edition helps you fully understand today's economy and shows you how to secure your financial future even as the market changes.

CHAPTER 1

The Basics

If you have taken an introductory economics course in high school or college or have read a basic economics textbook, you can probably skip this chapter and go right to the next. But if you want to refresh your grasp of basic economic terms, read on. You can also use this resource as you go through the book.

A GLOSSARY OF BASIC ECONOMIC TERMS

Asset. A property; something that is owned. For businesses, it can take the form of tangible physical items such as factories, products, and equipment or tangible financial items such as cash or receivables, that is, money owed to the firm. Assets can also be intangibles such as patents, trademarks, and copyrights. Such assets often fall into the category of intellectual property, a concept that’s the subject of a growing body of law. In the age of the Internet and with complex financial transactions, determining the value of an intangible asset has grown very complicated and is likely going to become more so in the future.

Broker. Someone who sells or buys things on behalf of other people for a fee, or commission. For example, a mortgage broker arranges and sells mortgages. An insurance broker arranges the sale of insurance policies to clients, and so on. The term brokerage firm usually refers to a company that deals in stocks. In addition, brokers often make recommendations to their clients about what to buy and sell, but in most cases the buy or sell decision rests with the client.

Capital. In economic terms, capital is one of three factors involved in the production of goods or services (the others are land and labor). Capital can include goods or physical assets like factories or equipment, or financial assets like cash or other monetary resources used to run a business or public agency.

Competitive Advantage. It’s the nature of capitalism that businesses compete against one another. Each entity tries to find some special way of beating its rivals, something that makes it stand out among the competition. That something is competitive advantage (also sometimes called the comparative advantage). Such an advantage can be based on product (quality or technical leadership, for example), price, distribution, or service, among other things. Competitive advantage is one of the most valuable tools a company has to ensure its growth, and companies try to protect their competitive advantages from all rivals.

Consumer. Anyone who purchases and uses goods and services that companies produce. Consumers have become a major driving force in the United States economy, and companies compete fiercely for their business. To this end, they spend a lot of time analyzing consumers, trying to figure out their buying patterns, behaviors, and so on.

Credit. Money that’s loaned, or potentially loaned to an individual, business, or public entity. For an individual, credit can be in the form of a mortgage, a car loan, a line of credit through a credit card, or any one of numerous other forms. For a business, credit also comes in the form of a loan or a line of potential credit, or for a larger business, in selling securities, namely, bonds or other debt instruments. When you have credit, that’s money that has been loaned to you by someone else. If you’re a creditor, you’ve loaned money to someone, and they’ll have to pay it back to you, usually with interest.

Debt. Something you owe to someone else. Personal debt has become a huge issue in the United States in recent years, and many people, as a result of their exploding debt, have suffered bankruptcies and foreclosures. However, some debt can be good—for example, if it’s used to buy something that will provide greater value over time (like a personal residence), or something that you need but will cost more in the future. When you purchase something you don’t need or can’t afford or is “used up” before the debt is paid off, that’s considered “bad” debt.

Economic Forecast. An estimate of where the economy, a business, or some component of it is going. Different government agencies, as well as private and quasi-public agencies, make economic forecasts, some of which can affect the performance of the markets. Businesses use forecasts to plan their goals and budgets.

Elasticity. In economics, the tendency for demand to rise or fall for an item when the price rises or falls. In a more technical sense, it’s the ratio between the percentage change in two variables (for example, supply and price). For instance, if the price of a product rises slightly and immediately the demand for it falls dramatically, the product is said to have high elasticity. The price of a product such as gasoline, on the other hand, can rise quite a lot before demand drops substantially, so it’s said to have low elasticity.

Entrepreneur. Someone who starts a business and takes responsibility for its success or failure. The term has also come to mean someone who shows enterprise, initiative, and daring as an employee or in the business community at large. Small businesses, started and operated by entrepreneurs, represent 99 percent of all U.S. businesses, and for many they represent American capitalism in its purest form.

Free Enterprise. An economic system in which markets and companies are privately owned and are free to compete against one another with minimal government restrictions. This is the system that exists in the United States. It’s sometimes referred to as laissez-faire capitalism or free-market capitalism.

Interest. The fee paid in order to use money borrowed from someone else. Essentially, this is the cost of obtaining credit.

Interest is calculated as a percentage of the amount borrowed. This percentage is called the interest rate. You’ll hear about simple interest, which is interest paid or received over a single period, such as a year, and compound interest, which is interest received over a number of periods and reinvested so that additional interest is received on interest already received earlier. See #21 Interest Rates.

Investor. Someone who puts money into a business to produce a return, that is, to make money on their money. Sometimes investors do this by loaning money to the entrepreneurs who are starting or running the business, or by buying an interest (sometimes, stock) in their business. The money they receive, either as payments or from a sale of the investment down the road, is called the return on investment, and is calculated as a percentage based on the returns divided by the amount of the investment.

Macroeconomics. As implied by the prefix “macro,” the study of economics in the big picture, that is, regional, national, or international economic activity, trends, and issues. Macroeconomists try to figure out what drives entire economic systems and what impact these systems, or components of the systems, have on each other.

Microeconomics. The opposite of macroeconomics, microeconomics studies economic movement for individuals, businesses, or other entities within the economy, including the dynamics of pricing, supply and demand for individual goods and services. Microeconomists also study the behavior of companies and regions to understand how these units are allocating their resources and responding to pressures from above and below.

Monopoly. A single company or individual controlling an entire product or service. Monopolies can charge excessive prices and reap excess profits because of their controlling position in a market. In the nineteenth centuries, monopolies were fairly common in America (Standard Oil, for example). Throughout the late nineteenth and twentieth century, many of them were broken up by legislation, starting with the Sherman Anti-Trust Act of 1890. Today, government agencies review mergers in an attempt to prevent the formation of monopolies. In recent years, several companies, notably Microsoft, have faced monopoly criticisms and actions.

Mortgage. A loan made based on security, especially real property, pledged to ensure its repayment. When you take out a mortgage, you borrow money and give the lender a lien on a property as collateral to secure the repayment of the debt. When you’ve paid off the mortgage, the lien will be cancelled. If you don’t repay the debt, the lender can foreclose on the property, that is, take legal possession of it.

Outsourcing. The increasingly common practice of contracting people outside an organization to perform work that used to be done by workers within a company. Outsourcing has grown massively to include everything from call centers and customer service to information technology services. Many American companies are outsourcing, or offshoring, overseas to countries such as India and China, where labor costs are less.

Productivity. A measure of efficiency. It’s often expressed as the ratio of units to labor hours (a company produces 2,000 pairs of shoes per hour, for example). Productivity is one element that’s factored into studies of economic growth. In general, industries try to increase productivity through technological innovation and other methods.

Profit Margin. A measure of a company’s profit performance that may occur at several levels. For example, gross margin is a company’s revenue less the direct costs of producing a good or service but before expenses. Operating margin is revenue less costs and expenses; net margin, or net profit, is revenue less costs, expenses, and taxes. These figures are commonly represented as percentages, and are key indicators of a company’s health.

Publicly Held Company. A company that’s registered with the Securities and Exchange Commission and whose stock is traded on the open market where it can be bought and sold by the public. In a privately held company, on the other hand, stock is held by a relatively small number of shareholders who don’t trade it openly. Often these are family or friends of the owner. Eventually, the company may “go public,” holding an initial public offering and selling shares on the open market.

Return on Investment. A measure of how much money an investor gets back relative to the amount invested. It’s sometimes called the rate of return or return rate. Many people make decisions about investments based on a calculation of ROI.

Venture Capital. Money, or capital, invested directly into new businesses by outside investors. Venture capital investors tend to look for high-potential start-up companies that can grow quickly and provide a strong return on investment. Venture capitalists may be investors themselves or may invest on behalf of other investors. Family and friends who lend money for start-ups are sometimes referred to as angel investors. In some cases, venture capitalists anticipate that the company will grow to a certain size and then be sold for a profit, producing a rich return. Alternately, the company may take itself public, selling shares in an initial public offering (IPO) as has happened with Google and many other technology firms. See #73, Private Equity.

CHAPTER 2

Economy and Economic Cycles

We start with the economy. Not a big surprise in a book titled 101 Things Everyone Should Know about Economics. By way of definition, the economy is a system to allocate scarce resources to provide the things we need. The economy consists of the production, distribution, consumption, and exchange of goods and services. It is about what we do as a society to support ourselves, and about how we exchange what we do to take advantage of our skills, land, labor, and capital.

Of course, that definition is a bit oversimplified. The economy is really a fabulously complicated mechanism that hums along at high speed—lightning speed with today’s technology—to facilitate production and consumption. The economy itself is fairly abstract, but touches us as individuals with things like income, consumption, savings, investments, or more concretely, with money, food, cars, fuels, and savings for college.

One could only wish ours was a “steady state” economy, that it would always provide exactly what we need when we needed it. Unfortunately, it isn’t so simple. The economy is directly influenced by a huge, disconnected aggregation of individual decisions. There is no “central” planning for the economy (yes, it’s been tried but doesn’t work for a variety of reasons), although governments, central banks, and other economic authorities can influence its direction. Because the economy functions on millions of small decisions, the economy is subject to error—overproduction and overconsumption for example. Take these errors, add in a few unforeseen events, and the result is that economies go through cycles of strength and weakness.

The first fifteen entries describe the economy, economic cycles, economic results, and some of the measures economists use to measure economic activity.

1. INCOME

Income is the money we receive in order to buy what we need when we need it. Economists look at income in several different ways—including where it comes from, how much is earned, and how much of what is earned can really be spent. Income includes the following money flows: wages to labor, profit to businesses and enterprise, interest to capital, and rent to land.

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Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• INTRODUCTION
• CHAPTER 1: The Basics
• CHAPTER 2: Economy And Economic Cycles
• CHAPTER 3: Money, Prices, And Interest Rates
• CHAPTER 4: Banks and Central Banking
• CHAPTER 5: Governments and government Programs
• CHAPTER 6: Economic Schools and Tools
• CHAPTER 7: Finance and Financial Markets
• CHAPTER 8: Trade and International Economics