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Understand How the U.S. Economy Works

By: Laura Adams

Macroeconomics is a branch of economics that looks at aggregate or total economic variables to study the behavior of a national economy as a whole.

This is in contrast to Microeconomics which looks at production and prices within specific markets.

When Macro-economists study an economy, they look at 3 major variables. These are output, the unemployment rate, and the inflation rate.

1. Output is the level of production in an economy as a whole. The measure of aggregate output in the U.S. is known as the Gross Domestic Product, or GDP. It can be thought of from 2 different perspectives, production and income.

From the production side: GDP is the value of the final goods and services produced in an economy during a given period. GDP is also the “value-added” that all the businesses added to the economy during a given period.

From the income side: GDP is the sum of incomes in the economy during a given period. This is the income or revenue that a business (a) is left with as profit, (b) pays to the government as taxes, and (c) pays to employees as wages.

2. The unemployment rate is the proportion of workers in an economy who are not employed but are seeking work. The total labor force is a combination of people who are working plus those who are not working but want to work.

In the U.S., the Bureau of Labor Statistics conducts the Current Population Survey or CPS. It interviews about 50,000 households each month to determine if the adults are employed.

The survey classifies an individual as employed if they have a job at the time of the interview and as unemployed if they don’t have a job but have been actively seeking a job within the prior 4 weeks.

If someone isn’t working and doesn’t want to work, they are not counted as part of the labor force.

So the unemployment rate is the number of unemployed people seeking work divided by the total labor force. The lower the unemployment rate, the more people are working, and this results in higher economic output.

3. Inflation is a sustained rise in the general level of prices. The inflation rate is the rate at which the average price of goods in an economy increases over time.

And deflation is the rare opposite, a sustained decline in price levels. Deflation is also called negative inflation.

Here are some more economic scenarios: hyperinflation is extreme inflation and stagflation is when inflation gets combined with economic stagnation.

Macro-economists measure the cost of living by the consumer price index, or CPI. The CPI has been used since 1917 and is published monthly. It gives the cost in dollars of a specific list of goods and services over time.

U.S. Bureau of Labor Statistics employees actually visit over 22,000 locations in 85 cities to see what’s happening to the prices of products on the CPI list such as cars, gas, clothing, food, etc.

As an index, the CPI is set equal to 1 in the base period chosen. This is so its level has no particular significance. The current base period are the years 1982 to 1984, thus the average for the period 1982 to 1984 is equal to one.

In the year 2000, for example, the U.S. CPI was 1.71. This means that when comparing prices for similar products, they were 71% higher in 2000 than they were in the time period 1982-1984.

When demand rises, this is called a Boom and it leads to inflation. Follow this:

When consumer demand increases, the goal of production is, of course, to keep up with that consumer demand. This entails paying workers overtime or hiring additional workers to beef up output. All this extra work means that labor costs rise because more people are being paid to do the work. These increased labor costs are passed on to the consumer in the form of higher prices. And higher prices, as we’ve said, are the definition of inflation.

When demand falls, this is called a Recession and it leads to deflation. Follow this:

When consumer demand falls, workers get laid off or have their working hours cut back. If production needs decrease, fewer workers are obviously needed to fill the decreases in demand. The decreased labor costs are passed on to the consumer in the form of lower prices. Companies must reduce their prices to stay competitive in a shrinking marketplace. And lower prices are the definition of deflation.

Recession is a period of negative GDP growth. The time frame for a recession is debated. Many macro-economists insist that negative growth must last for at least 2 consecutive quarters.

Others define recession more loosely, as a significant decline in growth that lasts more than a few months. A sustained recession is called an economic depression.

“A creative economy is the fuel of magnificence.” -Ralph Waldo Emerson (1803-1882)

Article Source:
http://www.articlecity.com/articles/business_and_finance/article_8892.shtml

Treasure Hunting

By: Tracy Piercy

I’m a financial educator by calling and by profession. But when you get to know me and my family, you will discover fairly quickly that we are collectors of old, fun or unusual things. Some people might call it junk, and in fact that’s exactly where my husband finds many of our treasures - in the junk other people throw out.

Garbage to Gold

We’ve all heard the saying, ?One man’s trash is another man’s treasure.? Well, in my family, we find so many treasures that we have turned it into a side business for my husband. He is very handy so it’s pretty simple for him to take an old rusted, broken such-and-such and give it a quick sanding, glue and some paint and ‘voila’ - it’s better than new.

Now it’s not junk that I want to write about. Well, it sort of is. Treasures are all in the eye of the beholder, right? In other words, how you perceive something will give it either value, or not. The trick is to see value from multiple perspectives.

Let’s look at junk for a minute more, then apply the concepts to financial items. I’m looking around my office for an item I can use as an example of some junk that has been re-purposed, and realize there are too many items to choose from. I have a rusted watering can holding silk roses on my desk, a post office sorter holding up my desk and organizing my papers, a carpenter’s nail box holding my paperclips and sticky notes, an old lampstand holding my pen, a solid maple wooden kitchen counter as my desk top surface, faded drapes, remade into blinds, a very high-tech keyboard tray rescued from a dumpster, and one of my all-time favorite junk makeovers is my office chair covered with an old leather coat.

A Second Look at Everyday Items

While I’m not suggesting you all become junk collectors, I’d like to share with you some of the questions we ask when we see something discarded at the side of the road or offered inexpensively at a garage sale: What could this be used for? Who could use this? How could we re-make, or re-do this? Where could it be used? Why would someone want this? What would need to be done to re-purpose it? How much time and/or money would that take to accomplish?

Now let’s look at financial things: credit cards, mutual funds, life insurance, real estate, your job or profession. Start asking some of the questions above, and rather than the usual answers, keep asking and soon you’ll start to come up with answers like this:

· You can use credit cards to increase your wealth and help you reach your goals;

· Mutual funds are a fabulous way to expand your financial knowledge and learn investment savvy;

· Life insurance has wonderful applications for you while you’re alive;

· You can purchase real estate for purposes other than providing the home you live in or an investment property you rent or flip;

· Your job or profession has multiple ways you can earn income from while still meeting the requirements of your employer and without you having to work overtime or pick up another job or contract.

Concentrate on the possibilities

The key is to keep asking yourself and others and never let yourself answer the question with a ‘can’t’ or a ‘but’ or an ‘I tried that’, or something similar that says, ‘that will never work’. How do you know? How important is your reaching your goals? I realize it is easier to look at your current situation and think it’s all junk, that you’ve ?wasted your money, your time, and coulda, shoulda, woulda done things differently if only…?

However, step number one is to start where you are. The past is gone and the future hasn’t arrived yet. Where you are is where you’re supposed to be. The search for your treasure starts here and will take you on an amazing journey uncovering hidden gems along the way. You’ll climb some mountains - maybe even climbthem sideways or backwards, and find new and interesting uses for the transactions you make every day. You are treasure hunting for your goals and dreams so you need to learn to see the ‘junk’ in your life as beautiful jewels that all add up to your overall life’s wealth.

Article Source:
http://www.articlecity.com/articles/business_and_finance/article_8897.shtml