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men Square in 1989. Why do you think capitalism can grow in China under a restrictive government when in the former Soviet bloc it went hand in hand with political freedom? 9. Applying Economic Concepts Explain how life in the former Soviet bloc changed for each of the following during a transition to a market economy. a. factory worker b. farmer c. consumer d. factory manager 10. Challenge Do businesses from foreign nations with strong antipollution laws have a responsibility to voluntarily limit pollution when located in a less developed country with less developed pollution laws? Give reasons for your answer. Budapest, Hungary Assessing Development The chart below shows statistics from 2004 for Kyrgyzstan and Tajikistan, in Central Asia, and Hungary and Romania, in Eastern Europe 268 154 4,913 1,729 6.0 10.5 3.9 8.1 6.0 8.2 9.6 4.0 0.702 0.652 0.862 0.792 Gross national income ($ per capita) Real GDP growth rate Industrial production growth rate Human development index (HDI)* * Highest HDI is 1.0; lowest is 0.0. Sources: CIA World Factbook; UNDP Compare and Contrast Economic Information Write a paragraph comparing and contrasting the transition to a market economy in the selected Central Asian and Eastern European countries. Use the figures from the chart to explain the similarities and differences. Challenge Why might the nation with the highest HDI, Hungary, also have the lowest real GDP growth? Issues of Economic Development 569 Case Study Find an update on this Case Study at ClassZone.com China’s Campaign for Economic Power Background Since 1978, when China’s former leader, Deng Xiaoping, made the decision to adopt free-market reforms, China’s economy has been steadily gaining momentum. Deng’s “four modernizations” (agriculture, industry, science and technology, and defense) have helped China become a player in the global economy in less than a generation. Its success is based in part on its encouragement of foreign investment, the establishment of a number of special economic zones, and the opening of 14 coastal cities to foreign investment in 1984. Also, in 2001, China joined the World Trade Organization. Today, China’s economic impact is too big to ignore. What’s the issue? What accounts for China’s successful transition to a market economy? Study these sources to discover what fuels China’s economic growth and how it affects the rest
of the world. A. Magazine Article This article discusses some of the underlying reasons for China’s growing impact on the global economy. The Dragon Awakes China is changing the dynamics of the global economy. [China’s] contribution to global GDP growth since 2000 has been almost twice as large as that of the next three biggest emerging economies, India, Brazil and Russia, combined. Moreover, there is [a] crucial reason why China’s integration into the world economy is today having a bigger global impact than other emerging economies, or than Japan did during its period of rapid growth from the mid-1950s onwards. Uniquely, China combines a vast supply of cheap labor with an economy that is (for its size) unusually open to the rest of the world, in terms of trade and foreign direct investment. The sum of its total exports and imports of goods and services amounts to around 75% of China’s GDP; in Japan, India and Brazil the figure is 25–30%.... As a result, the dragon’s awakening is more traumatic for the rest of the world. Source: The Economist, July 28, 2005 Thinking Economically Identify the aspect of China’s economy that, according to the article, has had the most significant impact on the global economy, and explain why its impact has been so great. 570 Chapter 18 B. Political Cartoon The volume of China’s exports has gotten a lot of attention in recent years. Thinking Economically Why is it worth pointing out that China’s exporting power seems to outstrip that of other nations? C. Online News Story China’s economic growth frequently is referred to as an “economic miracle.” The miracle, however, is not without problems. China’s Economic Miracle: the High Price of Progress China’s progress is uneven and sometimes problematic. [China’s] GDP is growing by 10 percent a year. Industrial production is galloping ahead at an annual rate of 17 percent. Its economy is now the second-biggest in the world, behind only the U.S., and there are predictions it will assume the top spot as early as 2020.... China’s explosive growth has come at a price. The economic gains have not been shared equally. Millions have become richer. But hundreds of millions have not. More than 60 percent of the population still toils in agriculture; the country’s “economic miracle” has yet to
make an appearance in much of the country. Corruption also remains well entrenched... [and] millions of workers have lost their jobs in the restructuring, prompting frequent protests.... Source: CBC News Online, April 20, 2005 Thinking Economically Will China’s economic growth alone increase the incomes of its poorest people? Why or why not? THINKING ECONOMICALLY Synthesizing 1. All three documents point to China’s success in international trade. What key element of financing development does document A cite as a component of China’s success? 2. Documents A and B hint that the rest of the world is uneasy with China’s economic growth, while document C discusses some of China’s problems at home. Discuss these fears and problems in the context of what you’ve learned throughout Chapter 18. 3. Which factors do you think are most significant relative to China’s economic growth? Explain why you think so. Use evidence from the documents in your answer. Issues of Economic Development 571 Review this chapter using interactive activities at ClassZone.com • Online Summary • Quizzes • Vocabulary Flip Cards • Graphic Organizers • Review and Study Notes Complete the following activity either on your own paper or online at ClassZone.com Choose the key concept that best completes the sentence. Not all key concepts will be used. debt restructuring default developed nations infant mortality rate International Monetary Fund (IMF) less developed countries (LDC) per capita GDP “shock therapy” stabilization program privatization World Bank Nations with little industry and relatively low GDP are said to be 1, while nations with a market economy and higher standard of living are known as 2. Economists measure the level of a nation’s development through such statistics as 3, which allows for easy comparison with other countries because it shows the nation’s output in relation to its population. When nations set a course for development, they often seek loans from other nations. Some heavily indebted nations have gone into 4 on their loans, being unable to pay them back. In those cases, nations can negotiate a 5 plan to extend the payback and/or lower the payback rate. Some economies are moving from central planning to an open market. These nations face a number of challenges. For example, there are questions about how to carry out 6, the transfer of public property into individually owned property. There are also questions about the pace of change. governmental restrictions on the economy. 7 involved suddenly removing 5
72 Chapter 18 CHAPTER 18 Assessment Definitions of Development (pp. 544–551) 1. What are some features of a developed nation? 2. Name five measures economists use to gauge a nation’s level of development. A Framework for Economic Development Objectives (pp. 552–561) 3. Describe the internal and external goals a developing nation may set for itself. 4. In what ways can developing nations receive aid from other countries? Transition to a Market Economy (pp. 562–571) 5. Name five challenges nations face when moving from a command economy to a market economy. 6. Briefly summarize the transition to a market economy in the former Soviet bloc and in China. A P P LY Look at the graph below showing life expectancy in various countries and regions from 1980 to 2003. 7. What explanation can you offer for the regions in which life expectancy declined? 8. In 2003, how much longer could someone living in a country that belongs to OECD expect to live than someone living in sub-Saharan Africa? FIGURE 18.8 LIFE EXPECTANCY IN WORLD REGIONS 80 70 60 50 ( 40 1980 1985 1990 1995 2000 2003 Year HIGH-INCOME OECD (ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT) NATIONS LATIN AMERICA & THE CARIBBEAN EAST ASIA & THE PACIFIC ARAB STATES CENTRAL & EASTERN EUROPE & THE COMMONWEALTH OF INDEPENDENT STATES SOUTH ASIA SUB-SAHARAN AFRICA Source: U.N. Human Development Report, 2005. Creating Graphs Create a graphic of your choice to show the figures below on the percentage of people living on $1 a day or less between 1981 and 2001. Region East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa 1981 56.7 1990 29.5 0.8 0.5 10.1 11.6 5.1 2.3 51.5 41.6 41.3 44.5 2001 14.3 3.5 9.9 2.4 31.9 46.4 World 40.4 26.3 20.7 Source: U.N. Human Development Report, 2005 Use to complete this activity. @ ClassZone.com 10. Analyzing and Interpreting Data Refer to the graph you created. In which region was the improvement in poverty most dramatic? In which regions did
the situation worsen? Work Toward Development Goals In 2005, all the 191 members of the United Nations voted to adopt the Millennium Development Goals, with a target date of 2015 to have the goals realized. Step 1 As a whole class, discuss the following eight goals that are part of this program: 1. Eradicate extreme poverty and hunger 2. Achieve universal primary education 3. Promote gender equality and empower women 4. Reduce child mortality 5. Improve maternal health 11. Analyzing Cause and Effect What might explain why this measure of poverty increased in Europe and Central Asia during this time period? 6. Combat HIV/AIDS, malaria, and other diseases 7. Ensure environmental sustainability 8. Develop a global partnership for development 12. Making Inferences and Drawing Conclusions For each dollar spent on foreign aid by members of OECD, $10 is spent on the military. What can you conclude about the OECD member nations’ concerns for the future? 13. Challenge A recent study found that an increase of ten mobile phones per 100 people raised GDP growth in a developing nation by ten percent. What might explain this? What does it suggest as a way to speed development? Step 2 Break into eight small groups, one for each of the goals. Step 3 Meet with your group and discuss concrete ways that the international community (either through such organizations as the IMF or World Bank or United Nations Development Program or through the efforts of individual nations or trading entities) can meet your goal and why it is important that it be met. Step 4 Present your recommendations to the rest of the class. Step 5 Follow up on the presentations with a discussion of how many different ways of approaching the problem surfaced and which seem most likely to lead to success. Issues of Economic Development 573 1.1 Budgeting 1.2 Checking Accounts 1.3 Saving and Investing QUICK REFERENCE A budget is a plan for allocating income for saving and spending Budgeting and Money Management 1.1 Budgeting As an independent adult you have the freedom to make your own ﬁ nancial decisions. But with freedom comes responsibility. It takes planning and practice to learn how to use your income wisely, to pay your bills on time, and to have money left to save for the future. What Would a Budget Do for Me? Everyone has a limited amount of money. A budget—a plan for how to save and spend your income—can help you focus your limited ﬁ nancial resources on what’s most important to you. It will help you pay for
basics like food, clothing, and shelter. After those expenses are met, it can include optional items such as travel or entertainment. And with savings as part of your budget, you will be on the path to achieve your long-term ﬁ nancial goals. How Do I Set Up a Budget? Determine Your Income Make a list of all the steady income you receive, including your pay from after-school and summer jobs and occasional work such as mowing lawns. List only the money you take home after taxes have been withheld from your paycheck. Track Your Expenses To learn where your money goes, keep a record of all your expenses for a month. Save your receipts, and carry a small notebook to jot down purchases when you make them. The list should cover a full month, because not all expenses occur every week. Categorize Expenses When you have a record of your expenses, put them into categories, such as transportation, food, clothing, savings, and entertainment. Figure CPF 1 shows how monthly expenses might be categorized to help set up a budget. EXPENSES for month Week 1 parking movie pizza $6. 00 $9. 00 $13. 00 574 Consumer and Personal Finance & Figure CPF 1 Creating a Budget a Fixed Expenses Your car payment and auto insurance are examples of ﬁ xed expenses. b Spending Wisely Food is a necessity. But packing a lunch, cutting back on snacks, or eating out less often can help your budget. c Savings Pay yourself each month. Limiting ﬁ xed expenses and reducing ﬂ exible expenses will help you meet your savings goals. d Flexible Expenses Make room in the budget for entertainment, travel, and other fun stuff. a Category Transportation Car payment Insurance Gas Parking Maintenance b Food School lunches Snacks Eating out c Savings Clothing d Entertainment Movie tickets Movie rentals Recorded music TOTALS Monthly Expenses Current Expenses Budget $200 70 60 6 50 $85 35 30 20 100 $27 12 20 $715 $200 70 40 0 25 $80 30 15 50 50 $18 12 20 $610 Determine Fixed and Flexible Expenses Identify which expenses must be paid every month and determine what portion of your income they take. Savings should be a ﬁ xed amount, not a ﬂ exible amount. Money from savings pays for emergencies, large insurance bills that only come due once or twice a year, and major investments such as cars or real estate. What�
�s left is available for ﬂ exible expenses like entertainment. Set Up a Spending Plan Now look at your income and expenses. Set out a plan for ﬁ xed expenses. Look at the amount left over and allocate it to cover the ﬂ exible expenses. If your ﬂ exible expenses are cutting into your savings or leading to debt, look for ways to cut your spending. For example, you might eat more meals at home instead of at restaurants, or rent DVDs to watch with friends instead of going out to the movies. Check It Out! ✔ Create an emergency fund for unexpected expenses. ✔ Save in advance for holiday or birthday gifts. ✔ Resist the temptation of impulse buying. APPLICATION Budgeting 1. Which of the expenses in Step 3 will be monthly bills? 2. Planning a Budget Suppose you have a job that brings in $1,150 a month after taxes. You contribute $350 toward rent and utilities each month for an apartment you share with two other people. You put $100 each month into a savings account, and you spend about $50 per month for a cell phone. Of course, you also eat, wear clothes, and go out with friends. You want to buy a car that will cost $300 per month for payments and insurance. Can you afford it? Plan a budget to see if you can take on this new ﬁ xed expense. Budgeting and Money Management 575 Budgeting and Money Management 1.2 Checking Accounts Banks offer two basic types of accounts: checking and savings. Checking accounts are for immediate expenses. They can help you manage your expenses and pay your bills. The bank records deposits and withdrawals on your checking account, whether they are in the form of paper checks, automated teller machine (ATM) transactions, debit card purchases, or electronic transactions. What Are the Benefits of Checking Accounts? When you earn money on a regular basis, you should have a place to put it. Most people use checking accounts. Not only is your money safe in the bank, but a checking account makes it easy to pay your bills. In order to use electronic banking and ATMs, you need a checking account. If you keep all your money as cash, your cash may be lost or stolen. It’s also difﬁ cult to pay bills with cash. A checking account is safe and convenient. Opening an Account By shopping around, you can ﬁ nd an account that suits your situation. Ask questions
about fees, interest rates paid on the checking account, charges for printing checks, and any restrictions on the number or size of checks you write. Find out the bank’s minimum balance requirement, which is the amount of money you must keep in the account in order to avoid fees. Most banks charge a high fee for an overdraft, a check or other withdrawal for more than the existing account balance. You’ll need several documents to open an account. Most banks require two forms of identiﬁ cation, one of which should have your photo on it. You must provide your Social Security number, address, and phone number. The bank may also ask for a personal or work reference. The money for an initial deposit may be in the form of cash or a check. QUICK REFERENCE A minimum balance requirement is the amount needed in an account to avoid fees. An overdraft is a check that exceeds the account balance. Figure CPF 2 Writing a Check a Write the full name of the person or business receiving the check. b Enter the amount in numbers and then in words on the next line. c Sign the check to make it valid. Never sign a blank check. 576 Consumer and Personal Finance a b b c What’s the Difference Between an ATM Card and a Debit Card? Once you have a checking account, you have several options for making deposits and withdrawals. You could go to the bank, but that can be time-consuming, and some banks charge a fee for using a human teller. Instead, automated teller machines (ATMs) give you access to your checking account. At ATMs Both ATM cards and debit cards allow you to use an ATM to access your checking account. You can withdraw cash, deposit cash or checks, or transfer money between linked accounts. Both cards require that you enter your personal identiﬁ cation number (PIN) when you use the ATM. Using an ATM can cost you money. Most ATMs charge a service fee unless you have an account with that bank. Fees range from $1 to $3 or more. To avoid this expense, learn where your bank has ATMs near your home, school, and workplace. At Stores You can also use ATM and debit cards at businesses to purchase goods and services. However, debit cards can be used like a credit card—the business swipes your card and you sign for the purchase. With an ATM card, the business must have a keypad for you to
enter your PIN. In either case, the money comes directly out of your account. Some stores let you get cash back—with no additional charge—when you make a purchase. For example, if you buy $20 worth of groceries, you can charge your ATM or debit card $50 and receive the $30 difference in cash. Register all the transactions you make with your ATM or debit card in your checkbook. These transactions will be recorded on the monthly account statement that the bank will send to you, but keep track of them as you go along to avoid overdrawing your account. Check It Out! ✔ Research banking services at several banks. ✔ Immediately record your deposits and withdrawals—including checks, cash withdrawals, and purchases—in your checkbook register. ✔ Review your bank statement every month & APPL IC ATION Checking Accounts 1. How is a debit card different from an ATM card? 2. Finding a bank Using the Internet, research checking accounts at three banks in your neighborhood. Create a table comparing the services offered and fees charged by the banks. Then write a paragraph identifying the bank you would choose if you wanted to open an account and why you would choose it. Budgeting and Money Management 577 Budgeting and Money Management QUICK REFERENCE Interest is the price paid for the use of money. 1.3 Saving and Investing What are your dreams? Do you want to go to college, to travel, to own a car and a home, or perhaps to retire early? Saving some of your income each month can help you achieve your dreams. Accidents and unforeseen problems happen to everyone, so it is good to have an emergency fund, too. When you save your money at a bank or invest in a company, they pay you for the privilege of using your funds. If you save and invest wisely, your money will grow, and you won’t have to work as hard to achieve your dreams. What Are the Benefits of Savings Accounts? Savings accounts allow you to save money for future expenses. Your money grows in a savings account because banks pay interest, a fee for the use of your money. To open a savings account, you’ll need the same kinds of identiﬁ cation and other information that you needed to open a checking account. Types of Accounts Banks and credit unions offer a variety of savings accounts including standard accounts, money market deposit accounts, and certiﬁ cates of deposit (CDs). The minimum balance, interest rates, and other
features vary by type of account. Some banks offer better rates than others, so it’s important to shop around for the best deal. Deposits in these accounts are insured by the government. If the bank should fail, the Federal Deposit Insurance Corporation (FDIC) would make sure you got your money back. The FDIC insures each depositor up to $100,000 at each bank. Retirement accounts are insured up to $250,000. Unlike stocks, bonds, and many other investments, you are guaranteed to get a positive return on your money in a government-insured account. Figure CPF 3 summarizes the features of the most common types of accounts used for savings. Figure CPF 3 Government-Insured Accounts Standard Savings Account Money Market Account Certificate of Deposit A standard savings account requires a small initial deposit and allows you the most access to your money. However, it pays the lowest rate of interest. A money market account pays higher interest and allows you to write a limited number of checks. But it also requires a higher minimum balance. Certificates of Deposit (CDs) usually offer the highest interest rates. But you pay a penalty if you withdraw any money before the CD matures. 578 Consumer and Personal Finance When Should I Start Investing? The purpose of saving is to accumulate readily available cash. Most ﬁ nancial advisors recommend saving an emergency fund that would cover three to six months of expenses. After you have created your emergency fund, you can begin saving for short-term goals such as buying a car or paying for college tuition. The purpose of investing is to build wealth—that is, to acquire assets that will grow in value over time and give you a pool of assets beyond the income you earn from a job. Building wealth comes from making your money work for you over a long period of time. It is never too early to start this process, even if you can only allocate a small portion of your income to investment. Investing even small amounts on a regular basis over a long period of time can lead to signiﬁ cant growth. Before saving or investing, pay off any credit card debt. It is almost impossible to earn more from your investments than you are paying in interest on your debt. For example, if you are paying 15 percent interest on a loan, it doesn’t make sense to put some of your money in a savings account that only pays 3 percent interest. Pay off the expensive loan ﬁ rst, then start saving.
Figure CPF 4 Risk and Return Determining Risk As you learned in Chapter 11, there is an inverse relationship between risk and return—the riskier the investment, the greater the potential return. Figure CPF 4 shows this relationship, with the least risky investments at the bottom of the graph and the riskiest ones at the top. Savings accounts and CDs carry little or no risk because the government insures the principal, and they pay a guaranteed rate of interest. Treasury bonds carry little risk because the U.S. government backs them. Corporate bonds carry greater risk because a company may go bankrupt and be unable to repay its creditors. Stocks offer higher possible returns but are subject to market risks and may decrease rather than increase in value. Bank savings accounts Treasury investments Time deposits (CDs) U.S. savings bonds Corporate bonds k s i R Potential Return Other common stocks Blue-chip stocks Stock mutual funds Stocks-and-bonds mutual funds & ➲ Budgeting and Money Management 579 Budgeting and Money Management How Should I Invest? Consider your investment objective when choosing the type of investment. If you want to use the money to buy a house in ﬁ ve years, you would choose a different type of investment than if you are investing for your retirement. Generally, the sooner you plan to use the money, the more conservatively you should invest. Conversely, the longer you have before you need the money, the easier it will be to recover from any downturns. Figure CPF 5 shows different ways of investing to reach long-term goals. There are three basic rules for building wealth: start early, buy and hold, and diversify. Start Early By starting to invest early you have a longer time for wealth to build. A longer investment time frame also allows you to take more risks, because you can ride out the ﬂ uctuations in the market. Buy and Hold The phrase “buy and hold” describes a disciplined approach to investing. Do research and talk to a ﬁ nancial adviser to make wise decisions, and then hold the investments you make for a long enough period of time to allow your wealth to build. Jumping in and out of the market can lead to signiﬁ cant losses of potential return. Diversify Diversifying helps you maximize your returns and limit risks. You’ve probably heard the saying “Don’t put all your eggs in one basket.” Putting your money in different types of investments
allows you to choose different levels of risk. Figure CPF 5 Investment Options Stocks, Bonds, and Mutual Funds Employer-Sponsored Retirement Plans Individual Retirement Accounts (IRAs) • Stocks let you share in • 401(k) plans let workers corporate profits. • Government and corporate bonds pay a fixed rate of interest. • Mutual funds are an easy way to invest in a large number of different stocks or bonds. • See Chapter 11 for more information. 580 Consumer and Personal Finance invest money for retirement and defer taxes. Employers may also contribute. • Workers may invest money each year for retirement, tax deferred. • Traditional IRA • Pension plans are controlled by employers. contributions may be tax deductible. • Employers may fund employee retirement benefits through profit sharing or stock ownership plans. • Roth IRA contributions are not tax deductible but earn tax-free income. • Funds must be held until age 59 ½—with some exceptions. Figures CPF 6 and 7 The Beneﬁ ts of Investing Early THE POWER OF COMPOUNDING BUILDING WEALTH OVER TIME Year Annual Investment (in dollars) 5 Percent Return (in dollars) Year-end Balance (in dollars 10 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 100.00 205.00 315.25 431.01 552.56 2,100.00 4,305.00 6,620.25 9,051.26 11,603.82 680.19 14,284.01 814.20 17,098.21 954.91 20,053.12 1,102.66 23,155.78 1,257.79 26,413.57 350,000 300,000 250,000 200,000 150,000 100,000 50,000 What Are the Benefits of Starting Early? Figures CPF 6 and CPF 7 graphically illustrate the beneﬁ ts of starting your investment program when you are young. The table, Figure CPF 6, shows how a savings account that pays 5 percent interest would grow. Investing $2,000 each year for 10 years—a total of $20,000—yields a balance of more than $26,000 through the beneﬁ ts of compounding and reinvesting the earnings. If the investments continued at the
same pace for 45 years, the total balance would reach almost $1 million 25 30 35 40 45 50 55 60 65 Age Check It Out! ✔ Make regular contributions to your savings account. ✔ Commit to investing for the long term. ✔ Diversify your investments. The graph, Figure CPF 7, shows the beneﬁ ts of starting to save for retirement early. The graph shows what happens to three people who invest $100 per month in a retirement account. It assumes they receive a return on their investments of 8 percent, which approximates the historical average return for the stock market. Someone who begins investing $100 per month at age 25 has over twice as much at retirement as someone who waits until age 35 and almost six times as much as someone who waits until age 45. Review Budgeting and Money Management using interactive activities at ClassZone.com APPL IC ATION Saving and Investing 1. Suppose you have saved $1,000 toward the purchase of a car. Which type of savings plan would be best for this money until you are ready to use it? Why? 2. Listing Financial Goals Make a list of ﬁ nancial goals you might want to reach by the time you are 30 years old, then 50 years old, then at retirement age. Think about a plan that might help you achieve these goals. What sort of investments will you make? Write a summary paragraph describing your goals and plans. Budgeting and Money Management 581 Credit 2 2.1 Types of Credit 2.2 Credit Reports 2.3 Identity Theft 2.1 Types of Credit If you budget wisely and save your money, you will be able to buy what you need most of the time. But sometimes, waiting to accumulate the money to achieve a goal is not the best economic choice. Using credit to make important purchases, such as a college education or a home, often has economic beneﬁ ts. If you decide to ﬁ nance a purchase by using credit, you ﬁ rst need to decide what type of credit to use. QUICK REFERENCE Credit is the practice of making a purchase now and paying for it in the future. A loan is borrowed money repaid with interest. What Is Credit? Credit is the practice of buying goods or services now and paying for them in the future. One form of credit is a loan, which is borrowed money that must be repaid with interest. Just as banks pay you interest for the use of your money in a savings account, you
have to pay them interest if you want to use their money to buy something. Loans are usually used for large purchases such as a home, automobile, or school tuition. Credit cards are like shortterm loans, because they allow you to buy things without having the cash at the time of purchase. But you will be charged interest if the credit card balance is not paid in full each month, and credit cards usually charge higher interest rates than other loans. QUICK REFERENCE The ﬁ nance charge is the total cost of the loan. The annual percentage rate (APR) is the amount of interest charged per year. How Much Does Credit Cost? The cost of credit is called the finance charge. It includes the total amount of interest you will pay plus any service charges. The amount of interest you pay depends on the annual percentage rate (APR), the length of the loan, and how often you make payments. With all of these variables, it can be challenging to ﬁ gure out how much a loan actually costs. But all lenders are 582 Consumer and Personal Finance Figure CPF 8 Costs of Borrowing $10,000 Loan APR (in percent) Length of Loan (in months) Monthly Payment (in dollars) Total Payments (in dollars) Finance Charge (in dollars) A B C 4 8 8 36 36 60 295.24 313.36 202.76 10,628.63 11,281.11 12,165.89 628.63 1,281.11 2,165.89 required to tell you the total ﬁ nance charges and the APR. This information should allow you to understand how much a loan will cost and to compare offers from different lenders. For example, suppose you want to borrow $10,000 to purchase a car. The ﬁ nance charge will vary depending on the length of the loan and the interest rate. As you can see in Figure CPF 8, a longer loan might have a lower monthly payment, but it will also have the highest total cost. How Do Lenders Decide If I Can Get Credit? Lenders use three basic criteria to determine if you are creditworthy and can be trusted to repay a loan. The criteria—character, capacity, and capital—are often referred to as the three Cs. These three criteria are based on your past, present, and future ﬁ nancial situation. Character refers to your past record of paying your bills on time. Lenders want to know if you
can live within your means, which makes it more likely that you will be able to repay the loan. When you make car payments on time or pay off a department store charge card each month, you build a positive credit history. These actions show that you are ﬁ nancially responsible. Capacity refers to your level of income relative to the size of the loan. A lender will check to see if you have a steady income and if the amount of your income is enough to make the loan payments. The lender may look at your past employment history to see if you are likely to keep your current job or may check with your employer to see if your income will remain steady over the projected term of the loan. Capital—speciﬁ cally, ﬁ nancial capital—includes your income, savings, and other investments. Lenders will consider how much money you have in the bank as well as assets such as a car or house. If you fail to repay the loan, the lender may be able to take these assets to recover the cost of the loan. If you are weak on any of these criteria a lender might ask for a cosigner for the loan. A cosigner is a person who will assume responsibility for the debt if you fail to repay the loan. Taking out a loan with a cosigner but repaying it yourself is one way you can build up a positive credit history & QUICK REFERENCE A cosigner assumes responsibility for debt if a borrower doesn’t repay. ➲ Credit 583 Credit WHAT SHOULD I DO IF MY CREDIT CARD IS LOST OR STOLEN? 1. Notify your bank or credit card companies immediately to limit your liability. 2. Report the loss to authorities or law enforcement officials. 3. Keep a list of account numbers and toll-free phone numbers in a safe place. What Should I Consider When Choosing a Credit Card? Credit card companies are eager to get young adults to use their cards. But these companies offer a variety of terms, and some of them can be costly. Before you apply for a credit card, carefully examine the terms. Annual Fee Many cards have no annual fee, but some charge $60 per year or more for membership. Interest Rate The Truth in Lending Act requires that credit card companies state the interest rate in the form of an annual percentage rate (APR). Rates may be ﬁ xed, meaning that they will stay the same, or variable, meaning that they are tied
to an index and likely to change frequently. Grace Period The grace period is the time between your billing date and the date your payment is due. Late payments may result in stiff fees. Minimum Payment The minimum payment may be a ﬂ at amount or a certain percentage of your balance. Paying this amount allows you to avoid paying penalties, but not interest. Credit Limit The credit limit is the maximum amount you can charge. Your available credit is your credit limit minus any outstanding balance. Other Fees There are usually fees for paying late or for spending over your credit limit. There may be a minimum ﬁ nance charge or amount of interest due, or transaction fees for cash advances. Bonuses Many credit cards offer to give you a bonus based on how much you charge as an incentive to use the card. Some cards offer “cash back”— a refund of a small percentage of your total purchases. Others offer discounts on merchandise or air travel. What Should I Know About My Credit Card Statement? When you pay by credit card, you will receive a record of what you have spent each month called a statement. It will also show any payments or credits to your account. Check your credit card statement right away to make sure all the purchases shown are ones that you made. Also check to be sure the credit card company received your last payment. Figure CPF 9 points out some of the important information to notice on your credit card statement. Your new balance is the amount you must pay by the due date to avoid paying interest. The ﬁ nance charge is the interest due on any unpaid balance from your last statement. Notice that the minimum payment is only a small percentage of your new balance. Credit card companies make money if you pay less than the full balance, because they charge you interest on the rest of your balance. 584 Consumer and Personal Finance Figure CPF 9 Understanding Your Credit Card Statement a The new balance includes all of your purchases for the month, plus any unpaid balance from the last month and interest, plus any fees. To avoid ﬁ nance charges, pay the entire balance by the due date. b If you cannot pay the entire balance, pay at least the minimum balance by the due date to avoid late fees. The minimum balance may be only a small percentage of your total balance but is usually at least $10. c The periodic rate is the daily interest rate, that is, the APR divided by the number of days in the year. CREDITCard PLATINUM ________________________
______ BILLING STATEMENT a b CARD NUMBER CREDIT LIMIT AVAILABLE CREDIT STATEMENT DATE NEW BALANCE PAYMENT DUE MINIMUM PAYMENT DUE & 1234 5678 9012 3456 2,000.00 1,954.83 04/25/10 45.17 05/20/10 15.00 TRANSACTION REFERENCE NUMBER TRANSACTION DESCRIPTION TRANSACTION CHARGE DATE ACTUAL POST CHARGES (+) CREDITS (-) 0123 6543 8901 MANGO GROVE JUICE & NUT BAR BART’S COSMIC COMICS MONTCLAIR VIDEO MART 03/26 03/30 03/31 03/28 04/01 04/03 13.76 25.41 6.00 FINANCE CHARGE CALCULATIONS FINANCE CHARGE SCHEDULE ANNUAL PERCENTAGE RATE CATEGORY DAILY PERIODIC RATE CORRESPONDING APR DAYS IN BILLING CYCLE 13.65% c DAILY PERIODIC RATE 0.037397% CASH ADVANCES A. BALANCE TRANSFERS, CHECKS B. ATM, BANK PURCHASES 0.037397 0.065041 0.037397 % % % 13.65 23.74 13.65 % % % 30 PREVIOUS BALANCE PAYMENTS CREDITS PURCHASES CASH ADVANCES PERIODIC RATE CASH ADVANCE 53.26 53.26 0.00 45.17 0.00 0.00 0.00 a 45.17 TO REPORT LOST OR STOLEN CARD(S) CALL: (800) 555 5555 NOTICE: SEE REVERSE FOR IMPORTANT INFORMATION Pay at least the minimum balance by the due date. Most credit card companies charge high fees for late payments. Allow time for your payment to arrive and be processed before the due date. How Is a Credit Card Different from a Debit Card? Both cards can be used to make purchases. But when you use a credit card you create a loan to repay, while a debit card takes money directly from your checking account. You can use your debit card to get cash from your checking account at an ATM. But if you use your credit card to get cash, you are essentially taking out a loan. Interest begins accruing right away on the amount of the cash advance, and most
cards charge an additional transaction fee. It is a very expensive way to get cash. Check It Out! ✔ Determine all costs and fees for a credit card or loan. ✔ Check your statement every month for unauthorized expenses. ✔ Pay on time. APPL IC ATION Types of Credit 1. What are the three Cs, and who uses them? 2. Determining the Best Offer Suppose you have offers from three credit card companies. Company A offers a ﬁ xed APR of 12 percent and has an annual fee of $60.00. Company B has no annual fee and offers an introductory rate of 9 percent—but it rises to 18 percent after the ﬁ rst 3 months. Company C offers a ﬁ xed APR of 15 percent with an annual fee of $30. If you pay off your balance each month, which offer is best for you? Credit 585 Credit 2.2 Credit Reports How you handle your ﬁ nances can determine your ability to qualify for a loan or credit card, to be hired for a job, or to rent an apartment. Your credit report contains much of the information on the three Cs discussed earlier. What’s a Credit Report? A credit report is a statement by a credit bureau that details a consumer’s credit record. Equifax, Experian, and Trans Union are the three companies that handle most credit reporting. The report includes information on your employment, bank accounts, and credit history. It will also indicate if you’ve had any legal problems regarding your ﬁ nances, such as bankruptcy. The report shows how well you have handled your ﬁ nancial obligations over the previous 7 to 10 years so lenders can determine if you are a good credit risk. Credit agencies use the information in your credit report to assign you a credit score, a number that rates your credit worthiness. Different agencies use different scoring systems, but higher scores indicate a better credit history. Lenders may charge a lower interest rate to someone with a high credit score. QUICK REFERENCE A credit report describes a consumer’s credit record. A credit score is a number that summarizes your credit worthiness. Where Do I Get My Credit Reports? online: www.annualcreditreport.com phone: 1-877-322-8228 mail: Annual Credit Report Request Service P.O. Box 105281 Atlanta, GA 30348-5281 (print form at www.annualcreditreport.
com) Do not contact the three nationwide consumer credit reporting companies directly for free reports. Credit Report Users Lenders evaluate your credit report when you apply for a loan or a credit card. Buying the report from one of the three major companies saves them the time of contacting all your creditors to see how well you’ve paid your bills. Landlords may also check your credit report before agreeing to rent you an apartment. Some employers check credit scores before hiring people. Because so many people rely on these reports, you should verify the accuracy of the information in the report. Checking your credit reports also helps guard against identity theft. (See 2.3 Identity Theft for more information on this topic.) How Do I Get a Copy of My Credit Report? The Fair Credit Reporting Act makes it easy to access your credit reports (see “Where Do I Get My Credit Reports?” sidebar). By law, you may use this service to order one free copy from each company every 12 months. You provide your name, address, Social Security number, and date of birth. You may be asked other questions to verify your identity. The government is the only legitimate source for free credit reports. 586 Consumer and Personal Finance Figure CPF 10 How Does Your Credit History Rate? Good Rating • You pay bills in full • You pay bills on time • You can cover payments in case of emergency • You can make payments if you lose your job Danger • More than 25 percent of your take-home pay goes to pay off debt • You only make minimum payments • You make payments after the due date • You open new accounts because the old ones are maxed out • Creditors harass you Overextended • Creditors repossess (take back) what you bought on credit • Creditors garnish your wages (take money from your 900 600 300 0 paycheck before you get it) • You must declare bankruptcy Avoid other sources that claim to offer free credit reports. Some of them want to sell you unnecessary services, and others want to steal your identity. Also avoid ﬁ rms that promise to ﬁ x your credit rating. Only you can do that. How Do I Solve Credit Problems? The best cure is prevention. You can avoid credit problems by following your budget and paying off your bills on time. But if you recognize any of the signs of danger or overextension shown in Figure CPF 10, you can take action to avoid ﬁ nancial problems. Self-Help These are the
ﬁ rst steps for restoring your credit rating. • Talk to your creditors and explain your situation and your desire to correct it. • Cut up your credit cards and pay off your debts as soon as possible. • Create a strict budget and follow it. Professional Help If you are unable to resolve the problems yourself, see a professional counselor. Try nonproﬁ t agencies ﬁ rst. The National Foundation for Credit Counseling can provide referrals. These agencies will provide services and help you to straighten out your debt problems. Check It Out! ✔ Check your credit report yearly. ✔ Pay your bills on time. ✔ Watch for the danger signs, and act promptly to correct the problem. AP P LI CATION Credit Reports 1. What groups might use your credit score? 2. Paying Off Your Bills Suppose you have a student loan, a car payment, and a credit card with debt. The student loan debt is $4,000 with interest at APR 8 percent. The car loan is $8,000 with APR of 4 percent. The credit card debt is $1,500 with APR of 18 percent. Your grandmother sends you a check for $1,000 for graduation. Which bill would you put the money towards? Credit 587 Credit QUICK REFERENCE Identity theft is the use of someone else’s personal information for criminal purposes. Find an update on identity theft at ClassZone.com 2.3 Identity Theft Your bank accounts, credit cards, and other ﬁ nancial tools are all tied to your name. You’ve seen what can happen if your credit report shows a poor credit history. What if a poor credit rating is not your fault? What Is Identity Theft? Identity theft is the use of personal information—such as Social Security numbers, credit card or bank account numbers—to commit fraud and other crimes. Identity thieves steal personal information to run up charges on existing accounts or to open new ones. They may withdraw money from your bank accounts, apply for loans, or use your telephone calling card. It takes victims weeks, months, and sometimes years to correct the damage done after their identity has been stolen. How Can I Protect Myself? If you know how these thieves operate, you can take measures to protect yourself. While some victims lose their identity through loss or theft of their wallet or purse, almost half of the victims don’t know how the thief obtained their information. Here are some of the most common techniques. Shoulder Sur�
� ng Identity thieves may watch you as you punch in a calling card or credit card number or your PIN. They might overhear you giving out an account number over the phone. Be conscious of those around you when you use an ATM or give out personal ﬁ nancial information. Dumpster Diving Thieves look through the trash to ﬁ nd discarded credit card statements or other documents with ﬁ nancial information. Put such documents through a shredder before throwing them away. Spamming or Phishing Identity thieves may send unsolicited e-mail (spam) that appears to be from a legitimate source. Or they may telephone and say there is a problem with your account or offer you some beneﬁ t if you conﬁ rm information. Hacking Sometimes identity thieves will use programs that invade your computer 588 Consumer and Personal Finance & and ﬁ nd your personal data. Or they might direct you to a fake Web site set up to look like that of a bank or other business. Security software can help prevent hacking, but you must pay attention when you give out credit card and other personal information over the Internet. Conﬁ rm that the site you visit is legitimate. Where Do I Get More Information? Department of Justice Federal Trade Commission Consumer Action Web Site www.usdoj.gov www.consumer.gov or 1-877-ID-THEFT 1-877-(438-4338) www.consumeraction.gov What If I Become a Victim? If you learn that your personal information has been stolen, act immediately to limit the damage. Keep good records of all the steps you take. First, contact one of the three credit reporting companies to place a fraud alert on your credit report. The fraud alert will make it necessary for creditors to contact you before opening new accounts in your name. The Federal Trade Commission and Department of Justice Web sites (see “Where Do I Get More Information?” sidebar) provide toll-free phone numbers and Web site addresses for the credit reporting companies. When you notify one company it will notify the others to place a similar alert on their reports. Once you have placed such an alert, you may order free copies of your report to check for fraudulent activity. Contact your creditors or banks to close out accounts that have been accessed by thieves or that have been opened without your permission. The FTC Web site also provides a form to dispute new accounts that you did not authorize. You may want to stop payment on any
checks that have not cleared and change your ATM account and PIN number. Check It Out! Remember the word SCAM. ✔ Be Stingy. Only give personal information to people you trust. ✔ Check your bank and credit card statements regularly. ✔ Ask for your credit report every 12 months. ✔ Maintain careful records of all your ﬁ nancial accounts. File a report with the police and get a copy of the report or the report number. Provide as much information as you can. The report will provide proof to your creditors or ﬁ nancial institutions that a crime has been committed. Also ﬁ le a report with the FTC, which maintains a database of reported cases of identity theft. Review Credit using interactive activities at ClassZone.com APPL IC ATION Identity Theft 1. What are some ways that identity theft can occur? 2. Planning a Response Take a look in your wallet or purse. What items there could be the source of identity theft? How do you protect yourself from having these items stolen? Review how you would respond if these items were stolen. Credit 589 3.1 Buying a Car 3.2 Financing Your Education 3.3 Getting Insurance 3.4 Contracts: Reading the Fine Print QUICK REFERENCE Depreciate means to decrease in value Wise Choices for Consumers 3.1 Buying a Car A car is a symbol of freedom and independence. It is convenient to be able to travel where and when you want. Yet owning a car includes ﬁ nancial obligations. Since it’s expensive to own a car, ﬁ rst consider whether you really need one. Is good public transportation, such as a bus or a train, available to get you to work or school? Do you live close enough to ride a bike or to walk? If you don’t need a car most of the time, would it make sense to rent a car occasionally or to join a car sharing plan? What Should I Consider When Buying a Car? If a vehicle is deﬁ nitely in your future, take your time before you make a purchase. A car is a major investment, so it makes sense to do some research. Use the information in Figure CPF 11 as a starting point. One decision is whether to buy a new car or a used car. New cars cost a lot and depreciate, or decrease in value, quickly. On average a new car loses 10 percent of its value as soon as you drive it
off the lot. The biggest advantage new cars have is that they are covered by warranties. If something goes wrong, you probably won’t have to dip into your savings to pay repair bills. A used car will cost less but may be less reliable. Many experts suggest that cars that are two to three years old offer the best value. Certiﬁ ed used cars come with limited warranties to cover certain major repairs. How Can I Finance the Purchase of a Car? If you have not saved enough for the total purchase price of a car, you might consider applying for a car loan. Investigate loans before you shop for the car, so that you will know how much you can afford to spend. Call banks and credit unions and check out online banks to ﬁ nd the best interest rate. Find out the length of available loans, total ﬁ nance charges, and the amount of your monthly payment. Most lenders will require that you have a down payment on the loan. You may also need a cosigner for your loan. Beware of ﬁ nancing packages offered by car dealers. Combining price negotiations with ﬁ nancing terms generally results in a good deal for the dealer, not for you. 590 Consumer and Personal Finance Figure CPF 11 Buying a Car Research Used cars • Decide what kind of vehicle best suits your • Check the odometer. Avoid cars with an average needs and budget. of 15,000 miles per year or more. • Use Internet or library resources to ﬁ nd out such information as gas mileage, repair costs, safety record, and prices. • Look for rust, dents, and signs of the car having been in an accident. • Review the vehicle’s repair record. Check for regu- • If it’s a new car, ﬁ nd out what the dealer paid for lar maintenance such as oil changes. the car so you can negotiate a good price. • If it’s a used car, look up the average resale value in a “blue book” (used car price guide). Looking for cars • Visit dealer lots when they are closed to get an idea of what’s available without sales pressure. • Ask family and friends about their car-buying experiences. See if they know a reliable dealer or anyone selling a car. • Check out “for sale” ads in newspapers, on local bulletin boards, or on Web sites. •
Look for dealer ads in newspapers or on the Internet. • Find the vehicle identification number (VIN), and use it to research the car’s history through an Internet service. • Take a test drive. Test the air conditioner, heater, radio, and other equipment. • Pay a mechanic you trust to examine the car and to list what needs to be repaired. The buying experience • Always go prepared with the information you have gathered. • Know which options you want and which ones you can live without. • Get any offer in writing. That way you are very clear on the exact costs. Check It Out! ✔ Consider whether you really & What Should I Do After I Buy a Car? Each state has laws about vehicle titles, taxes, registration, and insurance. You can learn what is required from a car dealership or your state’s motor vehicle department. Call several insurance agencies to ﬁ nd out how much insurance for your vehicle will cost (also see 3.3 Getting Insurance). Keep the title, sales receipts, and other important documents in a safe place—not in the glove compartment. Only the registration and proof of insurance should be carried in the vehicle. need a car. ✔ Research the car and its price before you talk to a salesperson. ✔ Be sure you have all the necessary legal documents. APPL IC ATION Buying a Car 1. Why should you do research on vehicles before you talk to a dealer? 2. Planning a Purchase Choose a particular model of car, new or used. Go to the library or look on the Internet and ﬁ nd information about the car from at least three different sources. Try to learn as much as you can about the car’s features, reliability, and pricing, and write down what you learn. Wise Choices for Consumers 591 Wise Choices for Consumers 3.2 Financing Your Education Choosing to go on to college or vocational or technical school after graduation from high school is one of the biggest economic decisions you will make. Getting more schooling will cost you money, but it will pay off in higher salaries and a greater lifetime income. As you learned in Chapter 9, each additional amount of education you receive increases your chances of earning a higher income. More highly educated workers are also less likely to be unemployed. Although the costs of higher education can be daunting, there are many alternatives to help ﬁ nance your education. How Do I Decide About Higher Education? What type of higher education do you want
? Choices include college, vocational school, and technical school. Costs at different types of schools vary widely and may inﬂ uence the type of education you choose. Generally, public colleges are less expensive than private ones, and community colleges are less expensive than four-year schools. Consider your career goals, interests, and aptitudes, and think about what type of school offers the best value that meets your needs. Do you want to start right after high school? If you want to take a year off, think about what you will do and who will provide your ﬁ nancial support. Consider your income and expenses during that time and what kind of help your parents might give you. Postponing education postpones your future higher earnings and may lead to increased education costs. Where do you want to go for schooling? Are there schools in your state that would meet your needs? Out-of-state tuition is signiﬁ cantly higher than tuition at a public college in your own state. Going away to school generally means higher costs for housing, food, and travel, but it may be important for other reasons. 592 Consumer and Personal Finance What Will Be the Total Cost of Going to School? Paying for tuition to cover the costs of your coursework is just the beginning of school expenses. A variety of fees to cover student activities, connection to the school’s computer network, and other costs are added to tuition. In the 2005–2006 school year, average tuition and fees ranged from about $2,200 at a public two-year college to about $5,500 at a public four-year college and more than $21,200 at a private four-year college. Room and board costs cover housing and food and average more than $6,600 per year at a public four-year college. You must also buy your textbooks, which may cost as much as $1,000 per year. Transportation for visits home as well as other personal expenses are also part of the costs of going to school. Where Can I Get the Money for Higher Education? Once you have determined the costs of going to school, you can begin to make decisions about how to pay for your education. Here are some things to think about: Do I have the money to pay for it myself? Will my parents or family help me out? Can I work and study at the same time? Answers to these questions will help you decide if you need ﬁ nancial aid to go on to
school. All the costs of going to school can be daunting. Over 60 percent of students ﬁ nd that they need some ﬁ nancial help. In fact, most students pay much less than the published costs because of ﬁ nancial aid. There are three basic types of ﬁ nancial aid: grants and scholarships, loans, and work-study programs. Figure CPF 12 outlines the characteristics of each type of aid. Find an update on the cost of higher education at ClassZone.com & Figure CPF 12 Financial Aid Options Grants Scholarships Loans Work-Study Programs • do not need to • do not need to • must be repaid • college helps be repaid • usually based on need • sometimes based on academic merit • given by federal and state governments and colleges be repaid • usually based on academic merit or athletic or artistic ability • awarded by colleges, private groups, and the U.S. military • federal loans for student find a job students • federal government helps pay the salary • earnings do not need to be repaid • students who work part-time often do better in school • federal and private loans for parents • subsidized— based on need, some interest paid by government • unsubsidized— student pays all interest ➲ Wise Choices for Consumers 593 Wise Choices for Consumers How Much Aid Can I Get? In general, the amount of aid you receive is determined by the difference between the cost of attending school and the amount you and your family can contribute. Schools consider the following when awarding ﬁ nancial aid: • Income—yours and your parents. This is the single most important factor in determining ﬁ nancial aid based on need. Students and families with higher incomes are expected to contribute more. • Number of higher education students in your family. A family with more than one student in college would be expected to contribute less for each one. • Family assets and expenses. Students are expected to contribute a higher percentage of their savings than parents are, so it’s better to have more savings in parents’ accounts. In general, schools do not consider the value of retirement funds, a home, or personal assets such as automobiles in ﬁ guring out a family’s contribution. Some schools do consider these assets, so it’s important to know how the schools you are interested in ﬁ gure their aid awards. Unusual medical expenses and other large expenses may be considered in determining a family�
�s contribution. • Pool of aid dollars at the school you want to attend. Schools award aid based on a combination of federal, state, and school funds. A wealthy private school may have more funds available than a state school. • Number of students applying for aid at the school you want to attend. Since each school has a limited amount of funds available for aid, if more students apply for aid there may be less available for each student. The level of need of the students applying might also affect how much individual students receive. How Do I Apply? Start Early Meet with your guidance counselor and request ﬁ nancial aid information from schools at least a year before you plan to start school. Begin to research scholarships. Make note of all application deadlines. Get a PIN A personal identiﬁ cation number (PIN) allows you to submit your Free Application for Federal Student Aid (FAFSA) online for faster results. Go to www.pin.ed.gov. 594 Consumer and Personal Finance Gather All the Documents You Need You’ll need income tax returns and W-2 forms for you and your parents, as well as information on nontaxable income. You’ll also need your Social Security number and driver’s license number, along with bank statements and information on mortgage payments and investments. Complete the FAFSA Fill out a paper form or go to www.fafsa.ed.gov to apply online. Follow the instructions carefully. You only need to complete one form, which will be used by all the schools to which you are applying. Where Do I Get More Information? Federal Student Aid Information Center FAFSA on the Web The College Board SallieMae® loans studentaid.ed.gov 1-800-4-FED-AID (1-800-433-3243) www.fafsa.ed.gov www.collegeboard.com www.salliemae.com Your school guidance counselor and the ﬁ nancial aid ofﬁ ces of the schools you are considering also have information. Fill Out Any Additional Aid Forms These forms may be required for some nonfederal aid such as state and school aid or private scholarships. Ask for recommendations from your teachers and other adults who know you well at least a month before scholarship application deadlines. Provide them any necessary forms and a stamped envelope for the recommender to send to the school & & Review Your Student Aid Report (SAR) This report
is the result of your FAFSA application. Make sure all the information is accurate. Your SAR shows your Expected Family Contribution (EFC), which determines your eligibility for federal student aid based on need. Contact Schools’ Financial Aid Ofﬁ ces Make sure all schools you’ve applied to received all the information they need. Check It Out! ✔ Get forms in on time. ✔ Photocopy all information or print copies of online applications. ✔ Make sure information is consistent on all forms. Compare Your Aid Awards After you receive responses, decide which school’s aid package offers the best combination of grants, scholarships, loans, and work-study. AP P LI CATION Financing Your Education 1. What criteria are used to determine who gets ﬁ nancial aid? 2. Using a Decision-Making Grid Using the questions on page 592 and a decision-making grid, determine which type of schooling makes the most economic sense for you. Wise Choices for Consumers 595 Wise Choices for Consumers 3.3 Getting Insurance Insurance protects people from the ﬁ nancial effects of unexpected losses. When you buy insurance coverage, your money joins a pool of money from many different people who face similar risks. The system works because the risk is spread over a large group of people. The chances of any one individual suffering a loss are small. What Are the Benefits of Insurance? Most people take out insurance for problems that may be unlikely but would be expensive if they happened: medical treatment for a serious illness or accident, repairing a car damaged in an accident, or replacing valuables stolen from your residence. Such losses are potentially so large that it would be difﬁ cult to save enough in an emergency fund to pay for them. Insurance protects you ﬁ nancially against those kinds of losses. What Kinds of Insurance Should I Get? When you buy an insurance policy you purchase a certain amount of protection or coverage. Your payment for this protection is called an insurance premium. Many types of insurance require you to pay a deductible, which is the amount you pay before the insurance company pays on a loss. Some health insurance requires a co-pay, an amount you must pay each time you receive health care under your policy. When you have a loss you submit a claim, which is a request for payment, to the insurance company. Most people start out with car insurance, health insurance, and renter’s or personal property insurance. There are other options as
well. See Figure CPF 13 for an overview of the basic types of insurance. Most states require that you carry at least a minimum amount of car insurance in case of injury or property damage caused by your car. Premiums are based on the type of vehicle, your age, your driving record, and other related information. The more coverage you have the more the insurance will cost. If you carry a high deductible, it will reduce the premium. QUICK REFERENCE A premium is amount paid for insurance. A deductible is an amount paid by the insured before the insurance company pays. A co-pay is an amount due when an insured receives health care. A claim is a request for payment on an insured loss. 596 Consumer and Personal Finance & Figure CPF 13 Types of Insurance Type of Insurance Protects Pays Car Health vehicle in case of accident or theft; occupants in case of accident for property damage and bodily injury, legal costs, and related expenses policyholder in the event of illness or injury for doctor and hospital visits, prescription drugs Homeowner’s structures, land, and personal property for damage due to fire, theft, or natural disaster Renter’s personal property income when a person cannot work for loss of or damage to personal items a percentage of income when a person is out of work due to injury or illness family when a wageearner dies money to the family to meet expenses after death Disability Life Health insurance is very costly. Your employer or school may offer insurance plans to cover some or all of your needs. In some states, you may be covered by your parents’ health insurance until you graduate from college or reach age 25. If you live in rented housing, you may want to protect your belongings with renter’s insurance or with personal property insurance. Some policies cover the full replacement cost of insured items; others cover only the current value of the items. For example, actual cash value coverage will not cover the full cost of replacing a three-year-old bike that gets stolen. Check It Out! ✔ Find out if you have insurance coverage at work or through your educational institution. ✔ See if your insurance covers the current value or the full replacement cost. ✔ Determine how much you can afford in deductibles. What Questions Should I Ask an Insurance Agent? • How much does the policy cover? Are there limits each year or for each accident or illness? Are there maximums for certain kinds of losses? • What levels of deductibles are available? Higher deductibles lower the
premiums. • Are claims paid on actual cash value or on replacement value? The former may cost less, but you will receive less in the event of a loss. • How often are premiums due—monthly or once or twice per year? APPL IC ATION Getting Insurance 1. What reasons do people cite for getting insurance? 2. Selecting Insurance Explain how having insurance could help in each of the following situations. Case A: Your CD player and 10 CDs are stolen from your car. Case B: You have to have emergency surgery for a fractured leg. Case C: Your car is smashed up by a hit-and-run driver. The damage is well over $2,000. Wise Choices for Consumers 597 Wise Choices for Consumers QUICK REFERENCE A contract is a legally binding agreement. 3.4 Contracts: Reading the Fine Print Buying insurance, taking out a loan, signing up for a credit card—all of these involve a formal, legally binding agreement known as a contract. The contract may be in the form of a signed document or may be executed on a Web site when you download something from the Internet. These terms and conditions are called the “ﬁ ne print” because they are often set in small type. Why Should I Read the Fine Print? There’s an old saying: “Education is when you read the ﬁ ne print. Experience is what you get when you don’t.” By reading the ﬁ ne print, you will understand exactly what you are agreeing to when you sign a contract. The ﬁ ne print often contains information about extra charges and fees that may not be displayed in marketing brochures or advertisements. Consider Michele, a student who signed a cell phone service contract without reading it. When the ﬁ rst bill arrived, it was over $1,000. She checked the contract and found ﬁ ne print stating that all text messaging both sent and received was subject to a charge. Even though Michele hadn’t read these terms, she had signed the contract, and she had to pay the bill. What Should I Do Before Signing a Contract? • First, actually read the contract. If it is long or complicated, ask for a copy and take it home to read. • Clarify all terms or provisions you don’t understand. In a cell phone contract, for example, be clear on peak and off-peak hours, roaming charges, and
the cancellation policy. Ask questions until you understand everything clearly. If there are parts you can’t ﬁ gure out, get advice from a friend before signing. Source: www.CartoonStock.com • Check all ﬁ gures in the contract. Bring a calculator and ﬁ gure the costs yourself—don’t depend on the salesperson’s math. • Make sure any mistakes or omis- sions are corrected on the contract and initialed by the salesperson. 598 Consumer and Personal Finance Figure CPF 14 A Cell Phone Contract a Note how many minutes are in- cluded in the basic monthly price. CellPhone Service Agreement b Asterisks or footnotes often lead to small print that provides important information. c If you exceed the allotted number of text messages, you pay a fee for each one. d If you want to end your contract before it expires, you pay the cancellation fee. e Your signature here shows that you have read and agree to the ﬁ ne print. Monthly calling plan Total minutes/month (peak) Unlimited off-peak b Voice mail Additional minutes Roaming charges (See coverage map and terms for details) Text messaging Total outgoing messages/month Additional outgoing messages Incoming messages Plus federal, state, and local taxes and fees Contract length Cancellation fee b $24.95 400 a $5.95 Included* b $0.40/minute $1.00/minute $3.95 100 $0.10/each c Unlimited Free 24 months $150.00 d What Should I Beware of? • Don’t let the salesperson rush you. *Accessing voice mail through cellular phone accrues minutes like any other call. I acknowledge that I have read and agree to the company’s Terms and Conditions e (your signature) Take your time and make sure you are certain of the terms of the contract. Even if the salesperson says certain desirable terms are about to expire, you should not sign anything you do not thoroughly understand and agree to & • Never sign a contract with blank spaces. Make sure every blank on the contract is either ﬁ lled in or marked through as being not applicable. If you leave blanks, someone might enter something after you sign that you did not want to agree to. • Don’t agree to verbal contracts. Make sure everything is in writing. If you agree to a verbal contract and run into a problem, you have no evidence of
what the agreement was. Business agreements are generally too complex for either side to remember all the details. • Don’t leave without getting a copy of the contract. Keep the contract in a safe place. Check your ﬁ rst bill carefully to make sure everything matches the contract. If you have questions, call the company to resolve your concerns. Check It Out! ✔ If it seems too good to be true, it probably is. ✔ Check all ﬁ gures on the contract. ✔ Never sign a contract with blanks not ﬁ lled in or crossed out. APPL IC ATION Contracts 1. Why shouldn’t you agree to a verbal contract? 2. Evaluating an Offer Study the ads or commercials for cell phone service. Review Wise Choices for Consumers using interactive activities at ClassZone.com Suppose you are ready to sign a contract for cell phone service. Make a list of the questions you will ask before you sign the contract. Wise Choices for Consumers 599 4.1 Getting a Job 4.2 Paying Taxes 4.3 Finding an Apartment Getting Out on Your Own 4.1 Getting a Job An important step to becoming an independent adult is getting a job. A job allows you to earn money, gain experience, and learn new skills. A career is more than a job. It is a work path that provides satisfaction, challenge, and opportunities for self-expression. Your ﬁ rst jobs help you learn about the world of work and what kind of career you might enjoy. Where Can I Look for a Job? Finding a job that suits your skills and helps advance you along your career path can be challenging. There are many sources of information about jobs, and the more you use, the better your chances of ﬁ nding a good ﬁ t. Friends and Family Talk to them to ﬁ nd out if they know of any job openings. They are the beginning of your network—people who will support you in what you attempt, and whom you support in turn. School Guidance Counselor, or Career Planning or Placement Ofﬁ ce These ofﬁ ces have listings of jobs and intern positions. You can also learn about different careers. Internet Many Web sites offer job listings, places to post your resumé, and other services. America’s Job Bank, managed through a partnership between federal and state governments, allows you to tap into career resources, look at job listings all over
the country, and post a resumé. Newspaper Want Ads Your local newspaper is a good source for jobs in your area. Employment Agencies Your state and local governments may offer employment services. These public agencies often offer job counseling and training as well as job listings. Private agencies also offer job listings and placement, but they sometimes charge a fee for their services. Job Fairs Job fairs offer the opportunity to talk to many employers in an area or a speciﬁ c job category in a very short period of time. 600 Consumer and Personal Finance What Do I Need to Apply for a Job? Before you apply for a job, you will need to prepare materials that introduce you to potential employers and tell them about your qualiﬁ cations. You will need a resumé, a cover letter, and a list of references. References are people who know you and your work habits and are willing to talk to potential employers. Many jobs will also require that you ﬁ ll out an application form. Resumé A resumé is a record of your job history and education. It should be truthful and succinct—no more than one page long. Since employers judge you by your resumé, be sure it is visually appealing and free of errors. Figure CPF 15 shows a sample resumé for a recent high school graduate. If you apply for different kinds of jobs, you may want to develop more than one resumé. Cover Letter A cover letter brieﬂ y explains why you want the job and how you are qualiﬁ ed for it. Address your letter to the speciﬁ c individual who is Cheryl A. Miller 1909 E. Walnut St. Long Beach, CA 90811 310-555-5678 camiller89@isp.net b c Objective To obtain an entry-level customer service position Education Jefferson High School, 2003-2007 Experience September 2006–Present Sales Associate, Electronics Super Center • Advised customers on product features and helped them choose the ones that best met their needs • Met or exceeded weekly sales quotas • Developed promotional materials for in-store use Summer 2006 Administrative Assistant, Oceanside Computer Center • Tracked customer sales and repair orders to improve response time • Responded to customer questions by phone and email • Provided ofﬁ ce support for staff of six September 2005–June 2006 User support, Jefferson High computer lab • Developed an orientation program for incoming students • Helped students use a variety
of software applications • Led a workshop on Web page design d Other Skills • Proﬁ cient in a wide range of application software, including word processing, spreadsheet, database, and presentations • Internet research e Activities and Honors • Member of varsity girls’ track team • Captain of debate team References available upon request Figure CPF 15 Writing a Resumé a Include all the information an employer might need to contact you. b Make your objective speciﬁ c and succinct. Tailor it to the job you are applying for. c List your work experience in reverse chronological order. Include volunteer work if you have little paid work experience. Focus on skills and accomplishments. d List other skills you have that might be useful on the job, even if you have not been able to use them in previous jobs. e Include a section that lists ac- tivities, honors, and community service. ➲ Getting Out on Your Own 601 Getting Out on Your Own designated to receive applications. Open your letter with a strong statement of your interest in this particular job. In the body of the letter, use information from your resumé to explain why you are the best candidate. Close by restating your interest and indicate your intention to follow up to request an interview. Internet and library resources can give you samples of strong cover letters. Figure CPF 16 References Cheryl A. Miller 1909 E. Walnut St. Long Beach, CA 90811 310-555-5678 camiller89@isp.net References Barry Woods Assistant Manager Electronics Super Center 1234 Main St. Long Beach, CA 90811 310-555-1357 bwoods@esc.com Cynthia North Director Jefferson High Computer Lab 461 Grand Oak Boulevard Long Beach, CA 90811 310-555-1234 c_north@jefferson.lb.ca.edu Danielle Curran Ofﬁ ce Manager Oceanside Computer Center 4916 Oceanside Road Long Beach, CA 90812 310-555-2468 dmcurran@occ.com Julie Barnes Moderator Jefferson High Debate Team 461 Grand Oak Boulevard Long Beach, CA 90811 310-555-1345 j_barnes@jefferson.lb.ca.edu References Before you list someone as a reference, talk with him or her about your job hunt and ask their permission. The list of references should include the person’s name, address (either business or home), telephone number, and an e-mail
address, if they have one. It’s also a good idea to indicate the person’s position or relationship to you. The people you choose as references should know you well enough to be able to describe your skills, experiences, and work habits. Choose people who will be enthusiastic about your abilities based on their experience with you. Typical references include former or current employers, teachers or coaches, or family friends who can vouch for your personal character. Stay in touch with your references during your job hunt. Let them know when they might expect to hear from an employer, and discuss what you would like them to emphasize when they are contacted. How Can I Ace the Interview? If an employer gets a good impression of you from your resumé and cover letter, they may invite you to come in for an interview. The interview is a chance for the employer to learn more about you and for you to learn more about the job and the company. The Company and the Job Do some research on the company to which you are applying. A company’s Web site will tell you more about the organization, but you might also ﬁ nd newspaper articles with information about the company. This research will help you to conﬁ rm that you are interested in working for the company. It will also show the company that you cared enough about the job to do some investigating before the interview. 602 Consumer and Personal Finance Use your research to prepare a set of questions about the organization and the job. Find out as much as you can about the job requirements and responsibilities before discussing such things as pay, hours, or beneﬁ ts. In some cases, those topics may not come up until a later interview. Remember that both you and the employer want to conﬁ rm that you are a good ﬁ t for the job and the organization. Presenting Yourself Be ready to answer questions about your qualiﬁ cations and about how you will ﬁ t into the company. You may want to practice answering questions in front of a mirror or with a friend or family member. Make sure your answers are clear and succinct. Take time to think about your responses to unexpected questions. Books and online resources can provide examples of many common interview questions & Dress appropriately for the job you are seeking. Don’t show up to the interview in business attire if you are applying to work where you will get very dirty. By the same token, don’t go to an interview for
an ofﬁ ce job dressed in jeans and a T-shirt. Always appear neat, clean, and well groomed. Determine how long it will take to get to the interview. Plan to arrive about ten minutes early. Take weather conditions and trafﬁ c into consideration. If you are delayed, be sure to call and explain that you will be late. Bring extra copies of your resumé and list of references. You may want to bring a pad of paper to take notes during the interview. Be sure to get the name and title of each person who interviews you. Check It Out! ✔ Learn about the company where you are applying. ✔ Prepare a list of questions about the job and the company. ✔ Bring extra copies of your resumé and your list of references. ✔ Be on time for your interview. Follow-Up Write a short thank-you note immediately after the interview to each interviewer. Thank the interviewer for spending time with you. If you still want the job, restate your interest in it. Refer to something you learned in the interview. Express your desire to learn more about the position. AP P LI CATION Getting a Job 1. What is the purpose of a resumé? 2. Writing Your Resumé Study the resumé in this section. Prepare a personal resumé based on the model. Also assemble a list of people whom you might want to use as references. Getting Out on Your Own 603 Getting Out on Your Own 4.2 Paying Taxes Benjamin Franklin once said, “In this world nothing is certain but death and taxes.” As you learned in Chapter 14, taxes provide the government with revenue to provide needed services. Recall that the Internal Revenue Service (IRS) is the government agency that collects the federal taxes owed by Americans. Most states also collect taxes. Taxes for the previous year must be paid by April 15 of the current year. For example, taxes for income earned in 2010 would need to be paid by April 15, 2011. How Are My Taxes Determined? The amount you pay in taxes is determined by your ﬁ ling status and your taxable income. Filing status is based on your marital status or whether you have any dependents. A dependent is a child or relative in your household whom you support. People with more dependents have less tax withheld. Employers use the W-4 form, shown in Figure CPF 17, to determine your ﬁ ling status for withholding taxes from
your paycheck. You ﬁ ll out a W-4 form when you begin a job. As long as you are still dependent on your parents, you claim only one withholding allowance. The second determinant is your taxable income, which is the amount of income subject to taxation after all exemptions and deductions. The higher your income, the higher your taxes will be. Certain income may not be taxed. For example, money can be deducted from your paycheck before taxes to pay for health insurance. Income above a certain level is not subject to Federal Insurance Contributions Act (FICA) taxes for Social Security. QUICK REFERENCE Filing status is based on your marital status or support of dependents. Taxable income is the income subject to taxation after exemptions and deductions. Figure CPF 17 The W-4 Form a a Instructions help you determine how many allowances to claim. A single person with one job who is claimed as a dependent gets one allowance. b Your Social Security number is required on all IRS forms. 604 Consumer and Personal Finance b Where Do I Get Tax Forms? Federal and state tax forms are available starting in January each year at post ofﬁ ces (federal forms only), libraries, banks, and IRS or state tax ofﬁ ces. They are also available through ofﬁ cial Web sites, or you can order forms through the mail or by phone. The ﬁ rst year you ﬁ le taxes, you will need to ﬁ nd the forms yourself. After that, you should receive forms in the mail from the state and federal governments at the end of each year. If your tax situation changes signiﬁ cantly from the previous year, you may need to pick up additional forms. Form 1040 Most young adults do not have to ﬁ le complicated tax forms. Generally, the 1040EZ form should be sufﬁ cient for your federal taxes. This is a one-page form that has only 12 lines to ﬁ ll out. The back of the form explains who is eligible to use it. See Figure CPF 18 for a sample of a 1040EZ form. If you receive more than $1,500 in interest, you cannot use the 1040EZ form. Likewise, if you receive any dividends or other income from stocks, bonds, or similar investments, you cannot use 1040EZ. Instead, you will need to use form 1040A or
1040. These forms have related forms, known as schedules, for reporting investment income. Most state tax forms are simple because they are based on the results you obtain from ﬁ lling out your federal forms. The W-2 Form The W-2 form shows how much you earned during the year and how much you paid in taxes through withholding. The form shows your total gross earnings and the amount of earnings subject to taxation. The amount withheld for each type of tax is also shown, including federal income tax, Social Security and Medicare taxes, and state and local taxes. At the end of each year, any employer that you have worked for that year must send you a W-2 form. Employers must send the forms in time to arrive at your home by January 31. The W-2 will include copies to ﬁ le with your federal, state, and local tax returns, as well as one copy for your ﬁ les. Other Forms When you have savings or investments, your bank or ﬁ nancial institution will send you other forms. Form 1099-INT for savings interest and form 1099-DIV for investment gains should arrive about the same time as your W-2 & ➲ Getting Out on Your Own 605 Getting Out on Your Own How Do I Fill Out a Tax Form? Instruction booklets are available in most locations where you ﬁ nd tax forms. You may also download them for free from the IRS or state tax Web sites or request them by mail or phone. The instructions will take you through the steps to ﬁ ll out the form line by line. They will also provide additional background information that may be helpful, as well as telling you where to go if you need help. Perhaps most important, the instructions contain the tax tables that will tell you how much tax you have to pay once you have determined your taxable income. Follow the step-by-step instructions to complete each form. Always use correct and veriﬁ able numbers. Making up numbers is considered tax fraud, which can be punishable with severe penalties. Figure CPF 18 shows a sample of a 1040EZ form. Figure CPF 18 Filling Out the 1040EZ a Use your W-2 form(s) to ﬁ nd the amount to enter here. b The 1099-INT form shows how much interest you earned. c The amount you enter here depends on your ﬁ ling status. If you are a dependent,
you get the standard deduction but not the personal exemption. d The amount of tax withheld is found on your W-2 form along with earnings. e If you had more withheld than you owe in taxes, you will get money back in the form of a refund. If you didn’t have enough withheld, you will have to pay the amount you still owe to the IRS. 606 Consumer and Personal Finance & How Do I File My Taxes? Everyone who receives more than a certain amount of income during the year must ﬁ le a tax return. Check the tax form instructions or the IRS Web site to determine if you are required to ﬁ le. Even if you don’t owe money, you must ﬁ le a form if you meet the requirements. And, of course, you will not receive a refund for excess taxes withheld unless you ﬁ le a tax return. See the “What if I get stuck?” sidebar to ﬁ nd out how to receive help with your taxes. Before you send in your forms, double check your work. Conﬁ rm that you have entered the correct Social Security number; that your income, withholding, and tax ﬁ gures are correct; and that you have signed your forms. Then make a photocopy of the forms for your own records. When everything is ready, you can mail all the paperwork to the IRS service center listed on your form. You can also ﬁ le your tax forms electronically. Electronically ﬁ led returns are generally more accurate, and refunds are processed more quickly. The IRS has formed a partnership with several tax software companies to offer the Free File service that allows most taxpayers to prepare and ﬁ le their taxes electronically for free. You can ﬁ nd more information and instructions on e-ﬁ ling options on the IRS Web site. WHAT IF I GET STUCK? • Ask a parent or other trusted adult. Most have many years of experience filling out tax forms. • For federal tax help, go to the IRS Web site. For state tax help use the name of your state and the key words tax help to find the Web site. • For additional help, call the local IRS office (1-800-829-1040) or your state tax office. After you ﬁ le your return, be sure to keep all your forms and copies in a safe place. Keep your tax returns and all related documents for at
least three years—the limit if the IRS wants to contest your return. Mistakes The IRS and state tax auditors usually catch simple math mistakes and inform you of them. They then recalculate your taxes and adjust the amount of your refund or taxes owed. If you discover a major error or omission on your form after you submit it, ﬁ le an amended return as soon as possible. You must ﬁ le an amended return within three years of the time when the original return was ﬁ led. You may have to pay a penalty depending on the type of error involved. Check It Out! ✔ The ﬁ ling deadline is April 15, every year. ✔ Check everything on your form carefully before submitting it. ✔ Save your forms and copies for at least three years. APPL IC ATION Paying Taxes 1. Where can you go to get tax forms? 2. Preparing to Do Your Taxes Make a list of the documents and information you will need to ﬁ le federal and state income tax forms. Decide on a location where you will keep the list and the information until it is time to ﬁ le your taxes. Getting Out on Your Own 607 Getting Out on Your Own 4.3 Finding an Apartment Most young adults will rent an apartment when they start out on their own because apartments are an affordable type of housing. Moving out of your parents’ home or out of a college dormitory into an apartment will give you more freedom. But it also means more responsibilities. You will have to pay monthly bills, shop for groceries, ﬁ x meals, clean your apartment, and do laundry. With a little effort, you can ﬁ nd an apartment that suits you. What Should I Consider About Renting an Apartment? How much should I spend? Your housing expenses should amount to no more than about one-fourth to one-third of your take-home pay. These expenses include not only your rent, but also utilities, cable, and any other housing costs. Spending a higher proportion of your income on housing may not leave you enough to meet your other expenses or to have the money you want to enjoy life. Should I live by myself or with roommates? If one-third of your take-home pay only pays rent for a storage locker, you may want to consider sharing a larger apartment with one or more roommates. Roommates can make living in an apartment cheaper and more fun, but they can become a problem if
they are irresponsible or have a lifestyle that clashes with your own. Think about how to balance the desire for privacy and your own space with the desire for companionship and help with household expenses and chores. If you decide to live with roommates, consider looking for an apartment together. That way, everyone can commit to the same place, and people will be less likely to grow dissatisﬁ ed and leave. How do I choose roommates? Look for individuals you are compatible with, whose personalities and lifestyles are similar to your own. Roommates should be people you can count on, whether it’s to pay their share of the rent or to do their share of household chores. Living with other people can bring up conﬂ icts about how to share expenses, use the living space, and keep it clean. You and your roommates will need to communicate to resolve such issues. Consider drawing up an agreement together that spells out the rules that everyone must obey and the responsibilities that each roommate accepts. 608 Consumer and Personal Finance Figure CPF 19 Looking for an Apartment Location The Building • Is it convenient to where you work? • Is it clean and well taken care of? • Is there nearby public transportation or parking? • Do the other tenants seem friendly? • Are there grocery stores, self-service laundries, or • Are the lobby and stairwells safe? other stores you need nearby? • Is the neighborhood safe? • Are there sufﬁ cient parking spaces, laundry facilities, or bike rooms? Space • Is there enough room for the number of people living in the apartment? • Is it suitable for your way of life? • Are all the roommates happy with the living space and available storage? Furnished or Unfurnished • Do you want it furnished with furniture or do you want to use your own furniture? • Can you get used furniture from family or friends or purchase inexpensive furniture? • Does the apartment include appliances, such as a stove and refrigerator? What Do I Need to Know About Signing a Lease? • A lease is a contract for renting an apartment for a speciﬁ c period of time. The contract is between you and your landlord, who is the owner of the rental property. A lease is a legal document that obligates you to pay rent and to follow certain rules for a speciﬁ c period of time. The landlord has responsibilities as well. If you have roommates, whoever signs the lease is
responsible even if other roommates fail to pay their part of the rent. QUICK REFERENCE A lease is a contract for renting an apartment. A landlord is the owner of rental property & • You may be asked for the ﬁ rst and last months’ rent, a security deposit, and possibly cleaning and key fees. When you move out, the landlord will inspect the property and return some or all of the security deposit and fees, depending on what repairs need to be done. • You may need to provide character references—name, address, and phone number. Generally you should use three people who are not relatives, such as teachers, employers, or supervisors of volunteer work, who can vouch for you. • You must provide your Social Security number and bank information. If you are employed you will provide employment information. Check It Out! ✔ Provide a list of references. ✔ Be prepared for up-front costs such as a security deposit. ✔ Look at several places before committing to an apartment. • If this is your ﬁ rst apartment or you are not employed, you may be asked to have a responsible adult act as a cosigner. This ensures that the landlord will be paid the rent due if you fail to pay. APPL IC ATION Finding an Apartment 1. What is a lease? 2. Analyzing Your Needs Decide if you would prefer to live alone or with others. If you prefer to live alone, write a paragraph explaining your decision. If you would like to live with others, create a list of roommate rules and responsibilities. Review Getting Out on Your Own using interactive activities at ClassZone.com Getting Out on Your Own 609 Reference Section McDougal Littell ECONOMICS Concepts and Choices Math Handbook Mathematical skills related to economics R1 Skillbuilder Handbook Skills for understanding economics and using print, visual, R12 and technology sources Glossary Important terms and deﬁ nitions Spanish Glossary Important terms and deﬁ nitions translated into Spanish Index Index of all topics in the textbook Acknowledgments Acknowledgments for text excerpts, images, and trademarks R32 R45 R61 R79 Math Handbook Table of Contents Refer to the Math Handbook when you need help with the mathematical concepts that you might encounter in your study of economics. 1.1 Working with Decimals and Percents 1.2 Calculating Averages 1.3 Calculating and Using Percents 1.4 Using Ratios 1.5 Calcul
ating Compound Interest 1.6 Understanding Progressive Taxes 1.7 Creating Line Graphs 1.8 Creating Bar Graphs 1.9 Creating Pie Graphs 1.10 Creating a Database R2 R3 R4 R5 R6 R7 R8 R9 R10 R11 Math Handbook R1 1.1 Working with Decimals and Percents Understanding the Skill A decimal is a number that uses the base-ten value system where a decimal point separates the ones’ and tenths’ digits. Each place value is ten times the place value to its right. For example, 5.2 is five and two tenths and 12.45 is twelve and forty-five hundredths. The word percent means “per hundred.” For example, 5 percent means “5 per 100,” or 5/100. If 5 percent of the population is unemployed, then, on average, 5 out of 100 people are unemployed. To write a decimal as a percent, multiply by 100 percent. To write a percent as a decimal, divide by 100 percent. Example 1: A company’s February sales were 0.125 of its total annual sales. Express this as a percentage. 0.125 0.125 x 100% Multiply by 100 percent. 12.5% Move the decimal point two places to the right. Check your answer: 12.5 should be larger than 0.125 because you multiplied by 100. Example 2: A company’s workforce was 105 percent of what it was a year earlier. Express this as a decimal. 105% 105%_____ 100% 105____ 100 1.05 Divide by 100 percent. Cancel the % signs. To divide by 100, move the decimal point 2 places to the left. Check your answer: 1.05 should be smaller than 105 because you divided by 100. Applying the Skill 1. In 2002, the total personal income in the United States was $8.922 trillion and the total personal taxes were $1.112 trillion. What percent of income were taxes? Round your answer to the nearest hundredth. 2. The GDP of the United States is $11.750 trillion and the GDP of the world is $55.500 trillion. What percent of the world’s GDP is from the United States? Round your answer to the nearest tenth. R2 Math Handbook 1.2 Calculating Averages Understanding the Skill There are three ways to express the average of a group of numbers. The
most common way is to divide the total by the number of values. This kind of average is called the mean. Mean, Median, and Mode Notice that, in Example 1, most workers earn much less than the mean of $27,000; the mean doesn’t describe typical earnings well. Typical earnings are often described better by the two other kinds of average: the mode and the median. To determine the mode and the median of a group of numbers, write the numbers in order from smallest to largest. The mode is the most common value. The median is the middle value. If the number of values is even, the median is the mean of the two middle values Example 1: The annual earnings of five workers are shown below. Calculate the mean earnings. $14,000 $18,000 $14,000 $75,000 $14,000 Solution Divide the total by the number of values. There are five numbers to average, so the number of values is 5. Mean Total _____________ Number of values 135,000 _______ 5 $27,000 The workers have mean earnings of $27,000 Simplify the numerator. Divide. Answer the question. Example 2: Find the mode and the median of the earnings in Example 1. Solution Write the values in order from smallest to largest. $14,000 $14,000 $14,000 $18,000 $75,000 The most common value is $14,000, so the mode is $14,000. $14,000 $14,000 $14,000 $18,000 $75,000 The middle value is also $14,000, so the median is $14,000. Applying the Skill Calculate the mean, the median, and the mode of each group of numbers. 1. $40,000 $32,000 $38,000 $40,000 $40,000 2. $80,000 $50,000 $35,000 $35,000 $40,000 $60,000 Math Handbook R3 1.3 Calculating and Using Percents Understanding the Skill As you recall, the term percent means “per hundred.” For example, 25% is 25/100. To change a decimal to a percent, move the decimal point two places to the right and add the % symbol. 0.253 = 25.3% 1.63 = 163% To calculate and use percents, first write a question. Then rewrite your question
as an equation. Replace “percent” with /100, “of” with, and “is” with =. Replace the unknown value with a variable, like x. Example 1: Sweden’s gross domestic product (GDP) is $255,400,000,000. Agriculture accounts for about $5,108,000,000 of the GDP. What percent of the GDP is from agriculture? Solution What percent of the GDP is from agriculture? Write a question. What percent of $255,400,000,000 is $5,108,000,000? /100 $255,400,000,000 $5,108,000,000 Rewrite as an equation. Substitute numbers. $5,108,000,000 ______________ $255,400,000,000 100 2 Two percent of Sweden’s GDP is from agriculture. Solve the equation. Use a calculator. Answer the question. Example 2: Sweden’s unemployment rate is 5.6% and its labor force is 4.46 million. About how many people are unemployed? Solution 5.6 percent of the labor force is how many people? Write a question. 5.6 percent of 4.46 million is how many? 5.6/100 4,460,000 Substitute numbers. Rewrite as an equation. 249,760 Use a calculator. About 250,000 people are unemployed. Round your answer. Applying the Skill 1. What is 10% of $65? 3. $3.75 is 15% of how much? R4 Math Handbook 2. What is 150% of 256,000? 1.4 Using Ratios Understanding the Skill A ratio compares two numbers that have the same units of measure. For example, if Tina runs 8 miles per hour and Maria runs 7 miles per hour, the ratio of their speeds is 8 to 7, or 8:7. A ratio can also be written as a fraction: 8_ 7. You can simplify ratios in the same way that you simplify fractions Example 1: Raul runs 8 miles per hour and his little brother Ben runs 4 miles per hour. What is the ratio of Raul’s speed to Ben’s speed? Solution 8__ 4 Raul’s speed _________ Ben’s speed 8 4 _____ 4 4 2__ 1 Write a fraction. To simplify the fraction, divide both the top and the bottom by 4. 2__ means
the same as 2:1 and “2 to 1.” 1 The ratio of Raul’s speed to Ben’s speed is 2 to 1. Ratios are sometimes written as decimals. For example, a company’s price-earnings ratio is the ratio of the price of a share of the company’s stock to the earnings per share. Example 2 Suppose a share of a company’s stock costs $54.75 and the earnings per share are $2.73. What is the company’s price-earnings ratio? Solution Price-earnings ratio = Price of a share of stock __________________ Earnings per share $55.75 ______ $2.73 20.421245 20.4 The company’s price-earnings ratio is about 20.4. Write a fraction. Substitute numbers. Use a calculator. Round your answer. Answer the question. Applying the Skill 1. The GDP of the world is about $55 trillion and the GDP of the United States is about $11 trillion. What is the ratio of the GDP of the world to the GDP of the United States? 2. Suppose a share of a company’s stock costs $26.24 and the earnings per share are $3.19. What is the company’s price-earnings ratio? Math Handbook R5 1.5 Calculating Compound Interest Understanding the Skill For some savings instruments, interest is calculated and paid multiple times each year. To calculate the amount of each interest payment, you can use the following formula. Interest = Balance Interest rate __________________________ Number of times calculated each year If interest on your savings is compounded, that means the interest you earn is added to your total savings, and is included in future calculations of interest. Notice that the interest for the second half of the year is greater than the interest for the first half of the year. In the second half of the year, you earn interest not only on your original balance, but also on the interest you earned in the first half of the year. Compound interest on loans works the same as compound interest on savings. But for loans, if interest is compounded, you must pay interest on interest you haven’t yet paid. Applying the Skill 1. If interest on $2,000 is compounded biannually with a rate of 6 percent, what is the interest for each compounding period in the first year? What is the total interest
for one year? Example: If interest on $1,000 is compounded biannually with an interest rate of 5 percent, how much interest do you earn for each compounding period in the first year? Solution If interest is compounded biannually, that means it is calculated two times a year and each compounding period is a half of a year. Calculate the interest for each half. First half of year Interest = $1,000 5% ___________ 2 $1,000 0.05 ____________ 2 $25.00 Balance Interest rate __________________________ Number of times calculated each year Substitute numbers. Convert the percent to a decimal. Use a calculator. Second half of year First, calculate the new balance by adding the interest to the old balance. New balance Old balance Interest on old balance $1,000 $25.00 $1,025.00 Interest New balance Interest rate ____________________________ Number of times calculated each year $1,025.00 5% _____________ 2 $25.63 The interest for the first half of the year is $25.00 and for the second half is $25.63. 2. If interest on $2,000 is compounded four times a year with a rate of 6 percent, what is the interest for each compounding period in the first year? What is the total interest? 3. Look at your answers to Questions 1 and 2. Do you earn more if the interest is compounded twice a year or if it is compounded four times a year? R6 Math Handbook 1.6 Understanding Progressive Taxes Understanding the Skill The federal income tax is progressive: a person with a low income is taxed at a lower rate than a person with a higher income. The table at the bottom of the page shows the 2006 income tax brackets for a single person. If you file as single and your taxable income is $7,125, you are in the 10 percent tax bracket because $7,125 is between $0 and $7,550. If your taxable income is $7,750, then you are in the 15 percent tax bracket, but your tax is not 15 percent of $7,750. Instead, you pay 10 percent on the first $7,550 of your income. You pay 15 percent on the rest Example 1: Calculate tax in the 10 percent tax bracket on $7,125. Tax Tax rate x Income in bracket 10% $7,125 0.10 $7,125 $712.50 The tax on $7
,125 is $713. Substitute numbers. Write 10 percent as a decimal. Multiply. Answer the question. Round to the nearest dollar. Example 2: Calculate tax in the 15 percent tax bracket on $7,550. Pay 10 percent on the first $7,550. Tax Tax rate x Income in bracket 10% $7,550 $755.00 Pay 15 percent on the rest of the income. Income in 15% bracket Total income – Income in 10% bracket $7,750 $7,550 $200 Tax Tax rate x Income in bracket 15% $200 $30.00 Add the tax from the two brackets together to find the total tax. $755.00 $30.00 $785.00 Applying the Skill Using the tax bracket table on the right, calculate the taxes on the following taxable incomes: A. $7,175 C. $74,100 B. $17,225 D. $98,975 2006 Federal Income Tax Brackets (Single) Income Bracket Tax Rate $0–$7,550 $7,550–$30,650 $30,650–$74,200 $74,200–$154,800 10% 15% 25% 28% Math Handbook R7 1.7 Creating Line Graphs Understanding the Skill A line graph is useful for showing how a value changes over time. You can use a spreadsheet or graphing software to make a line graph. In the example, type the years and inflation rates into the software. The software will do most of the above steps for you. See the software’s tutorials or help feature for guidance. United States Inflation Rate (in percent) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 5.7 4.4 3.2 6.2 11.0 9.1 5.8 6.5 7.6 11.3 Source: U.S. Bureau of Labor Statistics 1 Write the title of the graph and make a grid under it. 2 Write numbers along the left side, or verticle axis, of the grid with 0 at the bottom. The top number should be larger than the largest rate in the table. Label the axis. 3 Write years from the table evenly along the bottom line, or horizontal axis, of the grid. Label the axis. 4 Graph each point where the horizontal line from the inflation rate meets the vertical line from the year. 5 Draw a straight line to connect each point to the point for the next year. Example
: Make a line graph showing the rate of inflation from 1970 to 1979. Find the largest rate in the table. It is 11.3.S. Inflation Rate 1 4 5 12 10 Year Applying the Skill Make a line graph to show the unemployment rate from 1993 to 2002. Unemployment Rate (in percent) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 6.9 6.1 5.6 5.4 4.9 4.5 4.2 4.0 4.7 5.8 Source: U.S. Bureau of Labor Statistics R8 Math Handbook.8 Creating Bar Graphs Understanding the Skill A bar graph is useful for comparing different values. You can use a spreadsheet or graphing software to make a bar graph. In the example, type the oil consumption information into the software. The software will do most of the above steps for you. See the software’s tutorials or help feature for guidance. Leading Oil Consumers (in millions of barrels per day) United States European Union China Japan India Brazil Russia Canada 20.0 14.6 6.4 5.6 2.3 2.1 2.8 2.2 Source: CIA World Factbook, 2005 data 1 Write the title of the graph. Draw a box under it. 2 Write numbers evenly along the vertical axis. The largest number should be larger than 20.0 and the smallest number should be 0. Label the axis. 3 Write the names evenly along the horizontal axis. Label the axis. 4 Draw each bar. Find the oil consumption on the vertical axis. Imagine a horizontal line from the oil consumption to directly above the name. Draw the bar as shown. Each bar should be the same width. Example: Make a bar graph of the oil consumption of the three greatest oil consumers: the United States, the European Union, and China Solution Begin by finding the highest level of oil consumption—the United States with 20 million barrels a day. Then complete the following steps. 25 20 15 10 Leading Oil Consumers 4 United States 3 European Union China Country or Region Applying the Skill Use the information in the table at the top of the page to make a bar graph of the oil consumption of the three leading oil consumers in Asia: China, Japan, and India. Math Handbook R9 1.9 Creating Pie Graphs Understanding the Skill A pie graph is useful for showing the relationship of parts to the whole. The table at the right and the pie graph below show the GDP for various countries and the European Union. The graph makes it
easy to see how each GDP contributes to the world’s total GDP. The example shows how to make the pie graph. GDP (trillions of U. S. dollars) and Population (millions of people) of Various Countries and the European Union Country GDP Population Country GDP Population United States European Union China Japan India Brazil 11.8 11.7 7.3 3.7 3.3 1.5 296 457 Russia Canada 1,306 Mexico 127 South Korea 1,080 Indonesia 1.4 1.0 1.0 0.9 0.8 143 33 106 49 242 186 Other 11.1 2,421 Source: CIA World Factbook, 2005 data Example 1 Write a title for the pie graph. 2 Draw a circle. This represents the total GDP of all countries, or $55.5 trillion. 3 Draw a wedge to represent each country or group of countries. Calculate the angle for each wedge using this formula: Angle Country’s GDP ___________ World GDP 4 Label each wedge with the country name and the amount of GDP. Wedges too small to draw easily can be grouped together and labeled “Other.” 360° 1 World GDP (in trillions of U.S. dollars) United States 11.8 3 Other 17.7 4 2 European Union 11.7 India 3.3 Japan 3.7 China 7.3 Applying the Skill Use the information in the table at the top of the page to make a pie graph of the populations of the world. Include wedges for the five largest countries, and one for all others. R10 Math Handbook.10 Creating a Database Understanding the Skill A database is a large collection of information that can be organized and searched. You can use a spreadsheet to make a database. First enter information into the spreadsheet. Label each row and column, including units of measure. You can use the spreadsheet software to manipulate the information and answer questions. Example Which country has the largest per capita oil consumption? A B C D E F G United States European Union Japan Russia Canada Mexico 20.0 14.6 5.6 2.8 2.2 1.8 296 457 127 143 33 106 1 2 3 Oil Consumption (millions of barrels per day) Population (millions of people) Solution Per capita oil consumption is oil consumption divided by population. For the U.S. it is 20.0 million barrels per day ______________________ 296 million people 0.07 barrels per person per day. 20.0 barrels per day ________________
296 people A B C D E F G 1 Divide row 2 by row 3. Put the answer in row 4. 2 Sort the whole database by row 4, from largest to smallest. 1 2 3 4 Oil Consumption (millions of barrels per day) Population (millions of people) Per capita oil consumption (barrels/person/day) United States Canada Japan European Union Russia Mexico 20.0 2.2 5.6 14.6 2.8 1.8 296 33 127 457 143 106 0.07 0.07 0.04 0.03 0.02 0.02 Once the database is sorted, the United States and Canada are the first in the new order. So the United States and Canada are the countries in the database that have the greatest per capita oil consumption, with consumptions of 0.07 barrels per person per day. Applying the Skill Make a database of the information in the table on page R10, by entering the information into spreadsheet software. Multiply each GDP by 1 trillion so the units are “dollars” instead of “trillions of dollars.” Multiply each population by 1 million so the units are “people” instead of “millions of people”. Math Handbook R11 Skillbuilder Handbook Contents Refer to the Economics Skillbuilder Handbook when you need help in answering Application questions or questions in Section Assessments and Chapter Assessments. In addition, the handbook will help you answer questions about charts, graphs, databases, and economic models. Skills for Understanding Economics 1.1 Explaining an Economic Concept 1.2 Analyzing and Interpreting Data 1.3 Applying Economic Concepts 1.4 Creating and Interpreting Economic Models 1.5 Using a Decision-Making Process 1.6 Conducting Cost-Beneﬁ t Analyses 1.7 Comparing and Contrasting Economic Information 1.8 Analyzing Cause and Effect 1.9 Making Inferences and Drawing Conclusions 1.10 Evaluating Economic Decisions 1.11 Synthesizing Economic Data 1.12 Generalizing from Economic Information 1.13 Predicting Economic Trends Using Print, Visual, and Technology Sources 2.1 Analyzing Political Cartoons 2.2 Distinguishing Fact from Opinion 2.3 Evaluating Online Sources Interpreting Graphs 2.4 2.5 Interpreting Tables 2.6 Analyzing Databases R13 R14 R15 R16 R17 R18 R19 R20 R21
R22 R23 R24 R25 R26 R27 R28 R29 R30 R31 R12 Skillbuilder Handbook.1 Explaining an Economic Concept EXPLAINING ECONOMIC CONCEPTS involves clarifying and communicating the basic ideas of economics. Some of these concepts are simple, while others are complex. Three basic steps will help you develop an explanation of a concept, regardless of its complexity. Understanding the Skill STRATEGY: Use the steps in the concept-explanation process. The following passage provides information on economic recessions. The table below that provides an analysis of the concept of economic recession based on the concept-explanation process. 1 Identify and define the economic concept. 2 Describe the impact of the concept on the economy. 3 Give an example of the concept. Providing an illustrative example will help underscore your explanation of the concept. 1 An economic recession may be defined as a downturn in the business cycle. During a recession, both production and employment decline. 2 As a result, the economy experiences little, if any, growth. 3 In 1990 and 1991, the United States experienced the greatest recession since the Great Depression. According to some economic analysts, the 1990–1991 recession caused the loss of 1.9 million jobs in 1992. Make a Table Use a table like the one shown here to help you explain an economic concept with the threestep process. Explaining an Economic Concept Economic recession A downturn in the business cycle, characterized by a decline in production and employment Slows economic growth U.S. recession of 1990-1991 Concept Definition Impact Example Applying the Skill Turn to Chapter 7, Section 4, and read about deregulation on page 218. Use a table to explain the economic concept of deregulation with the three-step process. Skillbuilder Handbook R13 1.2 Analyzing and Interpreting Data DATA, or factual information, is the most basic tool of the economist. Economic data is most often in the form of statistics. Economists ANALYZE data to learn about economic conditions and trends. They INTERPRET data to draw conclusions or make predictions based on their analysis. Understanding the Skill STRATEGY: Analyze and interpret the data. Data usually is presented in visual form as a graph or a table like the one below. 1 Read the title. The title provides 1 a good indication of the kind of data shown. Here, the data concerns average food expenditures for several large cities in the Midwest of the United States. 2 Determine how
the data is organized. Here, data in each horizontal row provides information on a category of food expenditure. Each vertical column shows expenditures by food category for one of five metropolitan areas. 3 Ask what kinds of questions may be answered from the data. Answering such questions helps in the analysis and interpretation of the data. 1 Average Annual Household Food Expenditures in Selected Midwestern Metropolitan Areas, 2003–2004 (in dollars) Chicago Detroit Milwaukee MinneapolisSt. Paul Cleveland 2 2 Cereals and Bakery Meats, Fish, and Eggs Dairy Fruits and Vegetables 472 855 366 606 470 863 339 542 Other Foods at Home 1,128 1,073 460 837 309 506 950 Food Away from Home 2,597 2,439 2,126 509 779 431 610 1,236 2,983 388 854 310 449 822 1,765 Source: Consumer Expenditure Survey, 2003–2004, U.S. Bureau of Labor Statistics 3 Write a Summary Summarize your analysis and interpretation of the data in the table Data in the above table reflects average annual household food expenditures for one year (2003-2004) for 5 Midwestern metropolitan areas. Food expenditures are shown according to type of food purchased: a food at home versus food away from home. The data may be analyzed and interpreted in a number of ways, including the following: comparing expenditures in different cities for foods in a single category or comparing expenditures for two or more food categories within a city; computation of percentages of total expenditure spent on specific food categories. Applying the Skill Turn to Chapter 14, Section 2, page 421, and study the table showing data on itemized tax deductions. Write a summary of your analysis and interpretation of data in the table. R14 Skillbuilder Handbook 1.3 Applying Economic Concepts When attempting to understand complex economic behavior, economists make constant use of fundamental economic concepts, such as supply, demand, and price. By APPLYING ECONOMIC CONCEPTS to everyday situations, economists develop a better understanding of how the economy works. Understanding the Skill STRATEGY: Examine the information carefully. The news story below describes a fall in the price of crude oil. The supply and demand curves beneath it graphically illustrate this shift Crude Oil Prices Sink Below $66 a Barrel 1 1 Oil prices fell below $66 a barrel Monday as concerns over supplies eased in expectation that 2 OPEC ministers would not change their production targets.... 1 Supplies
remain ample.... OPEC maintains about 2 million barrels a day of spare capacity, and stocks are high elsewhere; the U.S. Department of Energy said last week that inventories have hit their highest 1 levels since 1998.... 2 The possibility that [British Petroleum] could restore 180,000 barrels per day of lost Alaskan production at Prudhoe Bay by the end of October also calmed the market. 1 Source: Associated Press, September 11, 2006 1 Look for economic concepts as you read. Such words as prices, supplies, inventories, and capacity indicate that the topic of this story is the relationship between supply and price. 2 Look for relationships among concepts. The story states that OPEC, the oil-producing cartel, has decided not to curtail production. It also notes that BP could restore lost oil production. So, even if demand remains constant, an increase in supply will cause the equilibrium price to fall. 3 Express the relationship in graphic form. Supply and demand curves provide a vivid picture of the impact of increased supply on price. Draw Demand and Supply Curves Draw demand and supply curves to illustrate the situation described in the news story. Assume that demand stays constant. The increased supply shifts the supply curve to the right (from S1 to S2), causing prices to fall (from P1 to P2). 3 Applying the Skill In the business section of a newspaper, find a story about a change in price. Analyze the information in the story to determine why the price changed. Then draw supply and demand curves that illustrate the shifts that caused such a change. Skillbuilder Handbook R15 1.4 Creating and Interpreting Economic Models CREATING an economic model involves using information and ideas to show an economic concept or situation in a visual way. An ECONOMIC MODEL might be a graph, a diagram, a three-dimensional representation, or a computer program. INTERPRETING AN ECONOMIC MODEL involves carefully studying the model in order to draw conclusions or make predictions based on the information it provides. Understanding the Skill STRATEGY: Create an economic model. The model below is a circular flow diagram. Economists use the circular flow model to help understand and describe how a market-based economy operates. Use the following steps to create an economic model. 1 Gather the information you need to create an economic model. In this case, you need to show the rules that govern the relationships between economic actors and economic markets in a market economy. 2 Visualize
and sketch an idea of your model. The creator of this economic model used a circular diagram to convey the relationships between economic markets and economic actors. 3 Think of symbols you may want to use. Here, different colored arrows indicate the flow of money and the flow of resources and products. The Circular Flow Model 1 Business revenue 3 Product Market Sell goods and services Buy goods and services Consumer spending 2 Businesses Buy productive resources Households (Individuals) Sell land, labor, capital, entrepreneurship Payments for resources Factor Market Income from resources Interpret the Model Write a summary of your interpretation of the information in the model. This model illustrates the interactions between businesses and individuals in the economy. The two main economic decision makers, businesses and households, are shown on the left and right of the model. The two main economic markets, product and factor, are shown at the top and bottom. The green arrows represent the flow of money between actors and through the markets. The blue arrows represent the flow of resources and products through the economy. Applying the Skill Turn to Chapter 7, Section 1, and read the information on perfect competition on pages 192–194. Create an economic model that shows the relationship between two actors—buyers and sellers—in a perfectly competitive market. R16 Skillbuilder Handbook 1.5 Using a Decision-Making Process USING A DECISION-MAKING PROCESS involves choosing between two or more options or courses of action. Organized decision-making involves four steps: 1) identify the problem or situation that requires a decision; 2) identify options; 3) predict possible consequences of the decision; 4) put the decision into effect. Understanding the Skill STRATEGY: Use the steps in the decision-making process. The following passage describes how a Polish food producer used a decision-making process to introduce a new product into Poland’s convenience food market. The flow chart organizes the elements of the process that was used Identify the decision that needs to be made. In this passage, the title offers a clue to the problem, which is stated more fully in the text. 2 Identify options. The company might have chosen to stay out of the convenience food market because most Poles did not own microwave ovens. 3 Identify possible consequences of the decision. Remember that there can be more than one possibility. Also look for factors that could affect the consequences. 4 Note what decision was made and the impact it had. 1 Polish Meals in the Microwave? 1 At the beginning of the current millennium, P
udliszki, a Polish firm owned by Heinz, was faced with a decision. Should the company introduce full-course microwaveable meals into Poland’s market for convenience foods? Poland’s accession into the European Union promised to have a positive effect on both employment and disposable income. And with Polish workers averaging 40 hours on the job, projected demand for convenience foods appeared promising—a strong indication for the product’s success. However, households owning microwaves were very much in the minority, which could result in the product’s failure. Perhaps banking on an increase in household microwaves, Pudliszki introduced Meals from the Four Corners of the World. According to Euromonitor, an international market research firm, Pudliszki’s four full-course meals 4 were “reasonably priced and accepted rather well by the market.” 3 3 2 Source: Adapted from “Poland’s EU Membership Presents Packaging Opportunities” by Chris Mercer. Food Industry News, February 2, 2005. Make a Flow Chart In a flow chart, state the decision to be made, its possible consequences, the actual decision, and the actual consequences of the decision. Applying the Skill Read the Chapter 1 Case Study, “The Real Cost of Expanding O’Hare Airport,” on pages 32−33. From this information, identify the four steps of the decision-making process. Present your findings in a flow chart like the one shown at the right. Option and possible consequence: Introduce meals; based on positive projections in the convenience food market; microwaveable meals would be successful. Decision to be made: Should Pudliszki introduce fullcourse microwaveable meals? 4 Decision made and consequence: Pudliszki introduced full-course microwaveable meals; the product was reasonably successful. Option and possible consequence: Do not enter market; based on the low number of households with microwaves; the product would fail. Skillbuilder Handbook R17 1.6 Conducting Cost-Beneﬁ t Analyses A COST- BENEFIT ANALYSIS involves determining the economic costs and benefits of an action and then balancing the costs against the benefits. Understanding the Skill STRATEGY: Look for the trade-offs that are a part of every economic decision. The passage below describes the costs and benefits of a government-subsidized business development in Hong Kong. The decision-making grid
beneath it summarizes the trade-offs in the project. 1 Identify the decision that is being made. The article notes that the Hong Kong government signed an agreement with a large private company to construct a new business. 2 Note the potential benefits of the decision. Here, government officials provide estimates of the economic benefits—jobs and money pumped into the economy. 3 Note the potential costs of the decision. The article focuses on the huge cost of the project to the government. 4 Determine if the decision is beneficial. Make a Diagram Summarize the costs and benefits of the Hong Kong government’s decision in a diagram. Consider the wisdom of the decision by analyzing these costs and benefits. Applying the Skill Turn to page 125 and read the article titled “The Year of the Hybrid.” Based on the information you find there, conduct a cost-benefit analysis of buying a hybrid automobile. R18 Skillbuilder Handbook 2 1 Hoping to jump-start their economy, government officials in Hong Kong inked an agreement with Walt Disney to build the U.S. company’s third overseas theme park.... Government officials estimate that construction of Hong Kong Disneyland will create 16,000 jobs. Another 18,400 jobs will be created once the park opens in 2005. Further, they hope that the park will draw millions of tourists to this city every year, raising more than US $1 billion a year. Few doubt that the project will provide the city with a shot of confidence. Yet John Whaley, a Virginia-based economist, says the construction jobs provided by the project will be short-term positions, with little long-term economic impact. Also, since many tourists to Hong Kong are people of modest means from China, there is no guarantee that they will spend the money to go to the park. 3 Nevertheless, much of the costs for the new park will be paid by the Hong Kong government, which is spending more than US $2.83 billion to build the park. Estimates suggest the government is spending about US $100,000 for every new job it will create when the park is running. Source: Adapted from “Disney-Park Deal May Not Wave A Magic Wand Over Hong Kong” by Jon E. Hilsenrath and Zach Coleman. The Wall Street Journal, November 4, 1999. Decision: Hong Kong government partners with Disney to build a new theme park. Potential benefits: Many new jobs; perhaps US $1 billion poured into the economy. Potential costs:
Huge initial outlay by the government; about half the jobs created are short-term. Analysis: Too soon to tell, but the fact that potential audience for the park are of modest means does not guarantee success.7 Comparing and Contrasting Economic Information Economists compare and contrast economic programs, concepts, and trends in order to understand them better. COMPARING involves finding both similarities and differences between two or more things. CONTRASTING means examining only the differences between them. Understanding the Skill STRATEGY: Look for similarities and differences. The following passage describes pension reform in Chile and in Britain. The Venn diagram that follows the passage shows some of the similarities and differences between the two economic programs. 1 Compare: Look for features that two subjects or ideas have in common. Here, you learn that both Chile and Britain needed to reform their pension systems. 2 Compare: Look for clue words indicating that two things are alike. Clue words include all, both, as, likewise, and similarly. 3 Contrast: Look for clue words that show how two things differ. Clue words include different, however, unlike,and except. 4 Contrast: Look for ways in which two things are different. Here you learn that the structure and the administration of the two programs were different. Pension Reform in Chile and Britain In the late 20th century, Chile and Britain faced 1 the same problem: how to reform their overburdened pension systems. 2 Both countries had social welfare budgets that were stretched to the limit. And both had pension systems that were nearly bankrupt. To provide for their aging population, Chile and Britain chose privatization as the means to reform their pension programs. 3 However, 4 the structure and administration of the two programs were very different. For example, in Chile a monthly payroll deduction became mandatory for all employees. The payments are administered by one of six private pension funds. In Britain, however, the plan was voluntary. Six million people chose the plan when it was first offered. They received a government rebate, along with responsibility for managing their own retirement money. Source: Adapted from ”In Britain and in Chile, Lessons for Social Security” by Mark Rice-Oxley and Jennifer Ross. The Christian Science Monitor, March 14, 2005 Make a Venn Diagram Summarize similarities and differences in a Venn diagram like the one shown here. In the overlapping area, list characteristics shared by both subjects. Then, in one oval, list the characteristics of one subject not shared by the other. In the other
oval, list characteristics unique to the second subject. Applying the Skill Turn to Chapter 8 and read Sections 1 and 2, pages 226–235. Construct a Venn diagram comparing and contrasting sole proprietorships and partnerships. Chile Only Program requirement: mandatory Investment choices: limited Both Problem: pension systems nearly bankrupt Solution: privatization Britain Only Program requirement: voluntary Investment choices: unlimited Skillbuilder Handbook R19 1.8 Analyzing Cause and Effect CAUSES are the events, factors, and other reasons that lead to an event or condition. Causes happen before the event in time; they explain why it happened. EFFECTS are the results or consequences of the event. One effect often becomes the cause of other effects, resulting in a chain of events. Causes and effects can be both short-term and long-term. Understanding the Skill STRATEGY: Keep track of causes and effects as you read. The passage below describes factors leading to a shortfall of qualified staff in India’s call centers. The diagram that follows the passage summarizes the economic chain of causes and effects. 1 Causes: Look for clue words that show cause. These include due to, cause, and therefore. 2 Look for multiple causes and multiple effects. Increased outsourcing to India caused the series of effects discussed in the rest of the article. 3 Effects: Look for results or consequences. Sometimes these are indicated by clue words such as as a result and consequence. 4 Notice that an effect may be the cause of another event. This begins a chain of causes and effects. Each year, three thousand English speakers graduate from India’s universities. 1 Largely due to this pool of job seekers fluent in English, India has been able to establish a highly successful business process outsourcing industry. 2 As businesses in more and more countries outsourced to India, call centers there have become increasingly successful. As a result, salaries for entry-level positions have continued to rise. An unintended 3 consequence of the 4 higher salaries has been a greater tendency of workers to job hop. Increasing success also has created increasing stress, as employees often are required to work long hours. Therefore, employment in call centers, once considered glamorous, has begun to lose its appeal. Analysts claim that such conditions will cause a shortfall of as many as 260,000 qualified workers by 2009. Source: Adapted from “Busy Signals,” The Economist, September 10, 2005 Make a Cause-and-Effect Diagram Summarize cause-and-effect relationships in a diagram. Starting
with the first cause in a series, fill in the boxes until you reach the end result. Cause Effect / Cause Effect / Cause Effect / Cause Effect Many of India’s college graduates speak English. Outsourcing industry enjoys success. • Pay improves for entry-level jobs. • On-the-job stress increases. • Workers change jobs often. • Fewer people apply. There will soon be a shortage of qualified workers. Applying the Skill Turn to Chapter 2 and read “Under Pressure to Change” on page 40. Construct a Cause-and-Effect diagram summarizing the information you find. R20 Skillbuilder Handbook.9 Making Inferences and Drawing Conclusions MAKING INFERENCES involves reading between the lines to extend the information provided. DRAWING CONCLUSIONS involves analyzing what has been read and forming an opinion about its meaning. Understanding the Skill STRATEGY: Develop inferences from the facts. Use the facts to draw conclusions. The passage below describes the U.S. trade deficit in 2005. The diagram that follows shows how to organize the facts and inferences to draw conclusions. 1 Read carefully to understand all the facts. Fact: The U.S. trade deficit rose almost 18 percent in 2005. 2 Use the facts to make an inference. Inference: It’s unlikely that the United States will see a trade surplus in the foreseeable future. 3 Read between the lines to make inferences. Inference: Continued dependence on foreign oil will continue to increase the deficit. 4 Ask questions of the material. How can the United States reduce its trade deficit? 5 Use all this information to draw a conclusion. Conclusion: In order to reduce the deficit, the United States will need to reduce its dependence on foreign oil. 1 The U.S. trade deficit jumped nearly 18 percent in 2005, the government reported Friday, hitting its fourth consecutive record as consumer demand for imports increased, energy prices soared and the dollar strengthened against other currencies. The $725.8 billion gap, 1 which is almost exactly twice the deficit in 2001, was driven by a 12 percent jump in imports and a more muted 10 percent increase in exports, the Commerce Department reported in Washington. 2 The nation last had a trade surplus, of $12.4 billion, in 1975. 3 The nation’s deficit in trade for petroleum products accounted for 29 percent of the total gap, up from 25 percent in 2004. 4 Imports of petroleum goods climbed 39 percent, to $251.6 billion, after rising
by 39 percent in 2004. Excluding oil and other petroleum products, the trade deficit would have grown 10 percent, to $537 billion. Source: “The U.S. Trade Deficit Hit Record High in 2005” by Vikas Bajaj. The New York Times, February 10, 2006 Applying the Skill Read the online news story “China’s Economic Miracle; the High Price of Progress” on page 571. Use the chart at the right as a model for organizing facts, inferences, and conclusions about the passage. Facts Inferences Conclusion about Passage The U.S. trade deficit rose almost 18 percent in 2005. The deficit nearly doubled between 2001 and 2005. The deficit is growing at a marked rate. Last trade surplus was in 1975. Trade surplus is unlikely in foreseeable future. Trade in petroleum products accounted for 29 percent of deficit. Continued dependence on foreign oil will continue to increase the deficit. 5 In order to reduce the deficit, the United States will need to reduce its dependence on foreign oil. Skillbuilder Handbook R21 1.10 Evaluating Economic Decisions EVALUATING ECONOMIC DECISIONS means making judgments about decisions that individuals, businesses, and governments make on economic matters. Economists evaluate a decision based on its outcome and the choices available when that decision was made. Understanding the Skill STRATEGY: Look for choices and reasons. The following passage describes the marketing decisions Joe Sillett made to promote a cricket bat he had begun to manufacture. As you read the passage, look for alternative decisions he could have made. 1 Look at decisions made by individuals or by groups. Identify the decision Sillett made to market his company’s product. 2 Look at the outcome of the decisions. 3 Analyze a decision in terms of the choices that were possible. Sillett could have chosen a marketing strategy that was less expensive and therefore less risky. Make a simple chart of your analysis. Applying the Skill Pages 234–235 of Chapter 8 describe Bart’s decision to open his comic store as a partnership rather than a sole proprietorship. Make a chart like the one shown to summarize the pros and cons of his decision and your evaluation of that decision. Marketing Woodworm When Joe Sillett formed his company, Woodworm, to make cricket bats, he was up against stiff competition... Sillett had to decide how to break into the market. Should he utilize traditional marketing techniques, such as the development and purchase of print and media
ads, to introduce his product? Or should he try something bolder? 1 Sillett decided to risk most of his marketing budget on a single idea: the sponsorship of two English heavy hitters—Andrew Flintoff and Kevin Pietersen. Sillett’s idea proved to be a winner. 2 In just three years, Woodworm bats succeeded in capturing ten percent of the cricket bat market. 3 Sillett knew that a less expensive approach would have allowed him to grow his company over a more extended period of time. But because he believed that linking Woodworm bats with high profile players would quickly create brand recognition, Sillett risked the future of his company on a single marketing idea and won. Source: Adapted from “The Benefits of Woodworm.” The Economist, September 8th, 2005 3 Sillett’s Choices Pros Cons Evaluation Sponsor popular players Possible to gain market share quickly Risky and expensive Pursue a less expensive marketing strategy Less risky Market share likely to grow slowly In your opinion, which was the better choice? Why? R22 Skillbuilder Handbook.11 Synthesizing Economic Data SYNTHESIZING ECONOMIC DATA is the skill economists use to develop interpretations of past economic events. Like detective work, synthesizing involves putting together clues from data to form an overall picture of an economic event. Understanding the Skill STRATEGY: Build an interpretation as you read. The passage below describes the collapse of Enron, a giant American energy company. Note how combining different data leads to a synthesis—an overall picture of Enron’s fall and its significance. 1 Read carefully to understand the data. These statements explain why Enron borrowed money and how it succeeded in hiding $600 million in debt. 2 Look for variables in the data that need an explanation. Here, the data in the two statements present a puzzling picture. They lead one to question how a large company that tripled its profits could experience a loss of $638 million less than a year later. 3 Form a synthesis based on the data. This interpretation brings together the different pieces of data to arrive at a new understanding of the subject. Summarize your synthesis in a graphic organizer, such as a table or a cluster diagram. Enron’s Downfall 1 Enron began to borrow money to invest in new projects. Enron then created partnerships to keep the debt off its books. One partnership... allowed Enron to keep $600 million in debt off the books it showed to the government and to
people who own Enron stock. 2 In December 2000, Enron claimed to have tripled its profits in two years. 2 The collapse began in October [2001], when Enron announced a loss of $638 million. In November, Enron said that it had overstated earnings for the past four years and it now owed over $6 billion. With these announcements, Enron’s stock price took a dive. 3 Since Enron had made deals based on the assumption that the stock would go up, it suddenly had to repay lots of money. When Enron could not come up with the cash, it declared bankruptcy. 3 [One] consequence of [Enron’s] failure may be new laws that change how much money big businesses can give politicians. Enron gave over $5 million to [political] campaigns since 1998. Lawmakers [also] are considering whether to make new laws to better regulate accounting practices. Source: “Not Business as Usual,” by Elisabeth Bauman. Online NewsHour Extra, January 30, 2002 (www.pbs.org) Applying the Skill Read the information on income distribution and income inequality on pages 390–391. Look for data to support a synthesis about the effectiveness and limitations of measuring income inequality. Organize your findings in a table or cluster diagram. Skillbuilder Handbook R23 1.12 Generalizing from Economic Information GENERALIZING involves making broad judgments based on information from more than one source. When you form generalizations, you need to be sure they are based on sufficient evidence and that they are consistent with the information given. Understanding the Skill STRATEGY: Look for common themes. The following three excerpts reflect concern regarding the economic deprivation of the elderly during the Great Depression. 1 Determine what information the sources have in common. All the sources suggest the need for a government program to provide pensions to the elderly. 2 Form a generalization about the common information. 3 State your generalization in sentence form. A generalization often needs a qualifying word, such as most, many, or some, to make it valid. Plight of the Elderly 1 We also propose to give the old-age pensions to the old people... so that the people who reach the age of sixty can be retired from the active labor of life and given an opportunity to have surcease [rest] and ease for the balance of the life that they have on earth. —Governor Huey Long of Louisiana 1 “Old age
dependent pensions... are not gifts from charity. They are for compensation well earned.” —Flyer attached to a letter written to President Franklin D. Roosevelt by a woman asking for help for her 81-year-old mother 1 “It is estimated that the population of the age of 60 and above in the United States is somewhere between nine and twelve millions. I suggest that the national government retire all who reach that age on a monthly pension of $200 a month or more.” —Francis E. Townsend Make a Web Diagram Using a diagram can help you make generalizations. The diagram below records relevant information from the three statements that leads to a valid generalization. Huey Long calls for government pensions for those 60 and older. Printed flyer promotes the idea that the elderly deserve pensions. 2 3 Generalization Many people believed that the government should provide economic support for elderly Americans. Townsend proposes pension plan for the elderly. Applying the Skill Read the information under the headings “Changing Occupations” and “Changes in the Way People Work” on pages 268–271. Use a diagram like the one above to make a generalization about technology and work in the United States today. R24 Skillbuilder Handbook.13 Predicting Economic Trends PREDICTING ECONOMIC TRENDS involves projecting the outcome or the continuation of an economic condition or trend. Economists use their knowledge of past economic events and conditions and related decisions to predict the outcome of current economic events and conditions. Understanding the Skill STRATEGY: Identify decisions. The following passage describes how the United States government, under the leadership of President Franklin D. Roosevelt, dealt with a nationwide banking crisis during the Great Depression. 1 To help you identify decisions, look for clue words. These words include decide, decision, and chose. 2 Notice how one economic decision often leads to others. 3 Notice that decisions may have positive or negative impacts. 4 Consider alternatives to the decisions that were made. 5 Make a chart to record decisions, suggest alternative decisions, and predict a possible outcome for each alternative decision. During the Great Depression, many banks in the United States failed. In 1933 Americans, fearing the loss of their money, created “runs” on banks throughout the country. A bank run occurs when large numbers of people attempt to withdraw money within a short period of time. Banks did not have enough money to meet the demand. In response, President Roosevelt 1 decided to temporarily shut down the nation’s banks by
proclaiming a bank holiday. 2 Congress 1 chose to pass a law in support of Roosevelt’s decision. The law also provided for the rehabilitation of the nation’s banking facilities. To avoid an epidemic of bank failures, 3 it was decided not to reopen all the banks at the same time. Instead, banks would open once they had been examined and judged to be sound. In addition, the government made the 1 decision to issue new currency—based on sound assets—so that banks, once reopened, would have enough currency to meet increased demand. Finally, it was decided to include state banks that were not members of the Federal Reserve in the rehabilitation process. The government response to the banking crisis served to stabilize the U.S. banking system. Source: Franklin D. Roosevelt’s First Fireside Chat, March 12, 1933 5 Applying the Skill Read the document titled “Two American Entrepreneurs Start Out in a Garage” on page 252 and identify three business decisions that “the two Steves” made. Record them in a chart similar to the one shown for the passage above, along with an alternative decision for each. Then predict a possible outcome for each alternative decision. Decisions Alternative Decisions 4 Prediction of Outcome FDR proclaimed a nationwide bank holiday. FDR did not proclaim a bank holiday. The run on banks continued. Congress passed a law to rehabilitate banking facilities. Congress passed no law to rehabilitate banking facilities. Banks were not rehabilitated. New currency was issued. New currency was not issued. There was not enough money to meet depositors’ demands. State banks would receive assistance. Fed did not assist non-member state banks. State banks failed to reopen. Skillbuilder Handbook R25 2.1 Analyzing Political Cartoons POLITICAL CARTOONS are drawings that express the artist’s point of view about a local, national, or international situation or event. They may criticize, show approval, or draw attention to a particular issue, and may be either serious or humorous. Political cartoonists often use symbols as well as other visual clues to communicate their message. Understanding the Skill STRATEGY: Examine the cartoon carefully. The cartoon below was drawn as a comment on the process of globalization. 1 1 Look at the cartoon as a whole to determine the subject. 2 Look for symbols, which are especially effective in communicating ideas visually. Here, the cartoonist uses symbols that stand for a global economy. The arm in a suit stands for big business.
The globe stands for Earth and its resources. The people represent consumers. 3 Analyze the visual details, which help express the artist’s point of view. The Western-style house and clothing suggest that the people are Americans or Europeans. The people are smiling, indicating that they are happy about what is being offered to them. Make a Chart Summarize your interpretation in a chart. Look for details and interpret their significance. Then decide on the message of the cartoon. Symbols and Visual Details Significance Message • Oversized arm in • Corporations business suit • Disproportionately small Earth • Happy people reaching out • Earth as the property of big business • Consumers Big business is the driving force behind globalization. R26 Skillbuilder Handbook 2 3 Applying the Skill Turn to page 283 and study the political cartoon. Note the clothing and apparent attitudes of the figures in the cartoon, as well as how they relate to one another. Then analyze the cartoon by making a chart like the one to the right.2 Distinguishing Fact from Opinion FACTS are events, dates, statistics, or statements that can be proved to be true. Facts can be checked for accuracy. OPINIONS are judgments, beliefs, and feelings of the writer or speaker. Understanding the Skill STRATEGY: Find clues in the text. The following excerpt describes economist Sir William Beveridge’s 1942 recommendations for creating a welfare state in Great Britain. 1 Facts: Look for specific names, dates, statistics, and statements that can be proved. The first paragraph gives a factual account of the government’s plan. 2 Opinion: Look for assertions, claims, hypotheses, and judgments. Beveridge expresses his opinion regarding provision for old age and for medical care. 3 Opinion: Look for judgment words that the writer uses to describe policies and events. Judgment words are often adjectives that are used to arouse a reader’s emotions. Make a Chart Divide facts and opinions in a chart. Summarize and separate the facts from the opinions expressed in the passage. 1 The coalition British Government has unveiled plans for a welfare state offering care to all from the cradle to the grave. The Beveridge report proposes a far-reaching series of changes designed to provide a financial safety net to ensure a “freedom from want” after the war is over. Everyone of working age would be expected to pay a weekly national insurance contribution. In return benefits would be paid to the sick, widowed, retired, unemployed and there would also be an allowance
for families. The architect of the report, economist Sir William Beveridge, drew on advice from various government departments. 2 He found provision for old age represented one of the most pressing problems. But there were other failings too. Medical provision was not universally available to all and Britain’s achievement, in his words, “fell seriously short” compared with other countries of the world. At a time when the war was destroying landmarks of every kind, [Beveridge] said, it was a 3 “revolutionary moment in the world’s history, a time for revolutions, not for patching.” Source: BBC News Facts Opinions In 1942 the British government unveiled plans for a welfare state. The plan was based on a report by Sir William Beveridge and was designed to provide British citizens with a financial safety net. • The British government’s provision for old age represented one of the most pressing problems. • Britain’s medical provision fell seriously short as compared to that of other countries. •• It was a revolutionary moment in history. Applying the Skill Read “Government and Demand-Side Policies” on page 457. Using a chart like the one to the left, summarize the facts, opinions, and judgments stated. Look carefully at the language used in order to separate one from the other. Skillbuilder Handbook R27 2.3 Evaluating Online Sources EVALUATING ONLINE SOURCES involves making judgments about sites that are available on the Internet—a network of computers associated with universities, libraries, news organizations, government agencies, and other information providers. Each location on the Internet has a home page with its own address, or URL. The international collection of home pages, known as the WORLD WIDE WEB, is a good source of up-to-the-minute information as well as in-depth research on economic subjects. Understanding the Skill STRATEGY: Explore and evaluate the elements on the screen. The computer screen below shows “Treasury’s Learning Vault,” the education page of the United States Department of the Treasury. 1 1 Go directly to a Web page. Access the Internet using your Internet Service Provider (ISP). If you know the address of the Web site you want, type it in the address box at the top of your computer screen, then press ENTER or RETURN. (To access the page shown here, type in www.ustreas.gov/education.) 2 Explore the features and links
. Click on any one of the images or topics to find out more about a specific subject. These links take you to other pages at this Web site. Some links take you to related information that can be found at other places on the Internet. 3 Evaluate the Web site. Use the information you gathered in Step 2 to evaluate the Web site. Ask yourself the following questions: Is the information provided by the site useful to an economist or a student of economics? How reliable is this information? 2 2 2 Applying the Skill Access the Bureau of Labor Statistics (www.bls.gov) and the Census Bureau (www.census.gov) Websites through ClassZone.com. How useful do you think these sites might be to economists? How might economists use the information on these sites? R28 Skillbuilder Handbook 2.4 Interpreting Graphs GRAPHS show statistical information in a visual manner. Economists use graphs to show comparative amounts, ratios, trends, and changes over time. Interpreting graphs will increase your understanding of economic trends and data. LINE GRAPHS can show changes over time, or trends. Usually, the horizontal axis shows a unit of time, such as years, and the vertical axis shows quantities. PIE GRAPHS are useful for showing relative proportions. The circle represents the whole, such as the entire population, and the slices represent the different groups that make up the whole. BAR GRAPHS compare numbers or sets of numbers. The length of each bar indicates a quantity. With bar graphs, it is easy to see at a glance how different categories compare. Understanding the Skill STRATEGY: Study all the elements of the graph. This double line graph shows the number of new firms started and the number of firm closures from 1994 to 2005 Read the title to identify the content of the graph. Here, the title explicitly states the content of the graph—new firms and firm closures. 2 Read the vertical and horizontal axes. The vertical axis shows the number of firms, and the horizontal axis shows years. 3 Look at the legend to understand what colors and symbols represent. In this graph, different colored lines are used to represent new firms and firm closures. 4 Summarize the information shown in each part of the graph. What trend does each line show? FIGURE 3.1 NEW FIRMS AND FIRM CLOSURES 1 700 600 500 400 300 200 100 New firms Firm closures * Source: U.S. Small Business Administration Year *Estimated Write a Summary Write
a summary paragraph to show what you have learned from the graph. 4 Each year from 1994 to 2005, about 600,000 new firms opened in the United States. During the same time period, anywhere from 500,000 to about 575,000 firms closed. In 2001, there actually were more firm closures than new firms opened. The overall trend shows that nearly as many firms close as open each year. Applying the Skill Turn to page 267 and study Figure 9.7, a graph that provides information on the U.S. labor force. Write a paragraph summarizing what you learn from the graph. Skillbuilder Handbook R29 2.5 Interpreting Tables TABLES present information in a visual form. Tables are created by simplifying, summarizing, and organizing information into a format that is easy to understand. Tables are the most commonly used charts in Economics books. Understanding the Skill STRATEGY: Study all the elements of the table. The table shown here provides statistical information about employment in the United States. 1 Read the title to identify the main idea of the table. This table provides information on selected aspects of the United States labor force during 2006. 2 Read the headings to determine how the table is organized. In this table, data is organized by category and by month. 3 Study the data in the table to understand what the table was designed to show. This table shows economic data regarding employment in the United States during a six-month period in 2006. 4 Be sure to read any footnotes provided with the table. Footnotes clarify information. For example, (P) indicates that a statistic is preliminary rather than final. 5 Summarize the information shown in each part of the table. Use the title and side headings to help you focus on what information the table is presenting. Selected Labor Force Statistics, February to July, 2006 1 Unemployment Rate (percent) New Jobs Added (thousands) Average Hourly Earnings1 (in dollars) 4.8 4.7 4.7 4.6 4.6 4.8 200 175 112 100 124p 113p 3 16.47 16.51 16.61 16.62 16.69p 16.76p 2 Month February March April May June July Footnotes: (P) Preliminary (1) For production and nonsupervisory workers, in dollars and cents 4 Source: Bureau of Labor Statistics 5 The table provides statistical information about employment in the United States. Statistics are given for each of six months, from February through July 2006
. The unemployment rate fluctuated between 4.6 and 4.8 percent. There was an increase in the number of jobs each month, with the greatest increase occurring in June and the smallest in May. Average hourly earnings rose fairly steadily from $16.47 in February to $16.76 July. Applying the Skill Turn to page 79 and study Figure 3.3. Then write a paragraph summarizing the information presented in the table. R30 Skillbuilder Handbook 2.6 Analyzing Databases A DATABASE is a collection of data, or information, that is organized so that you can find and retrieve information on a specific topic quickly and easily. You can search for specific information without going through the entire database. A database provides a list of all information related to a specific topic. Understanding the Skill STRATEGY: Study the elements of the database. First identify the topic. The title “World’s Top Oil Consumers” indicates the criterion for listing the six nations in the database. Look at the categories shown and pose questions about what you can learn from them. For example, in this database you could search for “countries consuming more than 10 million bbls (barrels) per day” and discover that the United States and the European Union fall into that category Determine the order of presentation of information. The six countries in this database are listed according to the amount of oil they consume, from most to least. 2 Identify the entries included under each heading. Here, the data in each row relates to one of the six countries listed. 3 Determine how the categories in the database relate to one another. This database includes the categories “oil production” and “proved oil reserves.” Both relate to oil consumption. These related categories enable you, for example, to determine which countries, if any, produce less oil than they consume. 4 Read any labels or footnotes that clarify the nature of the data. In this database, the figures represent barrels (bbl) of oil. Also note that for purposes of providing statistical information, the EU is considered to be one country. 5 Note the source of the data. Is the source reliable? The source of data here is The CIA World Factbook, a respected and reliable source of data on the countries of the world. World’s Top Oil Consumers 3 Country Oil Consumption (Millions of bbl1 / day) Oil Production (Millions of bbl1 / day) Proved
Oil Reserves (Billions of bbl1) 2 United States 20.0 1 European Union2 14.6 China Russia Saudi Arabia Iran 6.4 2.8 1.8 1.4 7.6 3.4 3.5 9.1 9.5 4.0 22.5 7.3 18.3 69.0 262.7 133.3 4 Footnotes: (1) Barrels (2) For data presentation, treated as a single country 5 Source: The CIA World Factbook, 2005 data Analyze the Database Consider the kinds of information that you could quickly find from the database. For example, you can search for countries that produce or consume more or less oil than a specific number of barrels per day. Make a list of the kinds of information you could search for in this database. Applying the Skill Turn to page A12 in the Economic Atlas and Statistics and review the information in the two sets of graphs. Create a database for United States industry using statistics for the most recent year shown. Consider the steps listed above when creating your database. Skillbuilder Handbook R31 Glossary A absolute advantage n. the ability of one trading nation to make a product more efﬁ ciently than another trading nation (p. 513) aggregate demand n. the sum of all the demand in the economy (p. 360) Board of Governors n. the board of seven appointed members that supervises the operations of the Federal Reserve System and sets monetary policy (p. 476) bond n. a contract a corporation issues that promises to repay borrowed money, plus interest, on a ﬁ xed schedule (p. 240) bounced check see overdraft aggregate supply n. the sum of all the supply in the economy (p. 360) break-even point n. a situation in which total costs and total revenues are the same (p. 142) antitrust legislation n. laws that deﬁ ne monopolies and give government the power to control or dissolve them (p. 214) budget n. a plan for allocating income for saving and spending (p. 574) appropriations n. set amounts of money put aside for speciﬁ c purposes (p. 431) budget deﬁ cit n. a situation in which the government spends more than it takes in (p. 462) authoritarian adj. requiring absolute loyalty and obedience to authority (p. 43) budget surplus n. a situation in which the government takes in more
than it spends (p. 462) automated teller machine (ATM) n. an electronic device that allows bank customers to make transactions without seeing a bank ofﬁ cer (p. 308) automatic stabilizer n. a feature of ﬁ scal policy that works automatically to steady the economy (p. 447) B balanced budget n. a budget in which total government revenue is equal to total government spending (p. 436) balance of payments n. a record of all the transactions that occurred between the individuals, businesses, and government units of one nation and those of the rest of the world (p. 529) balance of trade n. the difference between the value of a country’s imports and exports (p. 529) bull market n. a situation in which stock market prices rise steadily over time (p. 335) business cycle n. the series of growing and shrinking periods of economic activity, measured by increases or decreases in real gross domestic product (p. 358) business organization n. an enterprise that produces goods or provides services, usually to make a proﬁ t (p. 226) business structure see business organization C capital n. all the resources people make and use to produce and distribute goods and services (p. 8) capital budget n. a plan for major expenses or investments (p. 436) bank exam n. an audit, conducted by the Federal Reserve, of a bank’s ﬁ nancial practices (p. 481) capital deepening n. an increase in the ratio of capital to labor (p. 371) bank holding company n. a company that owns more than one bank (p. 481) capital ﬂ ight n. a situation in which capital from a country is invested outside the country (p. 558) barrier to entry n. anything that hinders a business from entering a market (p. 198) barter n. the exchange of goods and services without using money (p. 288) bear market n. a situation in which stock market prices decline steadily over time (p. 335) binding arbitration n. a process by which an impartial third party resolves disputes between management and unions (p. 280) black market n. the illegal business of buying or selling goods or services in violation of price controls or rationing (p. 183) capital gain n. the proﬁ t made from the sale of securities (p. 330) capitalism n. an economic system based on private ownership of the
factors of production (p. 49) capital market n. a market in which long-term ﬁ nancial assets are bought and sold (p. 322) cartel n. a formal organization of sellers or producers who regulate the production, pricing, and marketing of a product (pp. 198, 535) cease and desist order n. a ruling requiring a ﬁ rm to stop an unfair business practice (p. 217) central bank n. a nation’s main monetary authority (p. 474) R32 Glossary G l o s s a r y centrally planned economy n. a system in which the society’s leaders make all economic decisions (p. 42) change in demand n. a situation in which a change in the marketplace prompts consumers to buy different amounts of a good or service at every price (p. 109) change in quantity demanded n. a change in the amount of a product that consumers will buy because of a change in price (p. 108) change in quantity supplied n. an increase or decrease in the amount of a good or service that producers are willing to sell because of a change in price (p. 146) competitive pricing n. a situation in which producers sell goods and services at prices that best balance the twin desires of making the highest proﬁ t and luring customers away from rival producers (p. 174) complements n. products that are used together, so the increase or decrease in demand for one will result in an increase or decrease in demand for the other (p. 112) conglomerate n. a business composed of companies that produce unrelated goods or services (p. 243) consumer n. a person who buys goods or services for personal use (p. 5) change in supply n. a situation in which a change in the marketplace prompts producers to offer different amounts for sale at every price (p. 148) consumer price index (CPI) n. a measure of changes in the prices of goods and services that consumers commonly purchase (p. 396) check clearing n. a service provided by the Federal Reserve to record receipts and expenditures of bank clients (p. 480) circular ﬂ ow model n. a visualization of all interactions in a market economy (p. 52) civilian labor force n. people age 16 or older who are employed or actively looking for and available to do work (p. 266) consumer sovereignty n. the idea that consumers have the ultimate control over what is produced because they are free to
buy what they want and refuse products they do not want (p. 50) contingent employment n. temporary or part-time work (p. 270) contract n. a formal, legally binding agreement (p. 598) claim n. a request to an insurance company for payment on an insured loss (p. 596) contraction n. a decrease in economic activity (p. 359); see business cycle closed shop n. a business in which an employer can hire only union members (p. 279) coincident indicators n. measures of economic performance that usually change at the same time as real gross domestic product changes (p. 364) collective bargaining n. the process of negotiation between a business and its organized employees to establish wages and improve working conditions (p. 280) contractionary ﬁ scal policy n. a plan to reduce aggregate demand and slow down the economy during a period of toorapid economic expansion (p. 446) contractionary monetary policy n. a plan to reduce the amount of money in circulation; also called tight-money policy (p. 492) cooperative n. a type of business operated for the shared beneﬁ t of the owners, who are also its customers (p. 250) command economy n. an economic system in which the government makes all economic decisions (p. 39) co-pay n. an amount the insured owes when an insured receives health care (p. 596) commodity money n. money that has intrinsic value based on the material from which it is made (p. 291) corporate income tax n. a tax based on a corporation’s proﬁ ts (p. 412) common stock n. a share of ownership in a corporation that gives the holder voting rights and a share of proﬁ ts (p. 331) communism n. an economic system in which there is no private ownership of property and little or no political freedom (p. 43) corporation n. a business owned by shareholders, also called stockholders, who own the rights to the company’s proﬁ ts but face only limited liability for the company’s debts and losses (p. 238) cosigner n. a person who assumes responsibility for the debt if the borrower fails to repay the loan (p. 583) comparative advantage n. the ability of one trading nation to produce something at a lower opportunity cost than that of another trading nation (p. 513) cost-beneﬁ t
analysis n. the practice of examining the costs and the expected beneﬁ ts of a choice as an aid to decision making (p. 15) competition n. the effort of two or more people acting independently to get business by offering the best deal (p. 49) cost-push inﬂ ation n. a situation in which increases in production costs push up prices (p. 399) Glossary R33 Council of Economic Advisers n. the three-member group that advises the President on ﬁ scal policy and other economic issues (p. 452) demand deposits n. checking accounts, so called because checking accounts can be converted into currency “on demand” (p. 293) coupon rate n. the interest rate a bond-holder receives every year until the bond matures (p. 338) craft union n. an organization of workers with similar skills who work in different industries for different employers (p. 274) credit n. the practice of buying goods or services now and paying for them in the future (p. 582) credit report n. a statement by a credit bureau that details a consumer’s credit record (p. 586) credit score n. a number that summarizes a consumer’s creditworthiness (p. 586) crowding-out effect n. a situation in which the government outbids private bond interest rates to gain loanable funds (p. 466) currency n. paper money and coins (pp. 293, 475) customs duty n. a tax on goods imported into the United States (p. 425) customs unions n. agreements that abolish trade barriers among the members and establish uniform tariffs for nonmembers (p. 532) cyclical unemployment n. unemployment caused by the part of the business cycle with decreased economic activity (p. 384) D debit card n. a card one can use like an ATM card to withdraw cash or like a check to make purchases (p. 308) debt restructuring n. a method countries with outstanding debt obligations use to alter the terms of debt agreements to achieve some advantage (p. 559) deductible n. the amount the insured pays before the insurance company pays (p. 596) default n. the condition that occurs when a nation cannot pay interest or principle on a loan (p. 559) deﬁ cit spending n. the government practice of spending more than it collects in revenue for a speciﬁ c ﬁ scal year (p
. 462) deﬂ ation n. a decrease in the general price level (p. 398) demand n. the desire to have some good or service and the ability to pay for it (p. 98) demand curve n. a graph that shows a demand schedule, or how much of a good or service an individual is willing and able to purchase at each price (p. 102) demand-pull inﬂ ation n. a condition that occurs when total demand rises faster than the production of goods and services (p. 399) demand schedule n. a table that shows how much of a good or service an individual is willing and able to purchase at each price (p. 100) demand-side ﬁ scal policy n. a plan to stimulate aggregate demand (p. 454) deposit multiplier formula n. a mathematical formula that tells how much the money supply will increase after an initial cash deposit in a bank (p. 485) depreciate v. to decrease in value (p. 590) depression n. an extended period of high unemployment and reduced business activity (p. 359) deregulation n. the reduction or elimination of government oversight and control of business (p. 218) derived demand n. a demand for a product or resource based on its contribution to the ﬁ nal product (p. 259) developed nations n. nations that have a market economy, a relatively high standard of living, a high GDP, industrialization, widespread private ownership of private property, and stable and effective governments (p. 544) differentiated product see product differentiation diminishing returns n. a situation in which new workers cause marginal product to grow but at a decreasing rate (p. 139) discount rate n. the interest rate that the Federal Reserve charges when it lends money to other banks (p. 491) discretionary ﬁ scal policy n. actions taken by the federal government by choice to correct economic instability (p. 446) discretionary spending n. spending that the government must authorize each year (p. 428) disequilibrium n. a situation in which quantity supplied and quantity demanded are not in balance (p. 169) disposable personal income (DPI) n. personal income minus taxes (p. 355) diversiﬁ cation n. the practice of distributing investments among different ﬁ nancial assets to maximize return and limit risk (p. 327) dividend n. the part of a corporation’s proﬁ t that
the company pays the stockholders (p. 238) R34 Glossary G l o s s a r y dumping n. the sale of a product in another country at a price lower than that charged in the home market (p. 521) estate tax n. a tax on the assets of a person who has died (p. 425) Dumpster diving n. technique used by identity thieves to gather personal information in the garbage (p. 588) E easy-money policy see expansionary monetary policy economic cycle see business cycle economic growth n. an increase in a nation’s real gross domestic product (p. 358) economic interdependence n. a situation in which producers in one nation depend on others to provide goods and services they do not produce (p. 510) economic model n. a simpliﬁ ed representation of economic activities, systems, or problems (p. 18) economics n. the study of how individuals and societies satisfy their unlimited wants with limited resources (p. 4) economic system n. the way in which a society uses its scarce resources to satisfy its people’s unlimited wants (p. 38) economies of scale n. a situation in which the average cost of production falls as the producer grows larger (p. 201) economize v. to make decisions according what is believed to be the best combination of costs and beneﬁ ts (p. 12) efﬁ ciency n. the condition in which economic resources are used to produce the maximum amount of goods and services (p. 20) elastic adj. referring to a situation in which a change in price, either up or down, leads to a relatively larger change in the quantity demanded or the quantity supplied (pp. 117, 154) elasticity of demand n. a measure of how responsive consumers are to price changes in the marketplace (p. 117) elasticity of supply n. a measure of how responsive producers are to price changes in the marketplace (p. 154) embargo n. a law that cuts off most or all trade with a speciﬁ c country (p. 521) entitlement n. a social welfare program with speciﬁ c eligibility requirements (p. 428) entrepreneurship n. the combination of vision, skill, ingenuity, and willingness to take risks that is needed to create and run new businesses (p. 9) equilibrium price n. the price at which the quantity demanded equals the quantity supplied (p. 164) equilibrium wage
n. the wage at which the quantity of workers demanded equals the quantity of workers supplied; the market price for labor (p. 258) European Union (EU) n. the economic and political union of European nations that was established in 1993 (p. 532) euro n. the single currency of the European Union (p. 533) excise tax n. a tax on the production or sale of a speciﬁ c good or service (pp. 149, 425) expansion n. an increase in economic activity (p. 358); see business cycle expansionary ﬁ scal policy n. a plan to increase aggregate demand and stimulate a weak economy (p. 446) expansionary monetary policy n. a plan to increase the amount of money in circulation; also called easy-money policy (p. 492) exports n. goods or services produced in one country and sold to other countries (p. 516) externality n. a side effect of a transaction that affects someone other than the producer or buyer (p. 87) F factor market n. the market for the factors of production— land, labor, capital, and entrepreneurship (p. 52) factors of production n. the economic resources needed to produce goods and services (p. 8) federal budget n. a plan for spending federal tax money (p. 431) federal funds rate (FFR) n. the interest at which a depository institution lends available funds to another depository institution overnight (p. 490) Federal Insurance Contributions Act (FICA) n. a payroll tax that provides coverage for the elderly, the unemployed due to disability, and surviving family members of wage earners who have died (p. 423) Federal Open Market Committee (FOMC) n. the Federal Reserve System board that supervises the sale and purchase of federal government securities (p. 477) Federal Reserve System n. the central bank of the United States; commonly called the Fed (p. 474) ﬁ at money n. money that has no tangible backing but is declared by the government and accepted by citizens to have worth (p. 291) ﬁ ling status n. for ﬁ ling taxes, based on marital status or support of dependents (p. 604) ﬁ nancial asset n. a claim on a borrower’s property (p. 319) Glossary R35 ﬁ nancial intermediary n. an institution that collects funds from savers and invests these
funds in ﬁ nancial assets (p. 319) ﬁ nancial market n. a situation in which buyers and sellers exchange ﬁ nancial assets (p. 319) full employment n. a level of unemployment in which none of the unemployment is caused by decreased economic activity; generally marked by an unemployment rate of 4 to 6 percent (p. 383) ﬁ nancial system n. all the institutions that help transfer funds between savers and investors (p. 318) ﬁ scal adj. of or relating to government revenue and spending (p. 446) ﬁ scal policy n. the federal government’s use of taxing and spending to affect the economy (p. 446) ﬁ scal year n. a 12-month period for which an organization plans its expenditures (p. 431) ﬁ xed costs n. expenses that business owners incur no matter how much they produce (p. 140) ﬁ xed rate of exchange n. a system in which the currency of one nation is ﬁ xed or constant in relation to other currencies (p. 526) ﬂ exible exchange rate n. a system in which the exchange rate for currency changes as supply and demand for the currency changes; also called the ﬂ oating rate (p. 527) focus group n. a moderated discussion with small groups of consumers (p. 208) foreign exchange market n. a market in which currencies of different countries are bought and sold (p. 526) foreign exchange rate n. the price of one currency in the currencies of other nations (p. 526) franchise n. a business made up of semi-independent businesses that all offer the same products or services (p. 248) franchisee n. a semi-independent business that pays a fee for the right to sell the parent company’s products or services in a particular area (p. 248) free contract n. a situation in which people decide for themselves which legal agreements to enter into (p. 73) free enterprise system n. another name for capitalism, an economic system based on private ownership of productive resources (p. 70) free rider n. a person who does not pay for a good or service but who beneﬁ ts from it when it is provided (p. 85) free-trade zone n. a speciﬁ c region in which trade between nations takes place without protective tariffs (p
. 532) future n. a contract to buy or sell a stock on a speciﬁ ed future date at a preset price (p. 333) G general partnership n. a partnership in which each partner shares the management of the business and is liable for all business debts and losses (p. 233) geographic monopoly n. a monopoly that exists because there are no other producers or sellers within a certain region (p. 201) gift tax n. a tax on money or property given by one living person to another (p. 425) glass ceiling n. an unseen, artiﬁ cial barrier to advancement that women and minorities sometimes face (p. 262) global economy n. all the economic interactions that cross international boundaries (p. 61) gold standard n. a system in which the basic monetary unit is equal to a set amount of gold (p. 299) goods n. physical objects, such as food, clothing, and furniture, that can be purchased (p. 5) government monopoly n. a monopoly that exists because the government either owns and runs the business or authorizes only one producer (p. 201) grant-in-aid n. a transfer payment from the federal government to state or local governments (p. 432) gross domestic product (GDP) n. the market value of all ﬁ nal goods and services produced within a nation in a given time period (p. 350) gross national product (GNP) n. the market value of all ﬁ nal goods and services produced by a country in a given time period (p. 355) H hacking n. technique used by identity thieves to gather personal information using computers and related technology (p. 588) horizontal merger n. the joining of two or more companies that offer the same or similar products or services (p. 243) frictional unemployment n. the temporary unemployment of workers moving from one job to another (p. 384) human capital n. the knowledge and skills that enable workers to be productive (p. 261) R36 Glossary G l o s s a r y human development index (HDI) n. a combination of a nation’s real GDP per capita, life expectancy, adult literacy rate, and student enrollment ﬁ gures that indicates what life is like in a speciﬁ c country (p. 547) hyperinﬂ ation n. a rapid, uncontrolled rate of inﬂ ation in
excess of 50 percent (p. 398) I identity theft n. the use of someone else’s personal information for criminal purposes (p. 588) imperfect competition n. a market structure that lacks one or more of the conditions needed for perfect competition (p. 195) imports n. goods or services produced in one country and purchased by another (p. 516) incentive n. a beneﬁ t offered to encourage people to act in a certain way (pp. 12, 176) incidence of a tax n. the ﬁ nal burden of a tax (p. 415) income distribution n. the way income is divided among people in a nation (p. 390) income effect n. a change in the amount of a good or service a consumer will buy because his or her income (and therefore purchasing power) changes (p. 107) income inequality n. the unequal distribution of income (p. 390) increasing returns n. a situation in which hiring new workers cause marginal product to increase (p. 139) independent contractor n. someone who sells his or her services on a contract basis (p. 270) individual income tax n. a tax based on an individual’s income from all sources (p. 412) industrial union n. an organization of workers with many different skills who work in the same industry (p. 274) inelastic n. a situation in which quantity demanded or quantity supplied changes little as price changes (pp. 117, 155) infant industries n. new industries that are often unable to compete against larger, more established competitors (p. 523) infant mortality rate n. the number of children who die within the ﬁ rst year of life per 1,000 births (p. 547) inferior goods n. goods that consumers demand less of when their incomes rise (p. 110) inﬂ ation n. a sustained rise in the general price level, or a sustained fall in the purchasing power of money (p. 396) inﬂ ation rate n. the rate of change in prices over a set period of time (p. 397) infrastructure n. the basic set of support systems—such as power, communications, transportation, water, sanitation, and education systems—needed to keep an economy and society going (pp. 86, 545) input costs n. the price of the resources needed to produce a good or service (p. 148) insourcing n. the practice of foreign companies
establishing operations in, and therefore bringing jobs to, the United States (p. 269) interest n. a fee a bank pays for the use of money (p. 578) International Monetary Fund (IMF) n. the international organization established to promote international monetary cooperation, foster economic growth, and provide temporary ﬁ nancial assistance to countries to help ease balance-ofpayments adjustment (p. 559) investment n. the use of income today in a way that allows for a future beneﬁ t (p. 318) investment objective n. a ﬁ nancial goal that is used to determine if an investment is appropriate (p. 324) J junk bond n. a high-risk, high-yield corporate bond (p. 339) K Keynesian economics n. the idea, ﬁ rst advanced by John Maynard Keynes, that the government needs to stimulate aggregate demand in times of recession (p. 454) L labor n. all the human time, effort, and talent used to produce goods and services (p. 8) labor input n. the size of the labor force multiplied by the length of the workweek (p. 371) labor productivity n. the amount of goods and services a person can produce in a given time (p. 149) labor union n. an organization of workers that seeks to improve wages, working conditions, fringe beneﬁ ts, job security, and other work-related matters for its members (p. 274) Laffer Curve n. a graph that illustrates how tax cuts affect tax revenues and economic growth (p. 459) lagging indicators n. measures of economic performance that usually change after real gross domestic product changes (p. 364) Glossary R37 laissez faire n. the principle that the government should not interfere in the economy (p. 49) land n. all the natural resources on or under the ground that are used to produce goods and services (p. 8) landlord n. the owner of rental property (p. 609) law of comparative advantage n. the law stating that countries gain when they produce items that they are most efﬁ cient at producing and that are at the lowest opportunity cost (p. 514) law of demand n. states that when the price of a good or service goes down, quantity demanded increases, and when the prices go up, quantity demanded falls (p. 99) law of diminishing marginal utility n. states that the
marginal beneﬁ t from using each additional unit of a good or service during a given time period tends to decline as each is used (p. 106) law of increasing opportunity costs n. states that as production switches from one product to another, increasingly more resources are needed to increase the production of the second product, which causes opportunity costs to rise (p. 21) law of supply n. states that producers are willing to sell more of a good or service at a higher price than they are at a lower price (p. 131) leading indicators n. measures of economic performance that usually change before real gross domestic product changes (p. 364) lease n. a contract for renting an apartment, vehicle, or other item for a speciﬁ c period of time (p. 609) legal equality n. a situation in which everyone has the same economic rights under the law (p. 73) less developed countries (LDCs) n. countries with lower GDPs, less well-developed industry, and lower standards of living; sometimes called emerging economies (p. 545) life expectancy n. the average number of years a person could expect to live if current mortality trends were to continue for the rest of that person’s life (p. 547) limited partnership n. a partnership in which at least one partner is not involved in running the business and is liable only for the funds he or she invested (p. 233) literacy rate n. the percentage of people older than 15 who can read and write (p. 547) loan n. borrowed money that is usually repaid with interest (p. 582) Lorenz curve n. a curve that shows the degree of income inequality in a nation (p. 391) M macroeconomic equilibrium n. the point where aggregate demand equals aggregate supply (p. 361) macroeconomics n. the study of the behavior of the economy as a whole; concerned with large-scale economic activity (p. 27) mandatory spending n. government spending that is required by current law (p. 428) marginal beneﬁ t n. the beneﬁ t or satisfaction gained from using one more unit of a good or service (p. 16) marginal cost n. the additional cost of producing or using one more unit of a good or service (pp. 16, 140) marginal product n. the change in total output that results from adding one more worker (p. 138) marginal revenue n. the money made from
each additional unit sold (p. 142) market n. any place or situation in which people buy and sell goods and services (p. 48) market allocation n. an agreement among or between competing businesses to divide up a market (p. 216) market demand curve n. a graph that shows data from a market demand schedule, or how much of a good or service all consumers are willing and able to purchase at each price (p. 102) market demand schedule n. a table that shows how much of a good or service all consumers are willing and able to purchase at each price in a market (p. 100) market division see market allocation limited liability n. a situation in which a business owner’s liability for business debts and losses is limited (p. 240) market economy n. an economic system based on individual choice and voluntary exchange (p. 39) limited liability partnership (LLP) n. a partnership in which all partners are not responsible for the debts and other liabilities of the other partners (p. 233) market equilibrium n. a situation in which the quantity supplied and the quantity demanded at a particular price are equal (p. 164) limited life n. a situation in which a business ceases to exist if the owner dies, retires, or leaves (p. 228) market failure n. a situation in which people who are not part of a marketplace interaction beneﬁ t from it or pay part of its costs (p. 84) R38 Glossary G l o s s a r y market research n. the gathering and evaluation of information about consumer preferences for goods and services (p. 208) market share n. a company’s percent of total sales in a particular market (p. 209) money market n. a market in which short-term ﬁ nancial assets are bought and sold (p. 322) monopolistic competition n. a market structure in which many sellers offer similar, but not standardized, products to consumers (p. 206) market structure n. an economic model of competition among businesses in the same industry (p. 192) monopoly n. a market structure in which only one seller sells a product for which there are no close substitutes (p. 198) market supply curve n. a graph that shows data from a market supply schedule (p. 134) monopsony n. market structure in which there are many sellers but only one large buyer (p. 212) market supply schedule n. how much of a good or service all producers
in a market are willing and able to offer for sale at each price (p. 132) maturity n. the date when a bond is due to be repaid (p. 338) multifactor productivity n. the ratio between an industry’s economic output and its labor and capital inputs (p. 372) multinational corporation n. a corporation with branches in several countries (p. 243) Medicaid n. a government-run medical insurance program for low-income people (p. 429) Medicare n. a government-run, national health insurance program mainly for citizens over age 65 (p. 423) medium of exchange n. a means through which goods and services can be exchanged (p. 288) merger n. the combining of two or more companies to form a single company (p. 214) microeconomics n. the study of the behavior of individual players—such as individuals, families, and businesses—in an economy (p. 27) minimum balance requirement n. the amount of money needed in an account to avoid fees (p. 576) minimum wage n. the lowest amount, established by law, that an employer may pay a worker for one hour of work (pp. 182, 262) mixed economy n. an economic system that has elements of traditional, command, and market economies; the most common economic system (p. 58) modiﬁ ed free enterprise economy n. a mixed economic system that includes some government protections, provisions, and regulations to adjust the free enterprise system (p. 80) monetarism n. an economic theory that suggests that rapid changes in the money supply are the main cause of economic instability (p. 496) monetary adj. of or relating to money (p. 474) mutual fund n. an investment company that gathers money from individual investors and uses the money to purchase a range of ﬁ nancial assets (p. 320) N NAFTA n. the North America Free Trade Agreement, which ensures free trade throughout the continent and constitutes the largest free-trade zone in the world (p. 533) national accounts see national income accounting national bank n. a bank chartered by the national government (p. 299) national debt n. the total amount of money that the federal government owes (p. 462) national income (NI) n. the total income earned in a nation from the production of goods and services in a given time period (p. 355) national income accounting n. a way of analyzing a country’s
economy using statistical measures of its income, spending, and output (p. 350) nationalize v. to change from private ownership to government or public ownership (p. 61) natural monopoly n. a market situation in which the costs of production are lowest when only one ﬁ rm supplies a product or service (p. 201) near money n. savings accounts and other similar time deposits that can be converted into cash relatively easily (p. 293) monetary policy n. the Federal Reserve’s actions that change the money supply to inﬂ uence the economy (p. 490) needs n. things such as food, clothing, and shelter that are necessary for survival (p. 4) money n. anything that people will accept as payment for goods and services (p. 288) negative externality n. an externality that costs people who were not involved in the original economic activity (p. 87) Glossary R39 net national product (NNP) n. the gross national product minus depreciation of capital stock—in other words, the value of ﬁ nal goods and services less the value of capital goods that became worn out during the year (p. 355) nominal GDP n. the gross domestic product stated in terms of the current value of goods and services (p. 352) nonmarket activities n. services that have potential economic value but are performed without charge (p. 354) nonprice competition n. the use of factors other than price—such as style, service, advertising, or giveaways—to try to convince customers to buy from one producer rather than another (p. 207) nonproﬁ t organization n. an institution that acts like a business but exists to beneﬁ t society rather than to make a proﬁ t (p. 250) normal goods n. goods that consumers demand more of when their incomes rise (p. 110) normative economics n. a way of describing and explaining what economic behavior ought to be, not what it actually is (p. 29) not-for-proﬁ t see nonproﬁ t organization O oligopoly n. a market structure in which only a few sellers offer a similar product (p. 209) OPEC n. the Organization of Petroleum Exporting Countries, a regional trade group (p. 535) open market operations n. the Federal Reserve’s sale and purchase of federal government securities; the monetary policy tool most used by the Federal Reserve to adjust
the money supply (p. 490) open opportunity n. the ability of everyone to enter and compete in the market of his or her own free choice (p. 73) operating budget n. a plan for day-to-day expenses (p. 436) opportunity cost n. the value of something that is given up by choosing one alternative over another (p. 14) option n. a contract giving an investor the right to buy or sell stock at a future date at a preset price (p. 333) outsourcing n. the practice of contracting with an outside company, often in a foreign country, to provide goods or services (p. 269) overdraft n. a check or other withdrawal that exceeds the existing account balance (p. 576) P par value n. the amount that a bond issuer promises to pay the buyer at maturity (p. 338) partnership n. a business co-owned by two or more people, or “partners,” who agree on how responsibilities, proﬁ ts, and losses should be divided (p. 232) patent n. a legal registration of an invention or a process that gives the inventor the exclusive property rights to that invention or process for a certain number of years (p. 202) peak n. the end of an expansion in the economy (p. 359); see business cycle per capita gross domestic product n. a nation’s GDP divided by its total population (p. 546) perestroika n. Russian leader Mikhail Gorbachev’s plan to gradually incorporate markets into the Soviet Union’s command economy (p. 564) perfect competition n. the ideal model of a market economy; the market structure in which none of the many well-informed and independent sellers or buyers has control over the price of a standardized good or service (p. 192) personal income (PI) n. the annual income received by a country’s people from all sources (p. 355) phishing n. technique used by identity thieves to gather personal information through deceptive telephone calls (p. 588) PIN n. personal identiﬁ cation number (p. 577) positive economics n. a way of describing and explaining economics as it is (p. 29) positive externality n. an externality that beneﬁ ts people who were not involved in the original economic activity (p. 87) poverty n. the situation in which a person’s
income and resources do not allow him or her to achieve a minimum standard of living (p. 388) poverty line see poverty threshold poverty rate n. the percentage of people living in households that have incomes below the poverty threshold (p. 389) poverty threshold n. the ofﬁ cial minimum income needed to pay for the basic expenses of living (p. 388) predatory pricing n. the setting of prices below cost for a time to drive smaller competitors out of a market (p. 216) preferred stock n. a share of ownership in a corporation giving the holder a share of proﬁ ts but, in general, no voting rights (p. 331) premium n. an amount paid for insurance (p. 596) R40 Glossary G l o s s a r y price ceiling n. an established maximum price that sellers may charge for a product (p. 180) price ﬁ xing n. conspiring among or between businesses to set the prices of competing products (p. 216) price ﬂ oor n. an established minimum price that buyers must pay for a product (p. 182) proﬁ t motive n. the incentive that encourages people and organizations to improve their material well-being by seeking to gain from economic activities (p. 73) progressive tax n. a tax that places a higher percentage rate of taxation on high-income earners than on low-income earners (p. 412) price maker n. a business that does not have to consider competitors when setting its prices (p. 198) price taker n. a ﬁ rm that must accept the market price set by the interaction of supply and demand (p. 193) primary market n. a market for buying newly created ﬁ nancial assets directly from the issuing entity (p. 322) prime rate n. the interest rate that banks charge their best customers (p. 491) private company n. a corporation that controls who can buy or sell its stock (p. 238) private property rights n. the rights of individuals and groups to own resources and businesses (p. 48) private sector n. the part of the economy that is owned by individuals or businesses (p. 432) privatization n. the process of transferring state-owned property and businesses to individuals (p. 563) privatize v. to change from government or public ownership to private ownership (p. 61) producer n. a person who makes goods or provides services (p. 5) producer
price index (PPI) n. a measure of changes in wholesale prices (p. 397) product differentiation n. the attempt to distinguish a product from similar products (p. 206) product market n. the market in which goods and services are bought and sold (p. 52) production possibilities curve (PPC) n. a graph used to illustrate the impact of scarcity on an economy (p. 18) productivity n. the amount of output produced from a set amount of inputs (p. 372) productivity, labor see labor productivity proﬁ t n. the ﬁ nancial gain a seller makes from a business transaction (p. 49); the money left over after the costs of producing a product are subtracted from the income gained by selling that product (p. 78) proﬁ t-maximizing output n. the point in production at which a business has reached its highest level of proﬁ t (p. 143) property tax n. a tax based on the value of an individual’s or a business’s assets (p. 412) proportional tax n. a tax that takes the same percentage of income from all taxpayers regardless of income level (p. 412) protectionism n. the use of trade barriers between nations to protect domestic industries (p. 523) protective tariff n. a tax on imported goods to protect domestic goods (p. 521) public company n. a corporation that issues stock that can be freely traded (p. 238) public disclosure n. a policy requiring businesses to reveal product information to consumers (p. 217) public goods n. goods and services provided by the government and consumed by the public as a group (p. 84) public transfer payment n. a transfer payment in which the government transfers income from taxpayers to recipients who do not provide anything in return (p. 89) pure competition see perfect competition Q quota n. a limit on the amount of a product that can be imported (p. 520) R rational expectations theory n. the theory that states that individuals and business ﬁ rms expect changes in ﬁ scal policy will have particular effects and take action to protect their interests against those effects (p. 452) rationing n. a system in which the government allocates goods and services using factors other than price (p. 183) real GDP n. the gross domestic product corrected for changes in prices from year to year (p. 352) real GDP per capita n. the
real gross domestic product divided by total population (p. 369) recession n. a prolonged economic contraction lasting two or more quarters (six months or more) (p. 359) regressive tax n. a tax that takes a larger percentage of income from low-income earners than from high-income earners (p. 412) Glossary R41 regulation n. a set of rules or laws designed to control business behavior (pp. 150, 214) Social Security n. a federal program to aid older citizens, orphaned children, and the disabled (p. 423) representative money n. paper money that is backed by something tangible (p. 291) sole proprietorship n. a business owned and controlled by one person (p. 226) required reserve ratio (RRR) n. the fraction of a bank’s deposits, determined by the Federal Reserve, that it must keep in reserve so that it can loan out money (p. 484) return n. the proﬁ t or loss made on an investment (p. 327) revenue n. government income from taxes and nontax sources (p. 410) revenue tariff n. a tax on imports speciﬁ cally to raise money; are rarely used today (p. 521) right-to-work laws n. legislation that makes it illegal to require workers to join unions (p. 279) risk n. the possibility for loss on an investment (p. 327) S safety net n. government programs designed to protect people from economic hardships (p. 89) sales tax n. a tax based on the value of goods or services at the time of sale (p. 412) savings n. income not used for consumption (p. 318) scarcity n. a situation that exists when there are not enough resources to meet human wants (p. 4) seasonal unemployment n. unemployment linked to seasonal work (p. 384) secondary market n. a market in which ﬁ nancial assets are resold (p. 322) service n. work that one person does for another for payment (p. 5) shadow economy see underground economy share n. part of the stock of a corporation (p. 238); see stock shock therapy n. an economic program involving the abrupt shift from a command economy to a free-market economy (p. 563) shortage n. a situation in which demand is greater than supply, usually the result of prices being set too low (p. 167) shoulder surﬁ ng
n. technique used by identity thieves to gather personal information as you disclose private information in public (p. 588) spamming n. technique used by identity thieves to gather personal information through deceptive e-mails (p. 588) special economic zone (SEZ) n. a geographic region that has economic laws that are different from a country’s usual economic laws, with the goal of increasing foreign investment (p. 567) specialization n. a situation that occurs when individuals or businesses concentrate their efforts in the areas in which they have an advantage for increased productivity and proﬁ t (pp. 50, 138, 510) spending multiplier effect n. a situation in which a small change in spending eventually results in a much larger change in GDP (p. 455) stabilization programs n. programs that require troubled nations to carry out reforms such as reducing foreign trade deﬁ cits and external debt, eliminating price controls, closing inefﬁ cient public enterprises, and slashing budget deﬁ cits (p. 559) stagﬂ ation n. a period during which prices rise at the same time that there is a slowdown in business activity (p. 359) standardized product n. a product that consumers consider identical in all essential features to other products in the same market (p. 192) standard of value n. the yardstick of economic worth in the exchange process (p. 289) start-up costs n. the expenses that a new business must pay to enter a market and begin selling to consumers (p. 209) state bank n. a bank chartered by a state government (p. 296) statistics n. numerical data (p. 24) stock n. shares of ownership in a corporation (p. 238) stockbroker n. an agent who buys and sells securities for customers (p. 332) stock exchange n. a secondary market where securities are bought and sold (p. 330) stock index n. an instrument used to measure and report the change in prices of a set of stocks (p. 334) socialism n. an economic system in which the government owns some or all of the factors of production (p. 43) stored-value card n. a card that represents money that the card holder has on deposit with the card issuer (p. 308) R42 Glossary G l o s s a r y store of value n. something that holds its value over time (p. 289) strike n. a work stopp
age used to gain negotiating power while attempting to convince an employer to improve wages, working conditions, or other work-related matters (p. 274) structural unemployment n. unemployment that exists when the available jobs do not match the skills of available workers (p. 384) subsidy n. a government payment that helps cover the cost of an economic activity that can beneﬁ t the public as a whole (p. 88) substitutes n. products that can be used in place of other products to satisfy consumer wants (p. 112) substitution effect n. the pattern of behavior that occurs when consumers react to a change in price of a product by buying a substitute product that offers a better relative value (p. 107) supply n. the willingness and ability of a producer to produce and sell a product (p. 130) supply curve n. a graph that shows data from a supply schedule (p. 134) supply schedule n. a table that shows how much of a good or service an individual producer is willing and able to offer for sale at each price (p. 132) supply-side ﬁ scal policy n. a plan designed to provide incentives to producers to increase aggregate supply (p. 458) surplus n. a situation in which supply is greater than demand, usually the result of prices being set too high (p. 167) T tariff n. a fee charged for goods brought into a country from another country (p. 521) tax n. a mandatory payment to a government (p. 410) taxable income n. the portion of income subject to taxation after all deductions and exemptions (pp. 421, 604) tax assessor n. a government ofﬁ cial who determines the value of property to be taxed (p. 437) tax base n. a form of wealth—such as income, property, goods, or services—that is subject to taxes (p. 412) tax incentive n. the use of taxes to encourage or discourage certain economic behaviors (p. 417) tax return n. a form used to report income and taxes owed to the government (p. 421) technological monopoly n. a monopoly that exists because a ﬁ rm controls a manufacturing method, invention, or type of technology (p. 201) technology n. the application of scientiﬁ c methods and innovations to production (p. 149) telecommuting n. the practice of doing ofﬁ ce work in a location other than the ofﬁ ce (
p. 270) telework see telecommuting temp, temps, temping see contingent employment thrift institution n. a ﬁ nancial institution that serves savers (p. 478) tight-money policy see contractionary monetary policy total cost n. the sum of ﬁ xed and variable costs (p. 140) total revenue n. the income a business receives from selling its products (pp. 122, 142) total revenue test n. a method of measuring elasticity by comparing the total revenue a business would receive when offering its product at various prices (p. 122) trade barrier n. any law passed to limit free trade between nations (p. 520) trade deﬁ cit n. an unfavorable balance of trade that occurs when a nation imports more than it exports (p. 529) trade-off n. the alternative someone gives up when making an economic choice (p. 14) trade surplus n. a favorable balance of trade that occurs when a nation exports more than it imports (p. 529) trade union see labor union trade war n. a succession of trade barriers between nations (p. 522) trade-weighted value of the dollar n. a measure of the international value of the dollar that determines if the dollar is strong or weak as measured against another currency (p. 528) traditional economy n. an economic system in which people make economic decisions based on customs and beliefs that have been handed down from one generation to the next (p. 38) transfer payment n. money distributed to individuals who do not provide goods or services in return (pp. 89, 432) transitional economy n. a country that has moved (or is moving) from a command economy to a market economy (p. 545) Treasury bill (T bill) n. a short-term bond that matures in less than one year (p. 464) Glossary R43 Treasury bond n. a long-term bond that matures in 30 years (p. 464) voluntary exchange n. a trade in which the parties involved anticipate that the beneﬁ ts will outweigh the cost (p. 49) voluntary export restraint (VER) n. a self-imposed limit on exports to certain countries to avoid quotas or tariffs (p. 521) W wage and price controls n. government limits on increases in wages and prices (p. 501) wage-price spiral n. a cycle that begins with increased wages, which lead to higher production costs, which
in turn result in higher prices, which result in demands for even higher wages (p. 400) wage rate n. the established rate of pay for a speciﬁ c job or work performed (p. 261) wages n. the payments workers receive in return for work (p. 258) wants n. desires that can be satisﬁ ed by consuming a good or service (p. 4) welfare n. government economic and social programs that provide assistance to the needy (p. 392) withholding n. the money taken from a worker’s pay before the worker receives the pay (p. 421) workfare n. a program that requires welfare recipients to do some kind of work in return for their beneﬁ ts (p. 393) World Bank n. a ﬁ nancial institution that provides loans, policy advice, and technical assistance to low and middle income countries to reduce poverty (p. 559) World Trade Organization (WTO) n. an organization that negotiates and administers trade agreements, resolves trade disputes, monitors trading policies, and supports developing countries (p. 535) Y yield n. the annual rate of return on a bond (p. 338) Treasury note n. an intermediate-term bond that matures in between two and ten years (p. 464) trough n. the end of a contraction in the economy (p. 359); see business cycle trust n. a group of ﬁ rms combined in order to reduce competition in an industry (p. 214) trust fund n. a fund held for a speciﬁ c purpose to be expended at a future date (p. 465) U underemployed n. people employed part-time who want to work full-time, or those who work at a job below their skill level (p. 383) underground economy n. market activities that go unreported because they are illegal or because those involved want to avoid taxation (p. 354) underutilization n. the condition in which economic resources are not being used to their full potential, resulting in fewer goods and services (p. 20) unemployment rate n. the percentage of the labor force that is jobless and actively looking for work (p. 382) union see labor union union shop n. a business in which workers are required to join a union within a set time period after being hired (p. 279) unit elastic adj. relating to a situation in which the percentage
change in price and quantity demanded are the same (p. 118) unlimited liability n. a situation in which a business owner is responsible for all the losses and debts of a business (p. 228) unlimited life n. a situation in which a corporation continues to exist even after a change in ownership (p. 240) user fee n. money charged for the use of a good or service (p. 425) utility n. the beneﬁ t or satisfaction gained from using a good or service (p. 12) V variable costs n. business costs that vary with the level of production output (p. 140) vertical merger n. the combining of two or more businesses involved in different steps of producing or marketing a product or service (p. 243) R44 Glossary Spanish Glossary A absolute advantage [ventaja absoluta] n. capacidad de un país para hacer un producto más eﬁ cientemente que otro país (pág. 513) aggregate demand [demanda agregada] n. suma de las demandas totales existentes en la economía (pág. 360) aggregate supply [oferta agregada] n. suma de las ofertas totales existentes en la economía (pág. 360) antitrust legislation [legislación antimonopolio] n. leyes que deﬁ nen los monopolios y dan al gobierno el poder de controlarlos o disolverlos (pág. 214) appropriations [asignaciones] n. cantidades ﬁ jas de dinero destinadas a ﬁ nes determinados (pág. 431) authoritarian [autoritario] adj. lo que exige una lealtad y una obediencia absolutas ante la autoridad (pág. 43) automated teller machine (ATM) [cajero automático (ATM)] n. dispositivo electrónico que permite a los clientes de un banco hacer transacciones sin ver al personal del banco (pág. 308) automatic stabilizer [estabilizador automático] n. característica de la política ﬁ scal que actúa automáticamente para mantener estable la
economía (pág. 447) B balanced budget [presupuesto balanceado] n. presupuesto en el que el total de ingresos del gobierno es igual al total de gastos del gobierno (pág. 436) balance of payments [balanza de pagos] n. registro de todas las transacciones ocurridas entre las personas, las empresas y las unidades gubernamentales de un país y las del resto del mundo (pág. 529) balance of trade [balanza de comercio] n. diferencia entre el valor de las exportaciones y el de las importaciones de un país (pág. 529) bank exam [inspección bancaria] n. auditoría, realizada por la Reserva Federal, de las prácticas ﬁ nancieras de un banco (pág. 481) bank holding company [compañía tenedora de acciones bancarias] n. compañía que posee más de un banco (pág. 481) barrier to entry [barrera de entrada] n. todo factor que impide que una empresa entre en un mercado (pág. 198) barter [trueque] n. intercambio de bienes y servicios sin utilizar dinero (pág. 288) bear market [mercado a la baja (mercado “oso”)] n. situación en la que los precios del mercado de valores bajan constantemente con el tiempo (pág. 335) binding arbitration [arbitraje vinculante] n. proceso por el que un tercero imparcial resuelve los conﬂ ictos entre la dirección de una empresa y los sindicatos (pág. 280) black market [mercado negro] n. compra o venta ilegal de bienes o servicios, violando los controles de precios o el racionamiento (pág. 183) Board of Governors [Junta de Gobern
adores] n. junta de siete miembros nombrados que supervisa las operaciones del Sistema de la Reserva Federal y establece la política monetaria (pág. 476) bond [bono] n. contrato emitido por una sociedad anónima que promete reembolsar el dinero prestado, más intereses, según las fechas establecidas (pág. 240) bounced check [cheque rebotado] véase overdraft [sobregiro] break-even point [punto de equilibrio] n. situación en la que el total de costos y el total de ingresos son iguales (pág. 142) budget [presupuesto] n. plan para asignar el ahorro y el gasto del ingreso (pág. 574) budget deﬁ cit [déﬁ cit presupuestario] n. situación en la que los gastos del gobierno son mayores que los ingresos (pág. 462) budget surplus [superávit presupuestario] n. situación en la que los ingresos del gobierno son mayores que los gastos (pág. 462) bull market [mercado alcista (mercado “toro”)] n. situación en la que los precios del mercado de valores suben constantemente con el tiempo (pág. 335) business cycle [ciclo económico] n. serie de períodos de ascenso y descenso de la actividad económica, medida por los aumentos o las disminuciones del producto interior bruto real (pág. 358) business organization [organización comercial] n. empresa que produce bienes o presta servicios, generalmente para obtener ganancias (pág. 226) business structure [estructura comercial] véase business organization [organización comercial] C capital [capital] n. todos los recursos que se
crean y utilizan para producir y distribuir bienes y servicios (pág. 8) capital budget [presupuesto de capital] n. plan referente a los principales gastos o inversiones (pág. 436) capital deepening [intensiﬁ cación del uso del capital] n. aumento de la razón entre el capital y el trabajo (pág. 371) capital ﬂ ight [fuga de capitales] n. situación en la que capitales de un país se invierten fuera de dicho país (pág. 558) Spanish Glossary R45 capital gain [ganancias de capital] n. ganancias obtenidas de la venta de valores (pág. 330) capitalism [capitalismo] n. sistema económico basado en la propiedad privada de los factores de producción (pág. 49) capital market [mercado de capitales] n. mercado en el que se venden y compran activos ﬁ nancieros a largo plazo (pág. 322) cartel [cártel] n. organización formal de vendedores o productores que regulan la producción, la ﬁ jación de precios y la comercialización de un producto (págs. 198, 535) cease and desist order [orden de cese de actividades comerciales] n. decisión judicial que obliga a una compañía a dejar de realizar una práctica comercial injusta (pág. 217) central bank [banco central] n. principal autoridad monetaria de un país (pág. 474) centrally planned economy [economía de planiﬁ cación centralizada] n. sistema en el que los dirigentes del país toman todas las decisiones económicas (pág. 42) change in demand [cambio en la demanda] n. situación en la que un cambio en el mercado incita a los consumid
ores a comprar una cantidad diferente de un bien o de un servicio a cada precio (pág. 109) change in quantity demanded [cambio en la cantidad demandada] n. cambio en la cantidad de un producto que los consumidores comprarán debido a un cambio en el precio (pág. 108) change in quantity supplied [cambio en la cantidad ofertada] n. aumento o disminución de la cantidad de un bien o de un servicio que los productores están dispuestos a vender debido a un cambio en el precio (pág. 146) change in supply [cambio en la oferta] n. situación en la que un cambio en el mercado incita a los productores a ofrecer para su venta una cantidad diferente a cada precio (pág. 148) check clearing [compensación de cheques] n. servicio proporcionado por la Reserva Federal para registrar las entradas y las salidas de los clientes de los bancos (pág. 480) circular ﬂ ow model [modelo de ﬂ ujo circular] n. visualización de todas las interacciones de una economía de mercado (pág. 52) civilian labor force [fuerza laboral civil] n. personas de 16 años o mayores que trabajan o que buscan activamente un trabajo y están en condiciones para trabajar (pág. 266) claim [reclamación] n. petición presentada ante una compañía de seguros para recibir un pago sobre una pérdida asegurada (pág. 596) closed shop [compañía de sindicación obligatoria] n. compañía en la que el empleador sólo puede contratar miembros del sindicato (pág. 279) coincident indicators [indicadores coincidentes] n. medidas del rendimiento económico que
generalmente cambian al mismo tiempo que cambia el producto interior bruto real (pág. 364) collective bargaining [negociación colectiva] n. proceso de negociación entre una empresa y sus empleados sindicalizados para establecer los salarios y mejorar las condiciones de trabajo (pág. 280) command economy [economía autoritaria] n. sistema económico en el que el gobierno toma todas las decisiones económicas (pág. 39) commodity money [dinero-mercancía] n. dinero que tiene un valor intrínsico basado en el material del que se compone (pág. 291) common stock [acciones ordinarias] n. participación en la propiedad de una sociedad anónima que da al titular derecho a voto y parte de las ganancias (pág. 331) communism [comunismo] n. sistema económico en el que no existe la propiedad privada y hay poca o ninguna libertad política (pág. 43) comparative advantage [ventaja comparativa] n. capacidad de un país para producir algo a un costo de oportunidad más bajo que el de otro país (pág. 513) competition [competencia] n. esfuerzo de dos o más personas que actúan independientemente por obtener clientes ofreciéndoles la mejor opción (pág. 49) competitive pricing [ﬁ jación de precios competitivos] n. situación en la que los productores venden bienes y servicios a precios que intentan el mejor equilibrio entre dos deseos: obtener las mayores ganancias y atraer a los clientes de los productores rivales (pág. 174) complements [complementarios] n. productos que se usan conjuntamente, de manera que el aumento

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