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The Importance of Economic Growth for Businesses and Individuals

Explore why economic growth is essential for businesses and individuals, including the role of natural resources, population growth, technology, and the business cycle. Learn about the impacts of inflation and the functions of money and banks.

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The Importance of Economic Growth for Businesses and Individuals

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  1. Unit 4 Section 1: slides 1 through 17

  2. Is Economic Growth Important? • YES!!! • EconomicGrowth: increase in the amount of goods and servicesproduced in a country. • American economy has grown • Businesses grown • Businesses improved • Jobs for people, earn $ • Spend $ for goods and services

  3. Business fails: • Lose money • Jobs lost • Spending ability negatively affected • SLOWS down economic growth

  4. Three Reasons for Economic Growth • LargeSupplyofNaturalResources • Land • Water • Oil • Trees

  5. SteadyIncreaseinPopulation - Provides workers - Demand for goods and services • Free Enterprise System - Provides a variety of jobs - “Be your own boss”

  6. Technology Has Also Helped Economic Growth • Technology: use of scientific knowledge, especially in industry and trade. • Cuts down on production costs • Better methods of growing crops • Better methods for feeding animals • Improves how products are made • Cars • Televisions • Appliances • Electronics

  7. GrossNationalProduct • Economic growth is measured annually (yearly) • GrossNationalProduct (GNP): Total $ value of all goods and services added up • Some products will sell better in some years, not in other years. • Businesses rely on GNP to know what to expect in the future

  8. Companies can tell what products are selling well • That knowledge helps businesses decide what and how much to produce in the future

  9. Uneven Growth of American Economy • Economicgrowth is essential for well-being of US • Today, people have morematerialgoods than their parents • Economy has improved for the good of most citizens • This growth did not take place at a steadyrate!

  10. Many economic ups and downs • 1920s following WWI = Rapidgrowth! • 1930s= Slowdown • Unemployment: being without a job • Peoplelostfaith in the bankingsystem • Afraid of losing their money, peoplerushedinto banksand tookoutall $they saved

  11. Banks did not have $ to give everyone • Many banksfailed • Large numbers of people lostlifesavings • GreatDepression–lasted until the 1940s • WWIIhelped the economy • The economydoesnotremainthe samefor very long!

  12. What is a Business Cycle? • Business Cycle: series of changes in the American economy • Usually goes from one period of prosperity (good times) to the next period of prosperity • Periods of prosperity most people have jobs, spendingis high businessessellalmost all they produce  businessesgrow • GNPgrowsduring prosperity

  13. Recession: gradual slowdownin business activity and consumer spending • Businesses not growing  harder to find jobs  less money for goods and services • Depression: Greaterslowdownin business activity and consumer spending • Poverty: Lack of money • 1930s, The Great Depression • Government tried to help poor by setting up soup kitchens and shelters for homeless people

  14. Recovery: Time when businesses start to improve • Employers able to offer jobs • People begin spending money • Economy improves • GNP begins to rise

  15. Why Do Business Cycles Take Place? • 1. Consumers can change their demands • Businesses rush to make the good or service • 2. Businesses may change willingness to grow and expand • 3. Changes in interestrates charged to borrow money • Growth of economy too fast = gvt raise interest rates = more difficult to borrow $ • Slow growth of economy = gvt lowers interest rates = encourages spending

  16. testmoz.com/1534758eco4

  17. The Problem of Inflation • Inflation: when pricesrisequickly, but incomes do not rise as quickly • Value of $ is decreased • Hurts those on fixedincomes (retirees—people no longer working, disabled) • Difficult to change • Gvt may try to control inflation with wage and price freezes • Only for short period of time • Does not always stop inflation

  18. What is Money? • Something given in exchange for goods or services • Currency: coins and paper money • Older forms of currency • Shells • Stones • Animal teeth • Spices • Tea • Salt

  19. Bartering: trading something that you have for something you want • Farmer needs lumber to build barn • Barters wheat for lumber

  20. Checks: an order to a bank to pay a certain amount of money to another person or place of business • Debit: Money is in an account and paiddirectlyfromaccount when used. • Both are: • Forms of currency • Used in place of money

  21. Creditcards: Shows businesses or banks that payment is able to be made at a future date • Some credit cards charge a fee when amount owed is not paid in full each month

  22. Functions of Money • Mediumofexchange: accepted by most people as payment for goods or services • Measureofvalue: Worth of goods can be measured • Car  $20,000 • Book  $20 • Chocolate  $2 • Storeofvalue: Save or store money to use in the future • PEOPLE LOVE MONEY! Easy to use

  23. What is the Function of Banks? • Keepsmoneysafe • Accepts deposits(put in) for safekeepingand convenience • Can be withdrawn(taken out) at any time • Demand deposits • Interest paid on savings accounts • Some banks pay interest on checking accounts

  24. Banksmake loans • IMPORTANT FUNCTION OF BANKS! • Banks lend money  charge interest (usually percentage of loan) and fees  borrower pays back original amount PLUS interest and fees • $100 borrowed at 10% for one year  $110 paid back

  25. Banks Must Earn Profits • Make profit by makingloans • Interest charged is profit for bank • Banks will checkbackground of loan applicant • If you are responsible, you will likely get a loan • If you are irresponsible (not pay your bills, late with payments, have too much credit), you will likely NOT get a loan

  26. When bank agrees to loan money, borrower signs a promissorynote (note promising to pay back the money) • Each month, person pays a certain amount to the bank until loanANDinterest is paid off • Helps YOU (get what you want to buy), helps bank (earn profit), helps economy (buying things!)

  27. Credit Unions vs. Banks

  28. The Federal Reserve System • In early times, Goldsmiths kept other people’s valuables in a safe place • Storedvaluablesand gaveslipsofpapersaying how much was stored • Slipsofpapercould be used as currency • Goldsmithswere the firstbankers

  29. Banking in US started in colonialtimes • Privatebanksformed and storedpeople’s money • Many banks failed • 1791, Congress founded nationalbankto help • It failed! • 1816, Congress founded a secondnationalbank • It failed! (lasted only about 20 years)

  30. So, why did the early banks fail? • Early banks issued papermoneyto showhowmuchof a valuablewas stored • Toomuchpaper money printed • Notbackedby goldor silver • Peopletried cashingin paper money, foundit was worthless • 1863, panic set it • Congress tried to fix things, did not help

  31. 1913 • FederalReserveSystemwas founded • Helped banking improve • Limitedamount of paper moneythat was printed • People’s depositsprotected • Federal Reserve System saved banking in the US

  32. What is the Federal Reserve System? • Centralbankingsystemin US • Often called “TheFed” • “Banker’s Bank” • 25 Federal Reserve banks in 12 districts throughout US • Federal Reserve banks dobusinesswithcommercial banksand financialinstitutionswithin own district • ALLNATIONALBANKSMUST BELONGTO FEDERALRESERVESYSTEM, but any other financial institution may join if they choose • Current chairman: Jerome H. Powell

  33. Federal Reserve System ControlsMoney • Offers 4 services: • 1. Banks can borrowmoney from them • 2. Keepsreserves of cash for banks to draw on • 3. Financialadvice and assistance offered • 4. Dividendspaid on stocks bought in district banks

  34. Federal Reserve System Controls Money Supply • Supplyof moneyimportantin free enterprise system • No$for loans= economywill notgrow/improve • Toomuch$ = valueof money goes down • Supplyof money is closely monitoredby FederalReserve • Each member bank MUST keep a certain amount of money on hand (reserve) • CANNOT be loaned out

  35. Amountin reserve can be raisedor loweredby FederalReserve • Controlsthe amount of moneyin circulation • Controlsamount of moneybeing used in businesses • Controlsamount of moneyused by individuals • Controlsinterestratesto bank • Highinterest rates = banks less likely to borrow = bank has less money to lend out = lowers money supply

  36. Bankmust keep%of money inreserve • This reservekepton depositwith FederalReservebank • testmoz.com/1566364 • 123

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