Fun.4.PPT.15 - Michael A Dalton | James F Dalton | Joseph M...

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Michael A. Dalton | James F. Dalton | Joseph M. Gillice | Thomas P. Langdon
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Fundamentals of Financial Planning © 2014 Money Education Chapter CHAPTER 15: ECONOMICS & THE EXTERNAL ENVIRONMENT
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Fundamentals of Financial Planning © 2014 Money Education Chapter EXTERNAL ENVIRONMENT Macroeconomics is the study of economic factors that are reflective of the entire economy such as gross domestic product (GDP), the unemployment rate, and the inflation rate. Microeconomics is the study of factors that impact small or individual economies, such as supply and demand for a product. 3 15
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Fundamentals of Financial Planning © 2014 Money Education Chapter ECONOMIC OUTPUT Gross National Product (GNP) measures the total final output by the citizens of a country, whether produced domestically or in a foreign country. Gross Domestic Product (GDP) represents the total final output of a country, by its citizens and foreigners in the country, over a period of time. A positive GDP is generally a sign that the economy is expanding, a negative GDP is a sign that the economy is contracting. 4 15
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Fundamentals of Financial Planning © 2014 Money Education Chapter GROSS DOMESTIC PRODUCT Nominal GDP measures the value of goods and services in current prices. Real GDP measures the value of goods and services at a base year price. The GDP deflator measures the current price of goods and services (nominal GDP) relative to a base year (real GDP). The formula for the GDP deflator is: GD Deflator = The GDP deflator could also be thought of as a measure of price increases or decreases. 5 15
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Fundamentals of Financial Planning © 2014 Money Education Chapter GROSS DOMESTIC PRODUCT 6 15 Source: Bureau of Economic Analysis
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Fundamentals of Financial Planning © 2014 Money Education Chapter INFLATION Inflation represents an increase in the general level of prices of goods and services. The biggest risks inflation presents are the loss of purchasing power. Inflation causes a decline in the real value of money. A primary cause of inflation is when the money supply increases faster than the growth in real GDP. Disinflation is a slowdown in the rate of inflation. Deflation is a decrease in overall price levels of goods and services. 7 15
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Fundamentals of Financial Planning © 2014 Money Education Chapter MEASURES OF INFLATION The Consumer Price Index (CPI) measures the overall price levels for a basket of goods and services. The CPI is the most widely quoted and relied upon measure of inflation. The Producer Price Index (PPI) measures the inflation rate for raw materials used in the manufacturing process. Inflation Rate = 8 15
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Fundamentals of Financial Planning © 2014 Money Education Chapter INTEREST RATES An interest rate is the price that a borrower pays to borrow money.
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