Chapter 27

Chapter 27 talks about using financial thinking to people's decisions in the financial market. The future value is the money in the future that would be produced today. Present value is the money available today that would be needed, using current interest rates, to produce a future amount of money. The equation X/(1+r)^N where "r" is the interest rate and "N" is the number of years that would amount to "X". Most people dislike uncertainty and are risk averse. To deal with that, in the economy, there's insurance, diversification, and risk-return trade off. Insurance suffers from problems that prevent their ability to spread risk. One problem is adverse selection, where a high risk person is more likely to desire insurance because they would benefit more from insurance protection than a low risk person. With diversification, risk can be reduced by placing a large number of small bets, rather than a small number of large bets. Even though diversification reduces the risk of holding stocks, it doesn't completely eliminate it. When people increase the percentage of their savings that they have invested in stocks, they increase the average return they can anticipate to earn. However, they also increase the risks they face, showing the trade off with risk and return. To determine the value of a company, the fundamental analysis is used. The value of an asset is determined by the efficient markets hypothesis, which implies that stock prices should follow a random walk. The efficient markets hypothesis is controversial because some economists believe that irrational psychological factors also impact asset prices and value. 

Chapter 26

Chapter 26 is about examining our financial system and its relationship with saving and investment. Financial markets are places where a person can provide money to some who needs to borrow it. Two financial markets are the bond market and the stock market. There are three characteristics of ds that are most important: a bond's term, its credit risk, and its tax treatment. In the stock market, equity finance is the sale of a stock to rise money. Debt finance is the sale of bonds. Financial intermediaries are institutions where savers can indirectly provide funds to borrowers. Two important financial intermediaries are banks and mutual funds  The interest rate in the economy adjusts its itself to balance the supply and demand for loanable funds. Saving is the source of supply, while investment is the source of demand. A closed economy is one that doesn't interact with other economies. Its equation is Y=C+I+G. This equation shows that GDP is the sum of consumption, investment, and government purchases. Imports and exports are zero because a closed economy isn't involved in trade. The interest rate in the economy adjusts to balance the supply and demand for loanable funds. Saving is the source of supply, meanwhile investment is the source of demand for loanable funds. The interest rate is the price of the loan. If a reform of tax laws encouraged greater saving, the result would be lower interest rates and greater investment. If a reform of tax laws encouraged more investment, the result would be higher interest rates and greater saving. A budget surplus increases the supply of loanable funds, reduces the interest rate, and encourages investment. I thought the section of this chapter on the history of the US government debt was interesting and informative.   

Chapter 24

Chapter 24 is about calculating the cost of living. The consumer price index (CPI) is used to observe changes in the cost of living over time. CPI is a measure of the overall cost of goods purchased  by an average consumer. The inflation rate is the percentage change in the prices from previous levels. The Bureau of Labor produces only reports on the consumer price index. These are the steps in calculating consumer price index: 1. Survey consumers to get a fixed basket of goods. 2. Find the rice of each good per year. 3. Compute the basket's cost. 4. Choose a base year and compute the index. 5. Compute the inflation rate. Three problems with the consumer price index are substitution bias, the introduction of new goods, and unmeasured quality change. The producer price index is a measure of how much an average producer pays for a good or service rather than a consumer. One difference between GDP deflator and CPI is that GDP deflator reflects all the prices of goods/services domestically produced, meanwhile CPI reflects the prices of goods/services bought by consumers. The second difference is that the CPI compares the price of a fixed basket of goods/services to the price of the basket in the base year. Meanwhile, the GDP deflator compares the price of currently produced goods/services to the price of the same goods/services in the base year. Real interest rate equals the nominal interest rate minus the inflation rate. The real interest rate tells you how fast the purchasing power of your bank account rises over time.

Chapter 23

Chapter 23 introduces GDP (gross domestic product). It's a part of macroeconomics, which studies the economy as a whole. Meanwhile, microeconomics, studies single firms and how they behave with one another. GDP is meant to judge a how well a country's economy is doing based on its total income earned as a nation. For an economy as a whole, income must equal expenditure. It's true because every expenditure has a buyer and a seller. The GDP's identity is denoted in the equation Y=C+I+G+NX. GPD(Y) is divided into four parts: consumption (C), investment (I), government purchases (G), and net exports (NX). Consumption is what households spend for goods and services. Investment is purchasing goods that'll be used later to make even more goods. Government purchases is what state, local, and federal governments spend on goods and services. Net exports is buying domestically produced goods from foreigners minus the domestic purchases of foreign goods. In short, it's the exports minus the imports. The GDP deflator is calculated from the ratio of the nominal to real GDP. The equation is GDP deflator= (Nominal GDP)/(Real GDP) * 100. The nominal GDP is the production of services and goods valued at current prices. The real GDP is the production of services and goods valued at constant prices. The goal in calculating GDP is to see how well the economy is performing overall. The gross domestic product seen as a good but not perfect measure of economic well-being. This is because GDP excludes the value of leisure, clean Earth, and volunteer work.