№8. Income and Spending.
Income is the money a person receives in exchange for work or property. There are five basic types of income:
1. Employee compensation is the income earned by working for others. It includes wages and fringe benefits such as health and accident insurance.
2. Proprietor compensation is the income that self-employed people earn.
3. Corporation profit is the income corporations have left after paying all the expenses.
4. Interest is the money received by people and corporations for depositing their money in savings account or lending it to others.
5. Rent is income from allowing others to use one's property temporarily.
The total income is the sum of 5 basic types.
One other type of income is a transfer payment - money one person or group gives to another, though the receiver has not provided a specific good or service. For example it can be gifts, inheritances, and aid to the poor are three examples of transfer payments.
Now lets speak about work people. By the type of work people do workers fall into one of four broad categories.
1. White collar workers are people who do jobs in offices, for example as secretaries, teachers, and insurance agents.
2. Blue collar workers are people who do jobs in factories or outdoors.
3. Service workers provide services to other individuals or businesses.
4. Farmworkers are people who work on their own farms or those of others.
In the market system a person's income is determined by how the market values that person's resources and skills.
People do a big mistake when they say that income is same as wealth. Wealth is any resource that can be used to produce income. An individual's possessions, such as a house, a car, or a stereo, are part of that person's wealth. Each of these could be sold to produce income.
Now if we want to understand it we have to consider two women who receive an income of $25,000 a year. One earns all of her income working at a bank. The other receives her $25,000 income from dividends on stock worth $250,000. The second woman is much wealthier than the first women.
At the end of my presentation I have to say that spending becomes income for someone else.
№9. Making a personal budget.
When you live in loneliness you understand that something should be done with your unlimited wants and limited resources. You should use your income as effectively as possible. Choices must be made concerning spending and saving. You never know whether you can afford another outing, or a disco, or a concert. Than you come to the conclusion that you must develop a useful personal budget. And if you want to do it you should keep track of your actual income and expenses for a month, and, of course, at first you have to clear out what should be recorded.
Money resources may include allowance, part-time jobs, babysitting, errands, interest on savings. You must list all sources of income. And it means that if somebody presented you with a sum of money on an account with a bank, so you can rely on interest on savings and allowance have to be included.
Than you should record how much you spend for food, entertainment, clothing, college supplies, personal care, transportation, and miscellaneous items. You wonder in which category you spend the most, the least. You think that you should decide what changes to make in the budget if you want to reduce your expenses.
You have to understand that there is some difference between fixed, optional and flexible expenses. Fixed expenses are set in advance and must be paid regularly (e.g. rent payments, tuition, higher purchase installments). Flexible expenses are necessary but change with circumstances (food, clothing, college supplies). Optional expenses vary and are not always necessary (entertainment, personal care).
Thus you can compare your income and expenses. And of course you understand if you want to live expenses should not be higher than income.
№10. The value of college education.
Every year millions of students graduate from high school. The decisions they make will affect the rest of their lives. Some will choose to go to college; some will want to get full-time jobs; others will decide to obtain technical job training. In every case, economic reasoning will help students make better choices.
Everybody decide to consider the costs and trade-offs connected with a decision to go to college. And the main questions in this situation: Is a college education worth the expense in terms of immediate and future personal growth and economic well-being?
The opportunity costs of going to college involve a loss of income and a loss of practical job experience while attending college. Lets consider two mans: The Education Level of the first one is less than 12 years and his Projected Lifetime Earnings is $850.000; The Education Level of the second one is 5 years college and his Projected Lifetime Earnings is $1.500.000. We see a big difference between them.
The trade-offs involved in going to college include using time and money now to gain greater advantages in the future. But somebody think that if you could invest $ 30.000 now, for instance, forego a college education, and with your investment returns still have the same lifetime earning power as acollege. It’s of course can be true bat where do you get $30.000 if you don’t have education. Besides nobody give you a job if you haven’t got education and knowledge. And I am sure that my further education is worth the time and money involved.
№ 14 Annual report of a company.
Just as teachers send out report cards to the Dean’s office each term, corporations issue annual reports summarizing the progress made last year. Stockholders and potential investors use the annual report to evaluate the performance of corporation.
The annual report is a message to the stockholders-the owners-of a corporation from the corporate management. The report tells the stockholders the company’s financial status at the end of the fiscal year and what the management sees for the future. Also, the annual report fulfils a legal requirement. The Securities and Exchange Commission a federal agency in the USA requires corporations to publish financial information about their firm. With such information, investors can make educated decisions.
Annual reports of company generally are divided into two sections. The first section contains a letter to the stockholders from the chief executive officer of a company. Accompanying this letter summarising the company’s performance is a chart of financial highlights. Also frequently included in the first section is an overview of the company’s organization. The second section includes statistics on the company’s performance. Most of the information appears in charts and graphs.
For example, the balance sheet is a chart that includes the assets (items of value the company owns) and it’s liabilities (debts or claims against the assets of the company). The balance sheet represents the financial picture of the firm at the instant in time. The income statement shows the profit or loss of the company for the year. This chart reports the income the company received from sales, interest, and other sources. The operating costs – salaries, advertising, maintenance – deducted from income total the profit or loss. The statement of stockholders’ investment, or equity includes information on the company’s stock such as number of shares outstanding and issued.
Various parts of the annual report can be used to determine whether a company is profitable. In addition to reporting on this current year, most companies include in their annual reports comparisons of the current year and the prior year’s financial information. Also important to stockholders and investors is the company’s return on sales. For example, if a firm sold $1 mln. worth of its products and its profit was $100,000; return on sales would be 10%.
So we can say that annual reports help us to understand financial status of the firm in the end of the fiscal year and to make educated decisions- invest in company our capital or not.
№15. Money: history, functions and forms.
Today we buy bread, clothes with money in a shop. These are goods: we exchange our money for goods which others sell to us. Today we travel on a train or bus. or maintain a banking account, and we pay the charge or fee. These are services: we exchange our money for the services which others provide for us.
In a primitive community people obtain goods and services by barter. Trade by barter is the earliest form of trade, when people offer goods in exchange for what they want, that is they swap goods for other goods.
As primitive communities develop into more advanced societies people realize they need some commodity they can use in exchange for anything, some commodity that does not decay and remains valuable, some commodity with the help of which people can measure the value of one thing against the value of another thing. Such commodity is money. Thus money is a necessary part of any civilized society, ft serves as:(1) medium of exchange; (2) a store of wealth; (3) a measure of value.
Money means coins, banknotes and cash in the bank account. We use it to make payments. Nowadays we know that the units of money must have certain qualities to be successful. They must be:
1. Standard.They must all be of the same kind.
2. Durable. They must be strong and long-lasting, so that they are a store of value and do not wear out easily.
3. Scarce. They must be difficult to come by to keep their value.
4. Acceptable. They must be accepted as a medium of exchange in a.
5. Portable. They must be easy to carry.
6. Divisible. It must be possible to divide the units of money of large value into smaller values.
In the past many things were used as the medium of exchange — corn, furs, rice, tobacco, salt tea, rum — there is no end to them. In time people realized that metals were superior to the commodities previously mentioned.
The Ancient Britons and Greek used iron, the Romans used copper but gradually silver and gold replaced them.
The advent of coinage is a step forward because coins are free from most of the disadvantages of earlier forms of money. The first coins are credited to China around about 1.000. B.C.
After coins came notes. The hardest problem for anyone with money then was to find somewhere safe to keep it. Gold and silversmiths had safes, because their trade was traffic in coin and bullion, and they needed somewhere secure to keep their stocks.
So it came about in the seventeenth century that goldsmiths took theses deposits for safe keeping. They issued a receipt. More and more people come to hold these receipts and they began to circulate for value among merchants. They come to be trusted and become usual in payment, as easier, lighter and quicker to handle than a lot of coin.
In the beginning people had to pay a fee for having money kept safe. Then goldsmith understood that some of his receipts were always out, circulating in the hands of the merchants. So the goldsmith always had some cash in hand, and he started to lend this out. This was the beginning of banks.
№16. The Bank of England.
c) keeps accounts for overseas central banks
The first and most important function of a central bank is to advise the government on the making of the country's financial policy and then help to carry it out which means carefully monitoring the money supply. Its business at first was to receive money on deposit, discount approved bills of exchange and lend against satisfactory security. At first this lending was nearly all to the government, and gradually the Bank came to perform other services on behalf of the government, and so to become regarded as 'banker to the government'.
Then The Bank of England was empowered to open country branches.
From the time of its foundation the Bank had strong links with the government and these strengthened over the centuries until in 1946 it was nationalised and became publicly owned.
The Bank of England is controlled by a Court of Directors — similar to a board of directors running a large public company — made up of the Governor, the Deputy Governor and sixteen directors. They are all appointed by the Crown.
As the central bank of the United Kingdom, the Bank of England:
— Implements the monetary policy of the government. It decides what percentage of bank deposits is held as cash, and what percentage may be lent.
— Acts as banker to the government. It administers exchange control and keeps the nation's gold and foreign currency reserves. The Bank keeps the government's banking accounts, manages the accounts and funds of various governmental departments.
— Acts as banker to the deposit banks. It keeps the accounts of other banks.
— Acts as lender of last resort to the discount houses.
Has about 90 accounts for overseas central banks.
№19. Types of bank services.
Banks are among the most important financial institutions in the economy that produce and sell financial services. Banking covers so many services that it is difficult to define it. Both types of banking, however, have three essential functions. They are:
Deposit function—receiving customers deposits and offering interest-bearing deposits.
Payments function — making payments on behalf of customers for their purchases of goods and services.
Credit function—tending and investing money. There are some traditional services that banks offer.
Carrying out currency exchange. In today's financial marketplace trading in foreign currency is usually carried out by the largest banks due to currency risk and the expertise needed to carry out cash transactions.
Safekeeping of valuables. During the Middle Ages, banks began the practice of holding gold, securities, and other valuables owned by their customers in secure vaults. Customers still leave articles of value, locked boxes, wills, and many other things in bank strong rooms for safety. The customer should lock boxes and seal parcels before he hands them in to the bank. The banker will issue a receipt if so required. The banker hands them back only against a signature by his customer or a properly-appointed agent whom the bank knows.
Trust services. This property management function is known as trust services. Most banks offer both personal trust services to individuals and families and commercial trust services to corporations and other businesses.
Among the newest services offered by banks are:
Financial Advising—customers have long asked for financial advice, particularly, when it comes to the use of credit and the saving and investing of funds.
Cash Management—over the years banks have found that some of the services they provide for themselves are also valuable for their customers.
Setting Insurance Policies—most banks either offer selected insurance policies to their customers or have plans to offer insurance services in die near future.
Offering Security Brokerage Services—in today's financial marketplace many banks are doing their best to become true "financial department stores”. This is one of the main reasons banks began to market security brokerage services in the 1980s, offering their customers the opportunity to buy stocks, bonds, and other securities without security dealers or brokers.
It should be clear from the list of services described that the changes affecting the banking business today are so important that many industry analysts refer to current trends as "a banking revolution".
№17. Banking in the US.
Banking services were associated with the Gold Rush. The first gold strike occurred in California in 1848. In the wake came the problems of carrying mail and gold dust over hundreds of miles. A concern called Adams and Company opened its office in San Francisco in 1849. The express company received the miner's gold for the pose of shipment. It weighed the gold, gave a receipt for it and assumed responsibility for its safety. Thus the express company’s iron safe became the local bank. About this time in Sacramento a group also opened a bank. There were three clerks, all armed with Colt revolvers and knives, and the banking hours were from six in the evening until ten at night. It was in 1852 that Wells Fargo andCompany was born. In the July of that year two of its senior men arrived in California, one to be responsible for the express service the other for the banking. The company forwarded packages, parcels and freights of ail descriptions between New York and San Francisco, purchased and sold gold dust, bullion and bills of exchange. It also attended to the payment and collection of notes, bills and accounts.
It was very different from the goldsmiths and their notes. And yet the basic functions of providing security, accepting deposits, paying and collecting bills, were exactly the same. All that has happened since has been only a development of these basic functions.
At present the Federal Reserve System is the core of the country's financial institutions, payment processes, markets and instruments. The system has four basic functions: