Chapter 27

Chapter 27 focuses on finance and the decisions that influence a person's choice on investments and savings. When a person is deciding where to invest or save, that person must consider both the present value and future value that the asset will have, along with how often it is compounded. these three factors are crucial to determining if the investment is a good one. The process of finding  a present value of a future amount of money is known as discounting. When making investments, people tend to avoid taking risks, otherwise known as risk aversion. Utility, a person's subjective measure of well-being changes based on the amount of wealth a person has. However, as the person has more and more money, they receive less utility per dollar. This concept is known as diminishing marginal utility. The utility function on the graph gets flatter the more wealth the person has. It is the shape of the function that shows diminishing marginal utility in action. In order to reduce risk, one tactic a person can use is diversification. This goes by the theory that having multiple smaller and unrelated risks will pose as a less over all risk. In other words, "don't put all your eggs in one basket." Some risks only affect firms. These are known as firm specific risks. While market risks affect all the companies in a stock market. Efficient market hypothesis is the theory that asset prices show information about the value of the asset. Informal efficiency is the description of an assets price that show all available information.

Chapter 26

Chapter 26 shifts from big monetary concepts such as GDP and CPI, to discussing the financial system. A group of institutions makes up the financial system, in which they match savings with investments. These institutions can be divided into financial markets and financial intermediaries. Financial markets provide a way for savers and investors to give money to borrowers. These financial markets can further be divided into bond and stock markets. A bond is a type of investment in which a person loans money to a company that will be paid back over time with interest. The safest of these bonds are government bonds as they are virtually guaranteed to be paid back in full. The two important factors when considering purchasing bonds is the term, or length of time until the bond is fully matured, and the credit risk, which is the chance that the borrower will not be able to pay in full. The other financial market are stocks. Stocks are an investment in a company that means the buyer has part ownership in that company. When a bond is sold, it is called equity finance, however when a bond is sold its called debt finance. A stock index is the average of a group of stock prices. Financial intermediaries are institutions that  savers use to indirectly give money to borrowers. This position that financial intermediaries holds reflects the fact that they are called intermediaries. Finally, a mutual fund is an investment in which the money invested is dispersed among a multitude of companies through stock and bonds.

Chapter 24

Chapter 24 transitions from gross domestic product to consumer price index, also known as CPI. Consumer price index is the measure of the prices that the average consumer in a country spends on services and goods. In order to calculate consumer price index, one must know the fixed goods that the average consumer purchases within a certain time frame. After accounting for inflation, the price of the good is calculated. The bureau of labor statistics calculates it with a rather similar procedure to that of the gross domestic product deflator. This is because that both gross domestic product and consumer price index are calculated based on previous years. However, they calculate the difference differently than one another. Similar to gross domestic product, the consumer price index is not one hundred percent accurate. People who are better off will throw off this average, while people who are not well off will do the same. This can alter the appearance of how wealth is spread throughout the country's society.  The consumer price index also does not take account of new goods, changes in tastes, and changes in prices that could change the quantity demanded of the goods.  The chapter also discussed the change in price index of a country. Although, the consumer price index does not account for inflation or slight changes that are ignored.

Chapter 23

Chapter 23 transitions from micro to macro economics. Macroeconomics is the study of bigger, more economy wide issues such as inflation and unemployment. The chapter also introduces the concept of gross domestic product, or GDP. Gross domestic product measures the total income for a country and is the best single statistic in determining that nation's well-being. The exact definition for gross domestic product is the "market value of all final goods and services produced within a country in a given period of time". For the country to be successful, income must at least equal expenditure. Gross domestic product only includes final goods, not intermediate goods. Intermediate goods are like the materials or resources to make a product, while the final product is the final good. Gross domestic product is also split into 4 different components. Consumption is the spending by households on all things except buying a home. Investment is the money spent on capital, including housing. Government purchases are the expenditures on goods and services on all levels of government. Net exports is exports minus the expenditure on imports. There are two types of gross domestic product, nominal GDP and real GDP. Nominal GDP are the goods that have fluctuating prices while real GDP goods have constant prices. The GDP deflator is the measure of price that is the ratio of nominal over real multiplied by one hundred.