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Inflation is an increase in the general price level of goods and services over time.     The U.S. Bureau of Labor Statistics calculates and tracks inflation yearly by the Consumer Price Index (CPI).  The CPI is calculated by tracking the average price changes in relation to prices in a selected base year. CPI is a reliable estimate of inflation.

Inflation is caused when too much money is available for people to buy and there are too few goods and services to buy.  Guess what happens in that case? Prices of goods and services will go up. In other words, goods and services will cost more. Inflation also reduces the value of money. For example, even if the salary of people goes up, they are not able to buy more goods and services (because the prices of these goods and services have gone up too!). With inflation, a dollar buys less and less over time.

Suppose you get $10 a week for doing chores around the house. You use this money to buy a ticket to watch the ball game for $6, a hotdog for $2, and a drink for $2. Over time, however, the ticket price of the ball game and food items rises. Now you can buy a ball game ticket for $7, and either a hotdog or a drink for $3. In this example, inflation caused the prices to rise and therefore, reduced the buying power of your $10. Perhaps you need to ask for a raise.

Bad loan problem spreads and markets take a roller-coaster ride.

This week S&P500, the Dow Jones Index and NASDAQ took a roller-coaster ride. In the beginning of the week, markets were up but the news of the spreading bad loans problem caused the markets to drop. In the end markets managed to stay up.  S&P500 gained 21 points, Dow gained 56 points and NASDAQ gained 20 points for the week ending August 10th, 2007.    

Experts claim that the bad housing loans problem has spread to a larger group of banks.  Last week, Bear Sterns, a major bank, announced that it is having trouble with its loans to the homeowners and could lose over $1 billion.  There are other banks that are also having trouble with their loans.  Goldman Sachs, one of the most elite banks, has over a $4 billion loan problem.  A major French bank BNP Paribas has over $2 billion loan problem.   

The loan problem has caused banks to issue fewer loans to people now.  When banks issue fewer loans, experts also call it “credit tightening.”  This news caused a scare in the financial markets, sparking fears that tighter credit will have a bigger impact on consumers, markets and the economy.  Credit tightening fears were so severe that major government banks had to get involved to soothe worried investors.  So what did the government banks do to calm the investors?  Government banks of the US, Europe and added over $290 billion into the market to increase the money supply, also called “money liquidity,” to meet the money demand. 

Suppose, one day you are out of cookies that you enjoyed with your milk before going to bed every night.  You get worried and get hungry for cookies.  Your mom adds freshly baked cookies to the jar to assure you and to calm your hunger down.  In the markets, credit tightening caused the money supply (cookies in the jar) to decrease and government banks (your mom) added more money (cookies) into the market (the cookie jar). For now, the government banks’ involvement has helped the investors and the market. Let us see what happens next week.

What is Currency? Currency is money (Coins and/or paper) that is used as a medium to exchange or trade. The money is issued by the government of a country through its central or federal bank for use as a legal tender/agreement for the trade. Countries have their currencies. For example, the currency of the US is the US dollar ($), for Britain, it is called British Pounds(£), the Japanese currency is called Yen(¥), Canadian currency is Canadian Dollar, the Chinese currency is Yuan and the Indian Currency is Indian Rupees. Many European countries recently decided to use a common currency, called Euros(€). Euros are used in Italy, Germany, Spain, France, Netherlands, and Belgium, amongst others.   When you travel to a foreign country, you will need the currency of that country.   So if you go to Japan, you will have to use their currency, Yen, to buy things. How will you get Yens? Well, you will “exchange” your money in US currency, i.e., US dollars, into Japanese Yen. How many Yen will you get for each US dollar? To answer this question and more, we need to learn about foreign exchange rates. We will discuss it in the coming weeks.

What is the Economy?  The word economy means everything related to the production and use of goods and services in an area. On a daily basis we buy many things (products) that come from many businesses, such as, food, drinks, toys, cars, etc.  When we buy or not buy such products it affects businesses, the economy and all of us.

What is a Stock? A stock is a share of a business.  So when you buy a stock of a company, say, McDonald’s, you become a McDonald’s shareholder or part owner of the business.

What is DOW? The Dow (also known as DJIA or Dow Jones Industrial Average) tracks 30 large US company’s stocks and it is 100 years old. DOW going up is good news as it indicates that the companies are expected to do well in the future.

What is S&P500? Standard & Poor’s 500, is also called S&P500. It tracks 500 companies and how they are doing.  It is over 50 years old and is most widely used because it is a better way to track the stock market.  It represents over 7 out of 10 US public companies.

What is NASDAQ? NASDAQ stands for National Association of Securities Dealers Automated Quotations System.  It sounds complicated but it is a highly computerized stock market.   It was started in 1971.  It has over 3,200 companies that are leaders in technology, communication, media etc.

What is a Business? The Business offers goods and services to customers for money.  Businesses create jobs for people who work to make goods and or provide services for others who need them.  

Who are the Workers? The people who work at the businesses are also called workers.  Workers are paid money which they use to take care of their loved ones.  When these workers are paid money they pay some money to the governments, called taxes, so that the government can provide the services to the communities where we live such as schools, police, fire stations, parks, roads, and many more. 

What are Goods? Goods are things that you can see, such as toys, balls, dolls, candies, cereals, etc.

What are Services? Services are things that are done for others for money, such as, a barber giving you service of hair cutting, a waiter serves you food at a restaurant, etc.