Econ 101

You’ve seen the headlines: “The Fed to Raise Interest Rates!,” “Investors Bullish on Stock Market,” “Will the U.S. Default on the National Debt?,” “Inflation Rises as Consumer Spending Dips.” These days, it seems like the economy is almost always in the news—but what does it all really mean?

The U.S. boasts the largest economy in the world. What makes it run is a complex system made up of several parts that work together to create jobs and provide people with goods and services.

To help you follow the headlines, here’s a breakdown of the key players in the U.S. economy and how they influence one another: big companies, small businesses, the stock market, the Federal Reserve, the U.S. government, workers, and consumers just like you.

You’ve seen the headlines: “The Fed to Raise Interest Rates!” “Investors Bullish on Stock Market.” “Will the U.S. Default on the National Debt?” “Inflation Rises as Consumer Spending Dips.” These days, it seems like the economy is almost always in the news. But what does it all really mean?

The U.S. boasts the largest economy in the world. What makes it run is a complex system made up of several parts that work together to create jobs and provide people with goods and services.

To help you follow the headlines, here’s a breakdown of the key players in the U.S. economy and how they influence one another: big companies, small businesses, the stock market, the Federal Reserve, the U.S. government, workers, and consumers just like you.

The U.S. economy, at street level, is made up of small businesses and big companies. Small businesses are run by entrepreneurs who hire anywhere from a few workers to hundreds. They have long been a source of millions of jobs around the country. Small businesses depend on consumers to spend enough money to earn a profit after paying their employees and suppliers. They often don’t have a lot of extra capital, or cash on hand, to weather major slowdowns in the economy. During the pandemic, for example, many small businesses suffered—or closed entirely.

The U.S. economy is made up of small businesses and big companies. Small businesses are run by entrepreneurs who hire anywhere from a few workers to hundreds. They have long been a source of millions of jobs around the country. Small businesses depend on consumers to spend enough money. They earn a profit after paying their employees and suppliers. They often don’t have a lot of extra capital, or cash on hand. This makes it difficult for them to weather major slowdowns in the economy. During the pandemic, for example, many small businesses suffered. Some closed entirely.

Big companies, also called corporations, usually have more money to spend and can have a bigger influence on the overall economy. The largest ones often issue stock and are followed by stock market investors. Not only do big companies employ a lot of people and produce a lot of things, but they can also push up or pull down prices since, in many cases, they don’t have the same competition that a local bookstore or café has.

Big companies, also called corporations, usually have more money to spend. They can have a bigger influence on the overall economy. The largest ones often issue stock and are followed by stock market investors. Big companies employ a lot of people and produce a lot of things. They can also push up or pull down prices since they don’t have the same competition that a local bookstore or café has.

“In our economy, big companies play a pretty big role,” says David Wessel, an economist at the Brookings Institution, a public policy think tank. “More and more industries are dominated by a small number of [larger] companies.”

But remember: Some of the largest and most influential companies, such as Apple, Google, and Meta, started out as small businesses. That’s one of the most dynamic aspects of the U.S. economic system, which encourages investment and innovation.

“In our economy, big companies play a pretty big role,” says David Wessel, an economist at the Brookings Institution, a public policy think tank. “More and more industries are dominated by a small number of [larger] companies.”

Remember that some of the largest and most influential companies, such as Apple, Google, and Meta, started out as small businesses. The U.S. economic system encourages investment and innovation.

Stocks are shares, or pieces, of a company that anyone can buy. When you buy stock, you become a shareholder and own a sliver of that business. If the company does well, its stock prices can rise and the value of your shares may increase. If the company does poorly, the shares may become less valuable, and you could lose money.

There are several major American stock exchanges, or markets where stocks are bought and sold. But the largest is the New York Stock Exchange on Wall Street in New York City.

Stocks are shares, or pieces, of a company that anyone can buy. When you buy stock, you become a shareholder and own a part of that business. If the company does well, its stock prices can rise. The value of your shares may increase. If the company does poorly, the shares may become less valuable. Then you could lose money.

There are several major American stock exchanges. These are markets where stocks are bought and sold. But the largest is the New York Stock Exchange on Wall Street in New York City.

You’ve probably heard about bear and bull markets. A bear market is a period in which stock prices are generally heading down—usually when investors are feeling pessimistic about the economy. During a bull market, stock prices are rising, and investors feel optimistic about the economy. Why bulls and bears? No one knows for sure. One theory says the terms come from the way each animal attacks—bears swiping their paws down, bulls thrusting their horns upward.

You’ve probably heard about bear and bull markets. A bear market is a period in which stock prices are generally heading down. This usually happens when investors are feeling pessimistic about the economy. During a bull market, stock prices are rising. Investors feel optimistic about the economy. Why bulls and bears? No one knows for sure. One theory says the terms come from the way each animal attacks. Bears swipe their paws down, and bulls thrust their horns upward.

People watch the stock market closely. How well or poorly it’s doing affects whether people want to invest and influences Congress’s economic decisions. People turn to the stock market as a leading indicator of where the economy is headed, says University of Pennsylvania economics professor Itay Goldstein.

“The stock market gives you information about the economy as a whole,” Goldstein says. “It gives you a sense of how well the economy is doing.”

People watch the stock market closely. How well or poorly it’s doing affects whether people want to invest. It influences Congress’s economic decisions. People turn to the stock market as a leading indicator of where the economy is headed, says University of Pennsylvania economics professor Itay Goldstein.

“The stock market gives you information about the economy as a whole,” Goldstein says. “It gives you a sense of how well the economy is doing.”

The Federal Reserve, also known as the Fed, was created in 1913 by Congress. It functions as the central bank of the U.S., meaning it regulates the banks that you and your parents do business with. It also works to protect the U.S. from financial crisis by lending failing banks money, as it did after the collapse earlier this year of Silicon Valley Bank.

One of the Fed’s most important roles is controlling the flow of money into
the economy. It does this by changing interest rates. Interest is the price you or a business pays to borrow money.

If the economy is doing poorly—if it’s not growing enough, or unemployment is too high—the Fed might lower interest rates so that people and businesses borrow and spend more. This helps get the economy moving and creates new jobs. On the other hand, if the economy is booming and inflation becomes an issue, the Fed might raise interest rates, which discourages borrowing and slows the economy down.

“The job of the Fed,” Wessel says, “is to equilibrate supply and demand so we have as many people working as possible and relatively stable prices.”

The Federal Reserve, also known as the Fed, was created in 1913 by Congress. It functions as the central bank of the U.S. It regulates the banks that you and your parents do business with. It also works to protect the U.S. from financial crisis by lending failing banks money. It did this after the collapse earlier this year of Silicon Valley Bank.

One of the Fed’s most important roles is controlling the flow of money into the economy. It does this by changing interest rates. Interest is the price you or a business pays to borrow money.

If the economy is doing poorly—if it’s not growing enough, or unemployment is too high—the Fed might lower interest rates. When rates are low, people and businesses borrow and spend more. This helps get the economy moving. It creates new jobs. On the other hand, if the economy is booming and inflation becomes an issue, the Fed might raise interest rates. This discourages borrowing and slows the economy down.

“The job of the Fed,” Wessel says, “is to equilibrate supply and demand so we have as many people working as possible and relatively stable prices.”

Every year, Congress passes a budget, deciding how much the federal government will spend on goods, programs, and services. The president usually gets the process started by submitting an annual budget proposal to Congress. The president also can submit stimulus packages aimed at improving the economy, but they’re subject to congressional approval. Many businesses rely on government spending, which puts more money into the economy and encourages consumers to spend more on things.

The United States government spent a whopping $6.3 trillion in 2022. This was more than the $4.9 trillion the government collected in revenue, which it gets from taxes on individuals and businesses. When the government spends more than it collects, it’s called a deficit. The government borrows from the public and from other nations,* but the accumulation of deficits year after year creates the national debt. Each year, one of the biggest national expenses is the interest payment on our national debt.

Last year, the U.S. paid $475 billion in interest, the highest dollar amount in recorded history. Many are concerned that if the debt isn’t reduced, the U.S. might one day “default on the debt,” or fail to make its payments.

Every year, Congress passes a budget. Lawmakers decide how much the federal government will spend on goods, programs, and services. The president usually gets the process started by submitting an annual budget proposal to Congress. The president also can submit stimulus packages aimed at improving the economy. They’re subject to congressional approval. Many businesses rely on government spending. It puts more money into the economy and encourages consumers to spend more on things.

The United States government spent a whopping $6.3 trillion in 2022. This was more than the $4.9 trillion the government collected in revenue, which it gets from taxes on individuals and businesses. When the government spends more than it collects, it’s called a deficit. The government borrows from the public and from other nations. The accumulation of deficits year after year creates the national debt. Each year, one of the biggest national expenses is the interest payment on our national debt.

Last year, the U.S. paid $475 billion in interest. It was the highest dollar amount in recorded history. Many are concerned that if the debt isn’t reduced, the U.S. might one day “default on the debt,” or fail to make its payments.

^{*The U.S. government does this by issuing treasury bonds that people or institutions, including foreign governments, buy.}

^{*The U.S. government does this by issuing treasury bonds that people or institutions, including foreign governments, buy.}

Workers and consumers are the fuel that makes our economic engine run. A company’s success hinges on its workers, who create the goods and services it sells to make money. When the labor market tightens, workers may demand and receive higher wages. This raises costs for companies, which in turn might pass those costs on to consumers, sometimes leading to a period of inflation, or rising prices.

When workers make money, they’re able to spend it as consumers. According to Financial Times editor Colby Smith, consumer spending accounts for about 70 percent of the U.S. economy.

“The consumer is the be-all and end-all when thinking about the health of the economy,” Smith says.

Workers and consumers are the fuel that makes our economic engine run. A company’s success hinges on its workers, who create the goods and services it sells to make money. When the labor market tightens, workers may demand and receive higher wages. This raises costs for companies. The companies might pass those costs on to consumers. This can sometimes lead to a period of inflation, or rising prices.

When workers make money, they’re able to spend it as consumers. According to Financial Times editor Colby Smith, consumer spending accounts for about 70 percent of the U.S. economy.

“The consumer is the be-all and end-all when thinking about the health of the economy,” Smith says.

Teens are a big part of that equation. In the U.S., teens spend an estimated $63 billion annually, according to a survey conducted by the financial company Piper Sandler. Of that, teens spend 22 percent on clothes, with many preferring to shop at small specialty stores over major chains.

“For a lot of companies, the teen is a trendsetting customer,” says Piper Sandler managing director Edward Yruma, who worked on the teen spending survey. “They’re the consumers of the future.” 

Teens are a big part of that equation. In the U.S., teens spend an estimated $63 billion annually, according to a survey conducted by the financial company Piper Sandler. Of that, teens spend 22 percent on clothes, with many preferring to shop at small specialty stores over major chains.

“For a lot of companies, the teen is a trendsetting customer,” says Piper Sandler managing director Edward Yruma, who worked on the teen spending survey. “They’re the consumers of the future.”