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Econ 301 Money and Banking Weekly Detailed Course Outline

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Econ 301 Money and Banking Weekly Detailed Course Outline Powered By Docstoc
					Welcome to
PMBA0608:
Economics/Statistics
Foundation




Fall 2006
      Session11: November 8
              Chillicothe

                              1
Discuss Assignment 5
 To learn how to create binomial distribution using
  Excel, check slides 28-31 of last class.
 Collaboration on an assignment is not the same as
  cut and paste.
   Academic dishonesty such as cheating on exams
     or submitting some one else’s work as your
     own (plagiarism) will not be tolerated in this
     class. These types of activities will result in
     penalties ranging from receiving a failing grade
     on one assignment or exam to failing this course
     or even expulsion from the University.


                                                    2
 Discuss Assignment 5: 4.5, Page 141 of
    Stat. (Do it using Excel. Show your
    work and the graph)

 For x = 0,1,2 … 5,6 where n = 6 and p = 0.1


   X     p(x)
   0    0.531441
   1    0.354294
   2    0.098415
   3     0.01458
   4    0.001215
   5     5.4E-05
   6    0.000001   Note: 5.4E-05 = 5.4 x 10 -5 or 5.4/100000 or
                                    0.000054
                                                            3
4.5, Page 141 of Stat. (Do it using
Excel. Show your work and the graph)
 For x = 0,1,2 … 5,6 where n = 6 and p =0.5

    X     p(x)

    0    0.015625
    1     0.09375

    2    0.234375
    3      0.3125

    4    0.234375
    5     0.09375

    6    0.015625


                                          4
4.5, Page 141 of Stat. (Do it using
Excel. Show your work and the graph)

 For x = 0,1,2 … 5,6 where n = 6 and p = 0.9

   x     p(x)
   0      1E-06

   1     5.4E-05

   2    0.001215

   3     0.01458

   4    0.098415

   5    0.354294

   6    0.531441
                                                5
4.5, Page 141 of Stat. (Do it using
Excel. Show your work and the graph)
 p is the probability of success in each trial.
 The graph of probability distribution shows
  the probability of having x number of
  success in n trials.
 The lower the probability of success in each
  trial (p), the lower the probability of having
  a large number of successes (x) in n trials
 This means that in your graph of probability
  distribution, you will find that small xs have
  a higher probability than large xs.

                                               6
4.11,Page 141 of Stat.
 Note: Tables on Pages 602-608
   Gives you cumulative probabilities for less than or
     equal to
 p(x<5) for n=10, p=.4
   0.834
 p(x<3) for n=5, p=.6
   p (x ≤2) = 0.317
 p(x<17) for n=20, p=.7
   0.965
 p(x>17) for n=20, p=.7
   1 - .965 = .035
 p(x<6) for n=15, p=.4
   p(x ≤5)= .403


                                                          7
4.17, Page 142 of Stat. (Do this one
   manually using the binomial
   formula. Show your work.)
 n = 4, p= 0.6
                                     n!      x ( n x)
a) p (4)=0.1296         p ( x)             p q
                                 x!(n  x)!
b) p (x≥1)= p (1) +
   p(2) + p(3) + p(4)
    p (x≥1)= 0.9744

c) p(1) = 0.1536
                                                  8
Problem 2, Page 132 of Econ
a) Surplus
b) TR (before floor)     P

   P1 x Q1                                          S

  TR (after floor)      Pf
                                  Surplus
                                                 Floor
   Pf x Q2
   If demand is elastic
                       P1
     TR falls
c) Now TR
     Pf x Q3
                                                 D
     Farmers win
     Tax payers lose        Q2     Q1      Q3
                                                     Q
     Consumers lose
                                                     9
  Problem 4, Page 133 of Econ
  (maximum of 4 bonus points)
 Tax of $2 per
  case is collected                P

  from consumers                                             S1

     D drops by $2
     Equilibrium       P paid = 11
      price drops to              10
      $9 (price        P received = 9
      received by                                 $2
      suppliers)
     Equilibrium Q                                    D2   D1
      drops to Q2
                                        Q2   Q1
     Consumers pay                                          Q
      $11
                                                            10
Next Class
 Wednesday, November 29, 19:30-
  21:00
   I will try to be in Ironton
   Chapter 4 of Stat




                                   11
Assignment 6
Due on or before November 25
1.   # 1, Page 526 of Econ.
2.   #4, Page 526 of Econ.
3.   #5, Page 526 of Econ.
4.   #10, Page 527 of Econ.




                               12
    Econ Chapter 6
    Excise Tax: Cigarettes
                                                                                    S2
   Free market:
                                          price
       P = $4.00                                                                    S1
       Q = 27.4             buyer pays
           TE = $110
                                           4.40
                                           4.00    Tax                     t = $1
   Gov’t imposes tax =                            Revenue
    $1/pack (collected from                3.40
    suppliers)
                                    seller keeps
                                                                                         D1
   Supply shifts upward by $1
       Price rises (by less than                                   27.4                 cigarettes
                                                             25.8
        $1)
       Quantity falls
   Economic burden of tax is
    split between buyers and
    sellers
                                                                                          13
Practice
1. What if demand was very elastic?
2. What if supply was very elastic?




                                      14
Econ Chapter 23
So far everything we did was
  microeconomics
This chapter is on the big
 picture
  MACROECONOMICS


                                15
How do we measure output?
 A nation’s output is measured by its
  real GDP.
 What is GDP?
 The value of all final goods and
  services produced domestically in
  an economy (country) in terms of
  current market prices in a given
  period.

                                         16
What are final goods?
 Final goods can be purchased by
  households (consumption goods) or
  firms (capital goods)
 What are intermediate goods?
   An intermediate good is used up in
    production of a final good
 Why is the value of intermediate
  goods excluded from GDP?

                                         17
Is this included in GDP?
 A desk bought by Jackie for her home
   Yes, consumption good
 A desk bought by OU for Jackie’s office.
   Yes, capital good
 A gallon of milk purchased by Jackie
   Yes, consumption good
 A gallon of milk purchased by a coffee shop
   No, intermediate good.



                                             18
GDP measures the value of
production

Not necessarily the same
 as the value of sales
Why?
This year we may sell
 more or less than this
 year’s production.
                            19
GDP measures domestic
production
 Not everything that is produced by
  Americans is produced inside USA
 How so?
 It is domestic production that creates
  employment in our country.




                                       20
GDP measures the market value of
production
 It only includes goods and services
  offered in the official and legal
  markets.
 Are there other goods and services?




                                        21
GDP measures value of goods and
services in terms of current prices
 This year’s GDP in terms of this year’s
  prices
 This is actually called nominal GDP.




                                       22
Theoretical calculation of GDP
Suppose in year 2006
 We produce n goods
 Pi = price of good i
 Qi = quantity of good i
 Then nominal GDP2006=           Σ Pi, 06 Qi, 06
    (where i takes a value of 1 through n)



                                                    23
What is real GDP in 2006?
 Choose a base year such as 2004
 Then real GDP2006=       Σ Pi, 04 Qi, 06
   (where i takes a value of 1 through n)
 What would the real GDP be in 2005?
 RGDP is NGDP adjusted for changes
  in the price level.


                                             24
GDP deflator
 A measure of price level
 GDP deflator = (NGDP/ RGDP) x 100
   NGDP = nominal GDP
   RGDP = real GDP




                                      25
Let’s Practice
Find NGDP, RGDP, and GDP deflator in both
years assuming 2000 is the base year

          P (year Q (year P (year   Q (year
          2000) 2000) 2006)         2006)

Guns      $10     20      $20       25


Roses     $2      100     $2        75


Marijuana $10     200     $15       190


                                            26
Let’s Practice
Find NGDP, RGDP, and GDP deflator in both
years assuming 2000 is the base year

 NGDP2000=   Σ Pi, 00 Qi, 00
 NGDP2000= ($10x20)+($2x100)= $400
 NGDP2006= ($20x25)+($2x75)= $650
 RGDP2000= Σ Pi, 00 Qi, 00 = $400
 RGDP2006 = Σ Pi, 00 Qi, 06 = ($250 ) +
  (150) = $400

                                            27
Let’s Practice
Find NGDP, RGDP, and GDP deflator in both
years assuming 2000 is the base year

 GDP deflator   2000= (NGDP/RGDP)x100
 GDP deflator   2000= ($400/$400) X
  100 = 100
   Note: not $100, just 100
 GDP deflator   2006=   ($650/$400) X
  100 = 162.5



                                            28
Let’s calculate growth rates
 Growth rate in NGDP= (NGDP06-
  NGDP00)/NGDP00
 Growth rate in NGDP = (650-400)/400
 Growth rate in NGDP = 0.625 or 62.5%
 Growth rate in RGDP = (RGDP06-
  RGDP00)/RGDP00 = 0 (This is called
  economic growth)
 Growth rate in GDP deflator = 62.5% (This
  is called inflation)

                                          29
Why is real GDP a better measure
of output than nominal GDP?
 NGDP may go up if prices go up or if
  quantities go up.
 RGDP can go up if and only if
  quantities (output) goes up.




                                         30
Let’s try to find a more practical
way to find GDP

Let’s take a look
 at the big picture


                                     31
4 Sectors in the economy
 1. Household
    Where individuals belong
 2. Firms
    Where goods and services are produced
 3. Government
    Local, state and federal
 4. Foreign
    The rest of the world



                                             32
3 Markets in the economy
1. Resource market
   Where resources are transacted
     Help wanted ads
2. Financial market
   Where firms go to borrow and invest
   Where households go to lend and save
3. Product market
   Where final goods and services are
    transacted

                                           33
        Circular Flow of Income and Expenditures
                                  X =$10         Foreign
Revenue = Expenditures =
value of final goods and   Product       M =$10
services= C+G+I+X-M=
$100                       Markets
                 I =$5        G =$20               C= $75
                           Government   T=$20
   Firms
                                                    Households
                           Financial    S=$5
                           Markets
                                               Income =
         Cost=                                 Y= $100
         $100               Resource
                            Markets
                                                                 34
What does the circular flow chart
for households and firms show?
 It shows how money circulates in the
  economy.
 It shows how GDP can be calculated
   The value of final goods = how much
    people spend on them= expenditures
   GDP = C + I+ G + X-M




                                          35
Household Consumption Expenditures
on domestic and foreign goods and
services (C)

   Durable goods
   Nondurable goods
   Services
   Purchase of new homes is excluded




                                        36
  Gross Private Domestic
  Investment (I)
Two major Components
1) Fixed Investment (If)
    Purchase of domestic and foreign
     capital goods by firms & new homes
     by households
2) Inventory Investment (Ii)
    Changes in Inventories
    Why is it included?
 I = If + Ii
                                          37
Gross private domestic investment
can not be negative.
1. True
2. False




                                    38
Government Expenditures on domestic
and foreign goods and services (G)

 Expenditures on everything (including
  investment) but transfer payments
 What are transfer payments?
 Why are transfer payments excluded?




                                      39
Net Exports (X-M or NX)
 Exports minus Imports
 Why are imports subtracted?




                                40
Calculate US GDP in (figures are in
billions of dollars)
Consumption of durable goods          950.7

Consumption of nondurable goods       2200.1

Consumption of services               4610.1

Gross Domestic Private Investment     1665.8

Net exports of goods and services     - 498.1

Imports of goods and services         1544.3

Federal government purchases          752.2

Sate and local government purchases   1323.3
                                                41
Calculate US GDP in (figures are in
billions of dollars)
 GDP = C + I + G + NX
 GDP = (950.7 +2200.1 +4610.1) + (1665.8) +
  (752.2 +1323.3) + ( - 498.1)
 GDP =11,004.1




                                               42
Let’s look at US GDP
 http://www.econstats.com/gdp/gdp_
  _q2.htm




                                  43
    SHORTCOMINGS OF GDP

1. Per capita output or income
2. Distribution of output
3. Household production of goods and
   services
4. Underground production of goods and
   services
   • Legal goods and services
   • Illegal goods and services
                                     44
SHORTCOMINGS OF GDP


5. Leisure has value
6. Improved Product Quality
7. The more you produce, the more
   you pollute




                                    45
      GLOBAL PERSPECTIVE
       The Underground Economy as a Percent of GDP
                    0   5   10         15        20         25         30
         Greece
            Italy
          Spain
       Portugal
        Belgium
        Sweden
       Germany
         France
        Holland
United Kingdom
          Japan
  United States
    Switzerland
                                                                       46
                            Source: The Journal of Economic Literature, 2000
Which year was a better year?
 In 1950 Neverland’s RGDP grew by
  10% compare to 1949.
 In 1970 Neverland’s RGDP grew by
  10% compare to 1969
 The level of air pollution grew by 5%
  in 1950 and 20% in 1970.



                                          47
Which country is better off?
 In 2003 Neverland’s RGDP grew by
  10% compare to 2002.
 In 2003 Noneland’s RGDP grew by
  10% compare to 2002
 In general, the cost of living in
  Noneland is much higher than the
  cost of living in Neverland


                                      48

				
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