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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
