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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

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