# Econ 301 Money and Banking Weekly Detailed Course Outline

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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
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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