Welcome to PMBA0608: Economics/Statistics Foundation

1. Welcome toPMBA0608: Economics/Statistics Foundation Fall 2006 Session11: November 8 Chillicothe

2. 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.

3. For x = 0,1,2 … 5,6 where n = 6 and p = 0.1 Discuss Assignment 5: 4.5, Page 141 of Stat. (Do it using Excel. Show your work and the graph) Note: 5.4E-05 = 5.4 x 10 -5 or 5.4/100000 or 0.000054

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 =0.5

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 = 0.9

6. 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 xnumber 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. 

7. 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

8. 4.17, Page 142 of Stat. (Do this one manually using the binomial formula. Show your work.) • n = 4, p= 0.6 • p (4)=0.1296 b) p (x≥1)= p (1) + p(2) + p(3) + p(4) p (x≥1)= 0.9744 c) p(1) = 0.1536

9. Problem 2, Page 132 of Econ • Surplus • TR (before floor) • P1 x Q1 TR (after floor) • Pf x Q2 • If demand is elastic • TR falls • Now TR • Pf x Q3 • Farmers win • Tax payers lose • Consumers lose P S Surplus Floor Pf P1 D Q2 Q1 Q3 Q

10. Problem 4, Page 133 of Econ (maximum of 4 bonus points) • Tax of $2 per case is collected from consumers • D drops by $2 • Equilibrium price drops to $9 (price received by suppliers) • Equilibrium Q drops to Q2 • Consumers pay $11 P S1 P paid = 11 10 P received = 9 $2 D1 D2 Q2 Q1 Q

11. Next Class • Wednesday, November 29, 19:30-21:00 • I will try to be in Ironton • Chapter 4 of Stat

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

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

14. Practice • What if demand was very elastic? • What if supply was very elastic?

15. Econ Chapter 23 • So far everything we did was • microeconomics • This chapter is on the big picture • MACROECONOMICS

16. 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.

17. 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?

18. 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.

19. 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.

20. 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.

21. 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?

22. 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.

23. 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= ΣPi, 06 Qi, 06 (where i takes a value of 1 through n)

24. What is real GDP in 2006? • Choose a base year such as 2004 • Then real GDP2006= ΣPi, 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.

25. GDP deflator • A measure of price level • GDP deflator = (NGDP/ RGDP) x 100 • NGDP = nominal GDP • RGDP = real GDP

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

27. Let’s PracticeFind NGDP, RGDP, and GDP deflator in both years assuming 2000 is the base year • NGDP2000= ΣPi, 00 Qi, 00 • NGDP2000= ($10x20)+($2x100)= $400 • NGDP2006= ($20x25)+($2x75)= $650 • RGDP2000= ΣPi, 00 Qi, 00 = $400 • RGDP2006 = ΣPi, 00 Qi, 06 = ($250 ) + (150) = $400

28. Let’s PracticeFind 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

29. 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)

30. 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.

31. Let’s try to find a more practical way to find GDP • Let’s take a look at the big picture

32. 4 Sectors in the economy • Household • Where individuals belong • Firms • Where goods and services are produced • Government • Local, state and federal • Foreign • The rest of the world

33. 3 Markets in the economy • Resource market • Where resources are transacted • Help wanted ads • Financial market • Where firms go to borrow and invest • Where households go to lend and save • Product market • Where final goods and services are transacted

34. Circular Flow of Income and Expenditures Foreign X =$10 Revenue = Expenditures = value of final goods and services= C+G+I+X-M= $100 Product Markets M =$10 I =$5 G =$20 C= $75 Government T=$20 Firms Households S=$5 Financial Markets Income = Y= $100 Cost= $100 Resource Markets

35. 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

36. Household Consumption Expenditures on domestic and foreign goods and services (C) • Durable goods • Nondurable goods • Services • Purchase of new homes is excluded

37. 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

38. Gross private domestic investment can not be negative. • True • False

39. 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?

40. Net Exports (X-M or NX) • Exports minus Imports • Why are imports subtracted?

41. Calculate US GDP in (figures are in billions of dollars)

42. 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

43. Let’s look at US GDP • http://www.econstats.com/gdp/gdp__q2.htm

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

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

46. 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 Source: The Journal of Economic Literature, 2000

47. 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.

48. 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