Financial Institutions and Markets FIN 304 Dr. Andrew L. H. Parkes Day 3a “How do financial markets work?” 卜安吉

Financial Institutions & Markets, Day 3a Price Indices GDP deflator Uses Current Year Quantities – Bought today Consumer Price Index Uses Base Year Quantities – Bought in the Base Year Are they the same? Shanghai Dow Stock Index – WSJ Over the last year! December 8, 2009 Financial Institutions & Markets, Day 3a

Financial Institutions & Markets, Day 3a Price Indices GDP deflator Uses Current Year Quantities – Bought today Consumer Price Index Uses Base Year Quantities – Bought in the Base Year Are they the same? http://finance.yahoo.com/q/bc?s=000001.SS&t=2y&l=on&z=m&q=l&c= Shanghai Composite Index – Yahoo!.com a year ago! December 8, 2009 Financial Institutions & Markets, Day 3a

Financial Institutions & Markets, Day 3a What did you buy in 1967? OK then try 1982? These are the base years Were the goods the same? Notice even our example! Chain Weighted GDP Price index now Dow Jones World Stock Index One year ago! December 8, 2009 Financial Institutions & Markets, Day 3a

What did today’s purchase cost in 1982? 1967? That’s the Paasche Index Today’s goods, base year prices An MP3 player in 1982? A digital Camera? So there are problems with Price indices … U. S. Treasury Bill One year ago: December 8, 2009 Financial Institutions & Markets, Day 3a

Cost of Living Adjustment Pay attention to the definition of the CPI in class! CPI in U.S. is what? Cost of Living is measured by the CPI Social Security and other wages are adjusted using CPI U.S. Department of Labor Bureau of Labor Statistics http://www.bls.gov/cpi/ December 8, 2009 Financial Institutions & Markets, Day 3a

Financial Institutions & Markets, Day 3a List of the Problems Four problems with using the CPI for a Perfect measure of a COLA Substitution Bias Introduction of new goods Unmeasured quality changes Typical Average Family December 8, 2009 Financial Institutions & Markets, Day 3a

Industrial Production & C.U. See the “downtick” in Industrial Production (often used for Real GDP because the numbers are reported monthly). December 8, 2009 Financial Institutions & Markets, Day 3a

Industrial Production & C.U. More evidence that the economy is beginning to “turn around,” as you can see from the pictures – the turn from down to up! http://www.nytimes.com/2009/09/17/business/economy/17econ.html?hpw December 8, 2009 Financial Institutions & Markets, Day 3a

Financial Institutions & Markets, Day 3a December 8, 2009 Financial Institutions & Markets, Day 3a http://www.nytimes.com/2008/12/08/business/economy/08econ.html?th&emc=th

Financial Institutions & Markets, Day 3a December 8, 2009 Financial Institutions & Markets, Day 3a http://www.bls.gov/news.release/pdf/empsit.pdf

Financial Institutions & Markets, Day 3a December 8, 2009 Financial Institutions & Markets, Day 3a http://www.nytimes.com/2008/12/06/business/economy/06idle.html?hp

Notice “They” always help me! Whatever I Teach The Markets help The Fed helps Actually, it really happens every single day! Sources: NY Times above with Labor report December 8, 2009 Financial Institutions & Markets, Day 3a

Financial Institutions & Markets, Day 3a Problem Set #2 TUTORIAL - Cheers Let’s work on Problem Set #2 in class for a while at least. U.S. Males around New Years call this College BOWL TIME See ESPN BOWLING TIME!!! (College - American Football) December 8, 2009 Financial Institutions & Markets, Day 3a