Welcome to PMBA0608: Economics/Statistics Foundation  Session 2: August 26 Assignment 1 is posted: Due on or before September 2 Next time we will meet on Wednesday, September 6 at 19:30-22:45 Before next class, please study  Chapters 1 through 4 of Mankiw  Chapters 1 through 3 of Mendenhall, Beaver & Beaver

What is statistics?  statistics is the science of learning from data

What are the uses of statistics in your line of work?  How much should your company spend on advertising?  Should your company increase the price of good and services it produces?  Should shoplifting detection devices be hidden or should their presence be made obvious?  What will the rate of inflation be next year

Here is the question of my interest these days  What are the factors significantly increase the probability of an individual’s participation in Brazilian shadow (underground) economy?

Population/Sample  Problem: I don’t have the resources to study the behavior of every individual who lives in Brazil. (population size = N)  Solution: Study the behavior of a representative gorup (sample size = n).  Here we are referring to sets of objects on which measurements are to be taken.

Another distinction between population and sample  There is a population of characteristics each individual poses (N characteristics)  I will look at of a sample of these characteristics (n characteristics)  Here are we are referring to a set of measurements themselves.

What is the difference between descriptive versus inferential statistics? 1.Descriptive Stat. Organizes/summarizes/ aggregates  describes to understand better. 2.Inferential Stat. Uses sample information to draw conclusions or make a prediction about the population.

In my study 1.I will use descriptive statistics to summarize my sample. 2.But my main goal is to use inferential statistics to use sample information to predict the probability of a Brazilian participating in the shadow market.

Is this descriptive to inferential? The Size of Shadow Economy ( as a percentage of GDP in )

Is this descriptive to inferential? ( Source: Dow Jones Industrial Average Stock Index Past Trend, Present Value & Future Projection

Five elements of statistical problem 1.Definition of objective 2.Design of experiment or sampling procedure 3.Collection and analysis of data (descriptive stat.) 4.Make inferences about the population. (inferential stat.) 5.Measurement of the goodness of inference.

Thinking like an economist (Mankiw Chapter 2) 1.Casual observation: There seems to be a lot of unofficial (underground) employment in Brazil.  Theory: The more complicated and costly the employment laws  the bigger the size of underground employment. Does this theory always hold?

What if at the same time that employment laws become more complicated, law enforcement becomes more effective too?  Then underground employment may or may not grow. 2. Building a model (mathematical/graphical)  Assumption: All else remains constant 3. Theory: All else constant, the more complicated and costly the employment laws  the bigger the size of underground employment.

4. Testing the theory: More observation  Here is where ________ statistics comes handy.  What if the minimum wage is lowered by 10%?  Here is where _______statistics comes handy. 5. Prediction: Underground employment will shrink by 5%.

Economic resources (factors of production)  Are scarce  Categories 1.Labor Anyone who is hired to use his mental/physical ability to produce a good or a service 2.Capital Produced means of further production 3.Land Natural resources 4.Entrepreneur Anyone who plans production and takes a risk

Circular Flow Model  Shows how money as well as real goods, services and resources flow through the economy  Most important assumptions No government No international trade No financial institutions Only 2 sectors in the economy:  households and firms Only 2 markets: goods and factors of production

Circular Flow Model Market for goods and services Market for factors of Production Households Firms factors of production Factors of production goods & services Income Expenditures Revenue Cost