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

2. 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

3. 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 Composite Index – Yahoo!.com a year ago!
December 8, 2009
Financial Institutions & Markets, Day 3a

4. 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

5. 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

6. 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
December 8, 2009
Financial Institutions & Markets, Day 3a

7. 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

8. 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

9. 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!
December 8, 2009
Financial Institutions & Markets, Day 3a

10. Financial Institutions & Markets, Day 3a
December 8, 2009
Financial Institutions & Markets, Day 3a

11. Financial Institutions & Markets, Day 3a
December 8, 2009
Financial Institutions & Markets, Day 3a

12. Financial Institutions & Markets, Day 3a
December 8, 2009
Financial Institutions & Markets, Day 3a

13. 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

14. 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