1. Financial Institutions and Markets FIN 304 Dr. Andrew L. H. Parkes Day 4 “How do financial markets work?” 卜安吉

2. September 17, 2009Financial Institutions & Markets, Day 42 Price Indices GDP deflator Uses Current Year Quantities – Bought today Uses Current Year Quantities – Bought today Consumer Price Index Uses Base Year Quantities – Bought in the Base Year Uses Base Year Quantities – Bought in the Base Year Are they the same? Shanghai Dow Stock Index – WSJ Over the last year!

3. September 17, 2009Financial Institutions & Markets, Day 43 Price Indices GDP deflator Uses Current Year Quantities – Bought today Uses Current Year Quantities – Bought today Consumer Price Index Uses Base Year Quantities – Bought in the Base Year Uses Base Year Quantities – Bought in the Base Year Are they the same? Shanghai Composite Index – Yahoo!.com almost a year ago! http://finance.yahoo.com/q/bc?s=000001.SS&t=2y&l=on&z=m&q=l&c=

4. September 17, 2009Financial Institutions & Markets, Day 44 What did you buy in 1967? OK then try 1982? OK then try 1982? These are the base years These are the base years Were the goods the same? Were the goods the same? Notice even our example! Notice even our example! Chain Weighted GDP Price index now Chain Weighted GDP Price index now Dow Jones World Stock Index One year ago!

5. September 17, 2009Financial Institutions & Markets, Day 45 What did today’s purchase cost in 1982? 1967? That ’ s the Paasche Index That ’ s the Paasche Index Today ’ s goods, base year prices Today ’ s goods, base year prices An MP3 player in 1982? An MP3 player in 1982? A digital Camera? A digital Camera? So there are problems with Price indices … So there are problems with Price indices … U. S. Treasury Bill One year ago:

6. September 17, 2009Financial Institutions & Markets, Day 46 Cost of Living Adjustment Pay attention to the definition of the CPI in class! Pay attention to the definition of the CPI in class! CPI in U.S. is what? CPI in U.S. is what? Cost of Living is measured by the CPI Cost of Living is measured by the CPI Social Security and other wages are adjusted using CPI Social Security and other wages are adjusted using CPI U.S. Department of Labor Bureau of Labor Statistics http://www.bls.gov/cpi/

7. September 17, 2009Financial Institutions & Markets, Day 47 List of the Problems 1. Substitution Bias 2. Introduction of new goods 3. Unmeasured quality changes 4. Typical Average Family Four problems with using the CPI for a Perfect measure of a COLA

8. September 17, 2009Financial Institutions & Markets, Day 48 Industrial Production & C.U. See the “downtick” in Industrial Production (often used for Real GDP because the numbers are reported monthly).

9. September 17, 2009Financial Institutions & Markets, Day 49 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

10. September 17, 2009Financial Institutions & Markets, Day 410 http://www.nytimes.com/2008/12/08/business/economy/08econ.html?th&emc=th

11. September 17, 2009Financial Institutions & Markets, Day 411 http://www.nytimes.com/2008/12/06/business/economy/06jobs.html?hp

12. September 17, 2009Financial Institutions & Markets, Day 412 http://www.nytimes.com/2008/12/06/business/economy/06idle.html?hp

13. September 17, 2009Financial Institutions & Markets, Day 413 What have I Hammered ON in Class? 3 Goals of any Macroeconomy 3 Goals of any Macroeconomy Full Employment Full Employment Economic Growth Economic Growth Price Stability Price Stability Sources: NYT and BLS – Sept. 16, 2009 http://www.nytimes.com/2009/09/17/business/economy/17econ.html?hpw

14. September 17, 2009Financial Institutions & Markets, Day 414 Notice “They” always help me! Whatever I Teach Whatever I Teach The Markets help The Markets help The Fed helps The Fed helps Actually, it really happens every single day! Actually, it really happens every single day! Sources: NY Times above with Labor report Mostly energy prices that have changed, although the prices of health care have also changed. See the Table for annual changed in EACH category as well.

15. September 17, 2009Financial Institutions & Markets, Day 415 Problem Set #2 TUTORIAL - Cheers TUTORIAL - Cheers Let’s work on Problem Set #2 in class for a while at least. 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 U.S. Males around New Years call this College BOWL TIME See ESPN See ESPN BOWLING TIME!!! (College - American Football)