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

2. December 7, 2010Financial Institutions & Markets, Day 32 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 year 2009

3. December 7, 2010Financial Institutions & Markets, Day 33 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 a year ago! http://finance.yahoo.com/q/bc?s=000001.SS&t=2y&l=on&z=m&q=l&c=

4. December 7, 2010Financial Institutions & Markets, Day 34 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. December 7, 2010Financial Institutions & Markets, Day 35 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. December 7, 2010Financial Institutions & Markets, Day 36 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. December 7, 2010Financial Institutions & Markets, Day 37 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. December 7, 2010Financial Institutions & Markets, Day 38 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)