1

Welcome toPMBA0608: Economics/Statistics Foundation

Fall 2006Session11: November 8

Chillicothe

2

Discuss Assignment 5 To learn how to create binomial distribution using

Excel, check slides 28-31 of last class. Collaboration on an assignment is not the same as

cut and paste. Academic dishonesty such as cheating on exams

or submitting some one else’s work as your own (plagiarism) will not be tolerated in this class. These types of activities will result in penalties ranging from receiving a failing grade on one assignment or exam to failing this course or even expulsion from the University.

3

Discuss Assignment 5: 4.5, Page 141 of Stat. (Do it using Excel. Show your work and the graph)

For x = 0,1,2 … 5,6 where n = 6 and p = 0.1

X p(x)

0 0.531441

1 0.354294

2 0.098415

3 0.01458

4 0.001215

5 5.4E-05

6 0.000001 Note: 5.4E-05 = 5.4 x 10 -5 or 5.4/100000 or 0.000054

4

4.5, Page 141 of Stat. (Do it using Excel. Show your work and the graph)

For x = 0,1,2 … 5,6 where n = 6 and p =0.5

X p(x)

0 0.015625

1 0.09375

2 0.234375

3 0.3125

4 0.234375

5 0.09375

6 0.015625

5

4.5, Page 141 of Stat. (Do it using Excel. Show your work and the graph)

x p(x)

0 1E-06

1 5.4E-05

2 0.001215

3 0.01458

4 0.098415

5 0.354294

6 0.531441

For x = 0,1,2 … 5,6 where n = 6 and p = 0.9

6

4.5, Page 141 of Stat. (Do it using Excel. Show your work and the graph)

p is the probability of success in each trial.  The graph of probability distribution shows

the probability of having x number of success in n trials. 

The lower the probability of success in each trial (p), the lower the probability of having a large number of successes (x) in n trials

This means that in your graph of probability distribution, you will find that small xs have a higher probability than large xs. 

7

4.11,Page 141 of Stat. Note: Tables on Pages 602-608

Gives you cumulative probabilities for less than or equal to

p(x<5) for n=10, p=.4 0.834

p(x<3) for n=5, p=.6 p (x ≤2) = 0.317

p(x<17) for n=20, p=.7 0.965

p(x>17) for n=20, p=.7 1 - .965 = .035

p(x<6) for n=15, p=.4 p(x ≤5)= .403

8

4.17, Page 142 of Stat. (Do this one manually using the binomial formula. Show your work.)

n = 4, p= 0.6

a) p (4)=0.1296

b) p (x≥1)= p (1) + p(2) + p(3) + p(4) p (x≥1)= 0.9744

c) p(1) = 0.1536

)(

)!(!

!)( xnxqp

xnx

nxp

9

Problem 2, Page 132 of Econa) Surplusb) TR (before floor)

P1 x Q1TR (after floor) Pf x Q2 If demand is elastic

TR fallsc) Now TR

Pf x Q3 Farmers win Tax payers lose Consumers lose

P

Q

D

S

P1

Q1

Floor

Pf

Q2

Surplus

Q3

10

Problem 4, Page 133 of Econ (maximum of 4 bonus points)

Tax of $2 per case is collected from consumers

D drops by $2 Equilibrium price

drops to $9 (price received by suppliers)

Equilibrium Q drops to Q2

Consumers pay $11

P

Q

D1

S1

Q1

10P received = 9

P paid = 11

D2

Q2

$2

11

Next Class

Wednesday, November 29, 19:30-21:00 I will try to be in Ironton Chapter 4 of Stat

12

Assignment 6 Due on or before November 25

1. # 1, Page 526 of Econ.2. #4, Page 526 of Econ.3. #5, Page 526 of Econ.4. #10, Page 527 of Econ.

13

Econ Chapter 6Excise Tax: Cigarettes

Free market: P = $4.00 Q = 27.4

TE = $110

Gov’t imposes tax = $1/pack (collected from suppliers)

Supply shifts upward by $1 Price rises (by less than

$1) Quantity falls

Economic burden of tax is split between buyers and sellers

cigarettes

price

D1

S1

4.00

27.4

S2

4.40

3.40

t = $1

buyer pays

seller keeps

25.8

Tax Revenue

14

Practice

1. What if demand was very elastic?2. What if supply was very elastic?

15

Econ Chapter 23

So far everything we did was microeconomics

This chapter is on the big picture MACROECONOMICS

16

How do we measure output?

A nation’s output is measured by its real GDP.

What is GDP? The value of all final goods and

services produced domestically in an economy (country) in terms of current market prices in a given period.

17

What are final goods?

Final goods can be purchased by households (consumption goods) or firms (capital goods)

What are intermediate goods? An intermediate good is used up in

production of a final good Why is the value of intermediate

goods excluded from GDP?

18

Is this included in GDP? A desk bought by Jackie for her home

Yes, consumption good A desk bought by OU for Jackie’s office.

Yes, capital good A gallon of milk purchased by Jackie

Yes, consumption good A gallon of milk purchased by a coffee shop

No, intermediate good.

19

GDP measures the value of production

Not necessarily the same as the value of sales

Why? This year we may sell more

or less than this year’s production.

20

GDP measures domestic production

Not everything that is produced by Americans is produced inside USA

How so? It is domestic production that creates

employment in our country.

21

GDP measures the market value of production

It only includes goods and services offered in the official and legal markets.

Are there other goods and services?

22

GDP measures value of goods and services in terms of current prices

This year’s GDP in terms of this year’s prices

This is actually called nominal GDP.

23

Theoretical calculation of GDP

Suppose in year 2006 We produce n goods Pi = price of good i Qi = quantity of good i

Then nominal GDP2006= Σ Pi, 06 Qi, 06

(where i takes a value of 1 through n)

24

What is real GDP in 2006?

Choose a base year such as 2004 Then real GDP2006= Σ Pi, 04 Qi, 06

(where i takes a value of 1 through n)

What would the real GDP be in 2005? RGDP is NGDP adjusted for changes in

the price level.

25

GDP deflator

A measure of price level GDP deflator = (NGDP/ RGDP) x 100

NGDP = nominal GDP RGDP = real GDP

26

Let’s PracticeFind NGDP, RGDP, and GDP deflator in both years assuming 2000 is the base year

P (year 2000)

Q (year 2000)

P (year 2006)

Q (year 2006)

Guns $10 20 $20 25

Roses $2 100 $2 75

Marijuana $10 200 $15 190

27

Let’s PracticeFind NGDP, RGDP, and GDP deflator in both years assuming 2000 is the base year

NGDP2000= Σ Pi, 00 Qi, 00

NGDP2000= ($10x20)+($2x100)= $400

NGDP2006= ($20x25)+($2x75)= $650

RGDP2000= Σ Pi, 00 Qi, 00 = $400

RGDP2006 = Σ Pi, 00 Qi, 06 = ($250 ) + (150) = $400

28

Let’s PracticeFind NGDP, RGDP, and GDP deflator in both years assuming 2000 is the base year

GDP deflator 2000= (NGDP/RGDP)x100 GDP deflator 2000= ($400/$400) X 100

= 100 Note: not $100, just 100

GDP deflator 2006= ($650/$400) X 100 = 162.5

29

Let’s calculate growth rates Growth rate in NGDP=

(NGDP06-NGDP00)/NGDP00 Growth rate in NGDP = (650-400)/400 Growth rate in NGDP = 0.625 or 62.5% Growth rate in RGDP =

(RGDP06-RGDP00)/RGDP00 = 0 (This is called economic growth)

Growth rate in GDP deflator = 62.5% (This is called inflation)

30

Why is real GDP a better measure of output than nominal GDP?

NGDP may go up if prices go up or if quantities go up.

RGDP can go up if and only if quantities (output) goes up.

31

Let’s try to find a more practical way to find GDP

Let’s take a look at the big picture

32

4 Sectors in the economy

1. Household Where individuals belong

2. Firms Where goods and services are produced

3. Government Local, state and federal

4. Foreign The rest of the world

33

3 Markets in the economy

1. Resource market Where resources are transacted

Help wanted ads

2. Financial market Where firms go to borrow and invest Where households go to lend and save

3. Product market Where final goods and services are

transacted

34

Circular Flow of Income and Expenditures

Firms Households

Foreign

Product

Markets

Resource

Markets

Government

Financial Markets

C= $75

Income = Y= $100

T=$20

S=$5

G =$20I =$5

Revenue = Expenditures = value of final goods and services= C+G+I+X-M= $100

Cost= $100

X =$10

M =$10

35

What does the circular flow chart for households and firms show?

It shows how money circulates in the economy.

It shows how GDP can be calculated The value of final goods = how much

people spend on them= expenditures GDP = C + I+ G + X-M

36

Household Consumption Expenditures on domestic and foreign goods and services (C)

Durable goods Nondurable goods Services Purchase of new homes is excluded

37

Gross Private Domestic Investment (I)

Two major Components1) Fixed Investment (If)

Purchase of domestic and foreign capital goods by firms & new homes by households

2) Inventory Investment (Ii) Changes in Inventories Why is it included?

I = If + Ii

38

Gross private domestic investment can not be negative.

1. True2. False

39

Government Expenditures on domestic and foreign goods and services (G)

Expenditures on everything (including investment) but transfer payments

What are transfer payments? Why are transfer payments excluded?

40

Net Exports (X-M or NX)

Exports minus Imports Why are imports subtracted?

41

Calculate US GDP in (figures are in billions of dollars)

Consumption of durable goods 950.7

Consumption of nondurable goods 2200.1

Consumption of services 4610.1

Gross Domestic Private Investment 1665.8

Net exports of goods and services - 498.1

Imports of goods and services 1544.3

Federal government purchases 752.2

Sate and local government purchases 1323.3

42

Calculate US GDP in (figures are in billions of dollars)

GDP = C + I + G + NX GDP = (950.7 +2200.1 +4610.1) +

(1665.8) + (752.2 +1323.3) + ( - 498.1) GDP =11,004.1

43

Let’s look at US GDP

http://www.econstats.com/gdp/gdp__q2.htm

44

1. Per capita output or income2. Distribution of output 3. Household production of goods and

services 4. Underground production of goods and

services• Legal goods and services• Illegal goods and services

SHORTCOMINGS OF GDP

45

SHORTCOMINGS OF GDP

5. Leisure has value6. Improved Product Quality7. The more you produce, the more

you pollute

46

0 5 10 15 20 25 30Greece

Italy

Spain

Portugal

Belgium

Sweden

Germany

France

Holland

United Kingdom

Japan

United States

Switzerland

GLOBAL PERSPECTIVEThe Underground Economy as a Percent of GDP

Source: The Journal of Economic Literature, 2000

47

Which year was a better year?

In 1950 Neverland’s RGDP grew by 10% compare to 1949.

In 1970 Neverland’s RGDP grew by 10% compare to 1969

The level of air pollution grew by 5% in 1950 and 20% in 1970.

48

Which country is better off?

In 2003 Neverland’s RGDP grew by 10% compare to 2002.

In 2003 Noneland’s RGDP grew by 10% compare to 2002

In general, the cost of living in Noneland is much higher than the cost of living in Neverland