Transcript Introduction to Financial Management FIN 102

Financial Institutions and
Markets
Price Indexes
Dr. Andrew L. H. Parkes
Day 2
“How do financial markets work?”
卜安吉
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 year 2009
March 27, 2014
Financial Institutions & Markets, Day 2
Continued
2
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?
http://finance.yahoo.com/q/bc?s=000001.SS&t=2y&l=on&z=m&q=l&c=
March 27, 2014
Shanghai Composite Index –
Yahoo!.com a year ago!
Financial Institutions & Markets, Day 2
Continued
3
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
March 27, 2014
Dow Jones World Stock Index
Financial Institutions & Markets, Day 2
Continued
One year ago!
4
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 …
March 27, 2014
U. S. Treasury Bill One year ago:
Financial Institutions & Markets, Day 2
Continued
5
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
http://www.bls.gov/cpi/
March 27, 2014
Financial Institutions & Markets, Day 2
Continued
6
List of the Problems
Four problems with using the CPI
for a Perfect measure of a COLA
1.
2.
3.
4.
Substitution Bias
Introduction of new goods
Unmeasured quality
changes
Typical Average Family
March 27, 2014
Financial Institutions & Markets, Day 2
Continued
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Problem Set #1

TUTORIAL - Cheers

Let’s work towards
Problem Set #1 in class for
a while at least.

U.S. Males around New
Years call this College
BOWL TIME

See ESPN
March 27, 2014
BOWLING TIME!!! (College - American Football)
Financial Institutions & Markets, Day 2
Continued
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