Financial Institutions and Markets Price Indexes Dr Andrew

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 n Uses Current Year Quantities – Bought today Consumer Price Index n 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 n Uses Current Year Quantities – Bought today Consumer Price Index n Uses Base Year Quantities – Bought in the Base Year Are they the same? http: //finance. yahoo. com/q/bc? s=000001. SS&t=2 y&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? n OK then try 1982? n These are the base years n Were the goods the same? n Notice even our example! n 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? n That’s the Paasche Index n Today’s prices goods, base year U. S. Treasury Bill One year ago: n An MP 3 player in 1982? n A digital Camera? n So there are problems with Price indices … March 27, 2014 Financial Institutions & Markets, Day 2 Continued 5

Cost of Living Adjustment n Pay U. S. Department of Labor Bureau of Labor Statistics http: //www. bls. gov/cpi/ March 27, 2014 attention to the definition of the CPI in class! n CPI in U. S. is what? n Cost of Living is measured by the CPI n Social Security and other wages are adjusted using CPI Financial Institutions & Markets, Day 2 Continued 6

List of the Problems Four problems with using the CPI for a Perfect measure of a COLA Substitution Bias 2. Introduction of new goods 3. Unmeasured quality changes 4. Typical Average Family 1. March 27, 2014 Financial Institutions & Markets, Day 2 Continued 7

Problem Set #1 n TUTORIAL - Cheers n Let’s work towards Problem Set #1 in class for a while at least. n U. S. Males around New Years call this College BOWL TIME n See ESPN March 27, 2014 BOWLING TIME!!! (College - American Football) Financial Institutions & Markets, Day 2 Continued 8