Managerial Economics (Macro) Dr. Timothy Simin 2011 Tim.Simin@mccombs.utexas.edu.

transcript

Managerial Economics(Macro)

Dr. Timothy Simin

Tim.Simin@mccombs.utexas.edu

Helicopter TourWhat Microeconomics?

Microeconomics covers:– Price determination via quantities supplied and demanded

Laws of demand

– Opportunity costs and sunk costs

– Theory of the firm Monopolies, Oligopolies, and perfect competition Cost benefit analysis/profit maximization

– Theory of the consumer Utility functions, budget constraints, utility maximization

– Specialization, efficiency, comparative advantage

– Examples

2Tim.Simin@mccombs.utexas.edu

Helicopter TourWhat is Macroeconomics?

Macroeconomics covers:

– Fiscal policy http://www.wtfnoway.com/ and http://www.usdebtclock.org/

– Monetary policy

– National Income Accounting GNP, GDP

– Interest rate determination

– Exchange rate determination

– Business Cycles

– Inflation

Financial IntermediariesWhat are they?

Lenders1) Households2) Business3) Governments4) Foreigners

Financial Markets1) Brokers2) Dealers3) Investment bankers4) Exchanges

Borrowers1) Households2) Business3) Governments4) Foreigners

Financial Intermediaries1) Banks2) Mutual funds3) Insurance companies4) Pension funds5) Finance companies

Financial MarketsSome puzzles

1. Why are banks and other financial intermediaries the primary sources of external financing for business, rather than stocks and bonds?

2. Why is the financial system among the most heavily regulated sectors of the economy?

3. Why do only large and well-established firms have access to the securities markets?

4. Why is collateral a prevalent feature of debt contracts?

Financial Intermediaries Why do we need them?

1. Information costs

– Adverse selection

– Moral hazard

2. Transaction costs

– Explicit Financial

– Implicit

Asymmetric InformationAdverse selection

1. Asymmetric information problem occurs before the transaction– Securities markets

– Banks

– Question: Will the asymmetric information problem be more or less of a problem as interest rates rise?

2. Dealing with adverse selection– Private production and sale of information

– Government regulation

– Intermediation

– Collateral

Asymmetric InformationMoral hazard

1. Asymmetric information problem occurs after the transaction

– Debt markets

– Equity markets

principle-agent problem

2. Dealing with moral hazard

– Intermediation

– Debt contracts

Trading CostsAnother surplus story

1. Start with a perfect financial market

– I is the amount of borrowing for investment

– S is the amount of savings

– rpm and qpm are the perfect market interest rate and level of investment

2. What happens to total surplus?

Trading CostsAnother surplus story

Quantities of Investment and Saving

Interest rate

Investors Surplus

Savers Surplus

Cost of Trading

Investors Surplus

Savers Surplus

Cost of Trading

Investors Surplus

Savers Surplus

Dead Weight Loss

Financial Intermediaries What they provide

Services Supplied by Financial Intermediaries

Reduce information costs Reduce transaction costs

Reduce search costs Denomination intermediation

Credit valuation Maturity intermediation

Price discovery Provide payments system

Monitoring Diversify risk and Hedge risk

Gross National Product What does it measure?

1. GNP is:

– the value of all final goods and services produced and sold

– a measure of a country’s output

– is the sum of four components

Consumption

Investment

Government expenditures

Current account balance

Gross National Product Break down

Gross National Product What does it measure?

1. GNP Y – Individual’s use income to either consume or save while the

government taxes and redistributes wealth – GNP measures only the final sale of products

I.E., the price of a computer to the consumer goes into GNP but the price IBM pays for RAM does not. Why?

2. GNP does not account for – Depreciation– Unilateral transfers

Pension payments to retired U.S. citizens abroad Relief funds

– Tax wedge: Price people pay - Price producers receive

Gross National Product What does it mis-measure?

1. Value of leisure

2. Value of government production

3. The illegal economy

– Cash transactions

– Drugs

– Household production

4. Increases in output of goods/services can either be a good or bad thing

GNP vs. GDP What’s the difference?

1. GDP = GNP – (income domestic residents earn on wealth held in other countries – payments to foreign owners of domestic wealth)

2. GDP doesn’t correct for domestic output produced by foreign owned capital

3. Are they correlated?

Three Price indexes Measuring Inflation

GNP deflator

– Ratio of nominal GNP in a given year to real GNP

– Measure of inflation between the period from which the base prices used in real GNP are taken, to the current period

GNP measured in current prices

GNP deflatorGNP measured in base year prices

Consumer price index (CPI)

– Cost of representative fixed bundle of goods

– Prices are of finished or retail goods and services

– Problems? Intertemporal changes in tastes and goods International differences in tastes and goods Should we include Food and Energy

GNP deflator vs. CPI

– Deflator measures wider group of goods than does the CPI – CPI uses fixed basket, deflator uses things produced in a year – The CPI includes imports, deflator only measures U.S. goods

Producer price index (PPI)

– Measures the cost of a given basket of raw materials and semi-finished goods

– Constructed from prices at the level of the first significant commercial transaction

– Often viewed as a predictor of business cycles

Managerial Economics (Macro) Dr. Timothy Simin 2011 Tim.Simin@mccombs.utexas.edu.

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