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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 7 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 8