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Managerial Economics
(Macro)
Dr. Timothy Simin
2011
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Helicopter Tour
What 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
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Helicopter Tour
What 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
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Financial Intermediaries
What are they?
Financial Markets
1) Brokers
2) Dealers
3) Investment bankers
4) Exchanges
Borrowers
1) Households
2) Business
3) Governments
4) Foreigners
Lenders
1) Households
2) Business
3) Governments
4) Foreigners
Financial Intermediaries
1) Banks
2) Mutual funds
3) Insurance companies
4) Pension funds
5) Finance companies
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Financial Markets
Some 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?
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Financial Intermediaries
Why do we need them?
1. Information costs
– Adverse selection
– Moral hazard
2. Transaction costs
– Explicit Financial
– Implicit
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Asymmetric Information
Adverse 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
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Asymmetric Information
Moral hazard
1. Asymmetric information problem occurs after the
transaction
– Debt markets
– Equity markets

principle-agent problem
2. Dealing with moral hazard
– Intermediation
– Debt contracts
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Trading Costs
Another 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?
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Trading Costs
Another surplus story
Interest rate
Si,nb
Investors Surplus
Dead Weight Loss
ri,nb
ri,b
Si,b
Cost of
Cost
of Trading
Trading
Spm
rpm
Ipm
ri,b
Ii,b
rs,nb
Ii,nb
Savers Surplus
Savers Surplus
qnb
qb
qpm
Quantities of Investment and Saving
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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
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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
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Gross National Product
Break down
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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
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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
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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?
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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 deflator 
GNP measured in base year prices
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Three Price indexes
Measuring Inflation
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
–
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Three Price indexes
Measuring Inflation
Producer price index (PPI)
– Measures the cost of a given basket of raw materials and semifinished goods
– Constructed from prices at the level of the first significant
commercial transaction
– Often viewed as a predictor of business cycles
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