Download Cost – Benefit Analysis

Some more theoretical background
Cost-Benefit Analysis
 Measuring Economic Performance
 System of National Accounts
 Basic Macroeconomic Transmission Mechanisms
 Economic Analysis of Financial Systems –
Transaction Costs and Assymetric Information
 Financial Crises
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Cost – Benefit Analysis
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Basic method of economics
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Applications:
Solutions of Population Explosion
 Why study in the Czech Republic?
 How can we limit corruption?
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Cost – Benefit Analysis
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Limiting corruption
The prevalence of corruption is primarily a
function of its perceived costs and benefits
 The best way to reduce the benefits is to reduce the
discretion officials have over funds and policies
 Increase in the detection of corruption – Free
press, various governmental agencies
 Judicial independence
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Cost – Benefit Analysis
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Question for discussion
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Can you rank countries according to the level of
corruption?
Measuring Economic Performance
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GDP (Gross Domestic Product) = Income
GDP per capita - indicator of the living
standard
Important Concepts:
Flows x Stocks
 Final x Intermediate
 Real x Financial
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GDP = real flow of final goods and services per
year
Measuring Economic Performance
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CPI (Consumer Price Index)- indicator of
Inflation
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Real x Nominal GDP
For comparison of the living standard in time –
real GDP
 Real GDP = Nominal GDP / Price Index
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Rate of Unemployment
Measuring Economic Performance
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Comparison in Space
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Exchange rate and purchasing power adjustment
System of National Accounts
Flow Diagram for the Macro Level
5 sectors: Households, Firms, Government, Foreign
Countries, Financial System
 All flows are real
 Financial flows occur in the financial system
 GDP is created by firms, can be divided into
consumption, investments, government purchases and
net exports
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Economic Analysis of Financial Systems
Economic Analysis-Facts
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Stocks are not the most important source of finance for
business
Issuing marketable securities is not the primary way of
financing
Indirect finance is more important than direct finance
Banks are the most important source of external funds
The financial system is heavily regulated
Only well established corporations have access to securities
markets to finance their activities
Economic Analysis-The Role of
Transaction Costs
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Possibilities for investing your $10,000
Direct lending: costs of a lawyer
 Direct investing in the stock market: costs of a
broker
 Indirect lending or investing through Financial
Intermediaries has advantages:
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 Economies
of Scale
 Development of Expertise
 Diversification of Portfolio
Economic Analysis-The Effects of
Asymmetric Information
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Adverse Selection (Before Transaction Occurs)
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The potential borrowers who are the most likely
to produce an undesirable outcome are the ones
who most actively seek out a loan and are thus
most likely to be selected
Moral Hazard (After Transaction Occurs)
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The borrower has incentives to engage in
activities that make it less likely that the loan will
be paid back
Economic Analysis-The Role of
Asymmetric Information
Solutions to Adverse Selection Problems
 Private Production and Sale of
Information
 Free-rider
problem
Government Regulation to Increase
Information in Securities Markets
 Financial Intermediation
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Economic Analysis-The Role of
Asymmetric Information
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Moral hazard in equity contracts: The
Principal-Agent Problem
Economic Analysis-The Role of
Asymmetric Information
Solutions to the Principal-Agent Problem
 Production of Information
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Monitoring - Costly state verification
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Government Regulation to Increase Information decreases
costs of verification
Corporate Restructuring
Debt Contracts
Financial Crises
Causing Factors
 Increase
in Interest Rates
 Increase in Uncertainty
 Stock Market Decline
(1)Adverse
Selection and Moral Hazard
Problems Worsen
Decline in Economic Activity
Bank Panic
Back to =>(1)
Financial Crises
Debt Deflation = Typical Financial Crisis +
Unanticipated Decline in Price level
 Adverse
Selection and Moral Hazard
Problems Worsen
 etc