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# Eco 202 exam 3 review

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### Eco 202 exam 3 review

1. 1. Exam 3 ReviewThe Basic Tools of Finance Islamic Finance Unemployment
2. 2. Finance Time Risk
3. 3. TimeFuture ValuePresent Value
4. 4. Future ValueWhat something today will be worth in the future Compounding
5. 5. Present ValueWhat something in thefuture is worth today Discounting
6. 6. N (1+r)r = Rate of compoundingN = Number of Periods
7. 7. Compounding Discounting 1    (1+r) N (1+r) N Future Value Present ValueMultiply Present Value Multiply Future Value by factor to get by factor to get Future Value Present Value
8. 8. Two ways to get Present Value PV = FV x 1    (1+r) N or PV = FV    (1+r) N
9. 9. Rewrite FV = PV x Factor FV = PV x FactorFactor Factor PV = FV Factor
10. 10. 1. Calculate factor (1+r) N2. Is the problem FV or PV?3. If FV then multiply by PVFV = PV x Factor4. If PV then divide FV byPV = FV ÷ Factor
11. 11. Future Value= Present Value x (1+r) N
12. 12. Present Value = 500r = 5% or .05N= 4Future Value = ?= PV x (1+.05) 4= PV x 1.2155= 500 x 1.2155= 607.75
13. 13. Present Value= Future Value ÷ (1+r) N
14. 14. Future Value = 2000r = 8% or .08N= 5Present Value = ?= FV ÷ (1+.08) 5= FV ÷ 1.4693= 2000 ÷ 1.4693= 1361.16
15. 15. Questions Always given r and NIf given PV, then solve for FVIf given FV then solve for PV PV = FV ?r and N FV = PV ?
16. 16. Risk Don’t like Risk Risk AdverseCannot always avoid Reduce exposure
17. 17. DiversiﬁcationReplace one large risk with lots of small unrelated risks Small SmallSmallRisk Risk Large Risk Small Risk Small Risk Small Risk Risk
18. 18. Insurance Sharing riskDoes not eliminate riskReduce your exposure
19. 19. How to Fund an Insurance Pool Estimate Loss Estimate Probability Premium = Loss x Probability Members = Loss ÷ Premium
20. 20. How to Fund an Insurance Pool Loss = 100 Probability 1 in 20 or .05 Premium = 100 x .05 = 5 Members = 100 ÷ 5 = 20
22. 22. Moral HazardChanging behavior after an agreement Temptation to abuse the other party
23. 23. Three Risks Firm RiskIndustry Risk Market Risk
24. 24. Speculative BubblePrice is greater than fundamental valueBuy because everyone else is buying
25. 25. Chapter 28 Islamic Finance
26. 26. Islamic Finance Must have an assetinvolved in the exchange No money for money
27. 27. IslamicProﬁt and loss sharing system Non Islamic interest-based system
28. 28. Shariah - Sacred LawRiba - Usury -InterestGharar - UncertaintyHaram - ProhibitiedHalal - PermittedZakat - Religious TaxHiba - Gift
29. 29. Deposits Current Saving -Wadiah Investment - MudarabahEquity Financing Mudarabah - Risk Musharakah - Share RiskAsset Financing Murabahah - Resell Salem - Crop Loan Ijarah Leasing - ReturnSukuk - BondsTakaful - Insurance
30. 30. FutureDifferent views and interpretations Evolving No uniform consensus Five schools of thought Shaﬁ’i, Maliki, Hanaﬁ, Hanbali, and Shi’a
31. 31. Chapter 29Unemployment
32. 32. Saudi Labor Force Around Total Population 30 million Non-Saudis 10 million Saudis 20 million Adult Population Age 15+ 11 million Not in Labor Force 6 million In Labor Force 5 million Labor Force Participation Rate 45% Employed 4.4 million Unemployed 600 thousand Unemployment Rate 12%Source: General Statistics Department and Information
33. 33. Employed paid employees work in own businessunpaid workers in family business full-time and part-time jobs but temporary absence
34. 34. Unemployed not employed availabletried to ﬁnd a job in the last four weekswaiting to be recalled from layoff
35. 35. Discouraged WorkersPeople who would liketo work but have given up looking for a job
36. 36. Not in Labor Forcenot employed or unemployed discouraged workers full-time student homemaker retiree
37. 37. Unemployment RateThe percentage of the labor force that is unemployed
38. 38. Employment Analysis Saudi U.S ChinaUnemployment Rate 12.2% 7.9% 4.1%Participation Rate 45.0% 63.3% 74.2%
39. 39. Natural Rate of Unemployment The normal rate of unemployment aroundwhich the unemployment rate ﬂuctuates
40. 40. Cyclical Unemployment The deviation ofunemployment from its natural rate
41. 41. ProblemsOverstate - Above actual Cash workersUnderstate - Below actual Discouraged workers
42. 42. Unemployment Frictional Seasonal Structural
43. 43. FrictionalTime to ﬁnd a new job
44. 44. SeasonalDemand changes with the season
45. 45. Structural Too many workersChange in demand for skills
46. 46. StructuralCreative Destruction 10% a Year
47. 47. Unemployment InsuranceGovernment program to provide income when workers become unemployed
48. 48. Unemployment InsuranceUnintended Consequence Moral HazardMay prolong unemployment
49. 49. Why are wages too high?Minimum wage laws Unions Efﬁciency Wages
50. 50. Minimum Wage Laws Government sets aminimum wage that can legally be paid
51. 51. Wage Minimum Wage Minimum Wage 40 workers 20 workers 4,000 20 jobs get a raise 20 unemployed 10 workers Supply lose job workers 3,000 Minimum 10 new unemployed Wage workers 2,000 Equilibrium Wage 1,000 30 workers 30 jobs no Demand unemployment 0 0 10 20 30 40 50 60 Workers
52. 52. Efﬁciency WagesHigher wages make more productive employees
53. 53. Efﬁciency WagesEmployee Wage Pizzas Productivity Wage per Pizza Ali 100 5 20.0Abdullah 200 12 16.7
54. 54. Efﬁciency Wages More HealthyLower TurnoverHigher Quality More Effort