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Eco 202 exam 3 review

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  • 1. Exam 3 ReviewThe Basic Tools of Finance Islamic Finance Unemployment
  • 2. Finance Time Risk
  • 3. TimeFuture ValuePresent Value
  • 4. Future ValueWhat something today will be worth in the future Compounding
  • 5. Present ValueWhat something in thefuture is worth today Discounting
  • 6. N (1+r)r = Rate of compoundingN = Number of Periods
  • 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. Two ways to get Present Value PV = FV x 1    (1+r) N or PV = FV    (1+r) N
  • 9. Rewrite FV = PV x Factor FV = PV x FactorFactor Factor PV = FV Factor
  • 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. Future Value= Present Value x (1+r) N
  • 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. Present Value= Future Value ÷ (1+r) N
  • 14. Future Value = 2000r = 8% or .08N= 5Present Value = ?= FV ÷ (1+.08) 5= FV ÷ 1.4693= 2000 ÷ 1.4693= 1361.16
  • 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. Risk Don’t like Risk Risk AdverseCannot always avoid Reduce exposure
  • 17. DiversificationReplace one large risk with lots of small unrelated risks Small SmallSmallRisk Risk Large Risk Small Risk Small Risk Small Risk Risk
  • 18. Insurance Sharing riskDoes not eliminate riskReduce your exposure
  • 19. How to Fund an Insurance Pool Estimate Loss Estimate Probability Premium = Loss x Probability Members = Loss ÷ Premium
  • 20. How to Fund an Insurance Pool Loss = 100 Probability 1 in 20 or .05 Premium = 100 x .05 = 5 Members = 100 ÷ 5 = 20
  • 21. Adverse SelectionMaking a bad choicedue to asymmetric information
  • 22. Moral HazardChanging behavior after an agreement Temptation to abuse the other party
  • 23. Three Risks Firm RiskIndustry Risk Market Risk
  • 24. Speculative BubblePrice is greater than fundamental valueBuy because everyone else is buying
  • 25. Chapter 28 Islamic Finance
  • 26. Islamic Finance Must have an assetinvolved in the exchange No money for money
  • 27. IslamicProfit and loss sharing system Non Islamic interest-based system
  • 28. Shariah - Sacred LawRiba - Usury -InterestGharar - UncertaintyHaram - ProhibitiedHalal - PermittedZakat - Religious TaxHiba - Gift
  • 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. FutureDifferent views and interpretations Evolving No uniform consensus Five schools of thought Shafi’i, Maliki, Hanafi, Hanbali, and Shi’a
  • 31. Chapter 29Unemployment
  • 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. Employed paid employees work in own businessunpaid workers in family business full-time and part-time jobs but temporary absence
  • 34. Unemployed not employed availabletried to find a job in the last four weekswaiting to be recalled from layoff
  • 35. Discouraged WorkersPeople who would liketo work but have given up looking for a job
  • 36. Not in Labor Forcenot employed or unemployed discouraged workers full-time student homemaker retiree
  • 37. Unemployment RateThe percentage of the labor force that is unemployed
  • 38. Employment Analysis Saudi U.S ChinaUnemployment Rate 12.2% 7.9% 4.1%Participation Rate 45.0% 63.3% 74.2%
  • 39. Natural Rate of Unemployment The normal rate of unemployment aroundwhich the unemployment rate fluctuates
  • 40. Cyclical Unemployment The deviation ofunemployment from its natural rate
  • 41. ProblemsOverstate - Above actual Cash workersUnderstate - Below actual Discouraged workers
  • 42. Unemployment Frictional Seasonal Structural
  • 43. FrictionalTime to find a new job
  • 44. SeasonalDemand changes with the season
  • 45. Structural Too many workersChange in demand for skills
  • 46. StructuralCreative Destruction 10% a Year
  • 47. Unemployment InsuranceGovernment program to provide income when workers become unemployed
  • 48. Unemployment InsuranceUnintended Consequence Moral HazardMay prolong unemployment
  • 49. Why are wages too high?Minimum wage laws Unions Efficiency Wages
  • 50. Minimum Wage Laws Government sets aminimum wage that can legally be paid
  • 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. Efficiency WagesHigher wages make more productive employees
  • 53. Efficiency WagesEmployee Wage Pizzas Productivity Wage per Pizza Ali 100 5 20.0Abdullah 200 12 16.7
  • 54. Efficiency Wages More HealthyLower TurnoverHigher Quality More Effort