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
  21. 21. Adverse SelectionMaking a bad choicedue to asymmetric information
  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

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