Why Study Economics at Nottingham

1

• Why Study Economics at Nottingham?
• Dr. Tim Lloyd Associate Professor
• Mrs. Jo Morgan Admissions Officer in the
  marquee

www.nottingham.ac.uk/economics
2

• What is Economics?
• "the science which studies human behaviour
  as a relationship
• between ends and scarce means which have
  alternative uses."
• Lionel Robbins, 1932, An Essay on the
  Nature and Significance of Economic Science
  (and Wikipedia)

So, economics is a scientific method. i.e. a
particular scientific way of analysing the world
around us. A Nottingham-trained, graduate
economist will be an expert in using this method.
This means that economic science has answers to
an enormous range of questions.
What are some of these questions.?
3

• Some questions for economic analysis
• Corporate Finance . . . How much should I pay
  for a company?
• What is the optimal level of pollution in our
  cities?
• Should the Monetary Policy Committee change
  interest rates?
• Why is there a global financial crisis ?
• What impact does China have on the globalised
  world economy?
• Should the UK get rid of Sterling and join the
  Euro?
• and many, many more

4

• Some questions for economic analysis
• Corporate Finance . . . How much should I pay
  for a company?
• Human brains are hard-wired to answer such
  questions
• Economic theory explains why we make the
  decisions we do
• Often this is straightforward
• But occasionally theory tells us some clever
  stuff about our behaviour

5

• Some questions for economic analysis
• Corporate Finance . . . How much should I pay
  for a company?
• Assume I own an under-performing business.
• You plan to buy the firm from me, hire new
  management and improve performance.
• By doing this the new value of the business would
  be 1½ times my current value of it.
• If you offer me at least my current value I will
  sell the business to you.
• Trouble is my current value is not known to you,
  but assume it is equally likely that . . .
• My valuation could be 0, 1m, 2m, 3m,
  4m, 5m, 6m, 7m, 8m, 9m.
• Example

6

• Some questions for economic analysis
• Corporate Finance . . . How much should I pay
  for a company?
• Assume I own an under-performing business.
• You plan to buy the firm from me, hire new
  management and improve performance.
• By doing this the new value of the business would
  be 1½ times my current value of it.
• If you offer me at least my current value I will
  sell the business to you.
• Trouble is my current value is not known to you,
  but assume it is equally likely that . . .
• My valuation could be 0, 1m, 2m, 3m,
  4m, 5m, 6m, 7m, 8m, 9m.

So you can make profits . . . but losses too. So
how much would you offer me for the business?
7

• To address this problem formally we need some
  logic and a few sums
• For some details see this presentation on our
  website
• It turns out that the profit you can expect on
  average is . . .
• Possible Offers 0 1 2 3 4 5
  6 7 8 9
• Expected profit 0 -0.05 -0.15 -0.30 -0.50
  -0.75 -1.05 -1.40 -1.80 -2.25
• On average, you will make a loss from trading,
  whatever you offer
• The optimal bid is actually zero!
• You should not enter in to trade.
• If you do, you may be lucky and make a profit
  but on average you will make a loss.
• The economic logic (informational asymmetry)
• As a buyer there is insufficient information to
  sustain profitable trade.

8

• To address this problem formally we need some
  logic and a few sums
• It turns out that the profit you can expect on
  average is . . .
• Possible Offers 0 1 2 3 4 5
  6 7 8 9
• Expected profit 0 -0.05 -0.15 -0.30 -0.50
  -0.75 -1.05 -1.40 -1.80 -2.25
• So, although human brains are hard-wired to
  answer questions of valuation, there are some
  results that are counter-intuitive
• While intuition is one thing, theres no
  substitute for economic analysis.
• But if your valuation was actually zero . . .
  youre cleverer than you may have thought !

9

• So how will we train you to answer such
  questions?
• We will equip you with the knowledge, skills and
  techniques of modern and advanced scientific
  enquiry, as practised by economists.
• This involves studying
• economic theory
• quantitative and statistical analysis
• modelling techniques
• practical examples of economic analysis

Precisely how will we do this ?...
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• Our Degrees
• Economics
• Economics and Econometrics
• Economics and International Economics
• Economics with a Foreign Language
• (Russian, French, German, Hispanic Studies)
• Economics with Chinese Studies
• Economics and Philosophy
• Mathematics and Economics

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• An Example Economics (Year 1)
• Core Economic Theory
• Introduction to Microeconomics
• Introduction to Macroeconomics
• Core Quantitative Analysis
• (A-level maths) or (no A-level maths)
• Mathematical Economics Quantitative Economics
  I
• Introductory Econometrics Quantitative
  Economics II
• Optional Modules
• European Economic Integration, Introduction to
  Industrial
• Economics, Introduction to Environmental
  Economics
• (and/or modules from other schools if you want)

Lectures, small-group tutorials, seminars, lab
classes
CHOICE
CHOICE
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• Another Economics International Economics
• Core Economic Theory
• Introduction to Microeconomics
  Introduction to Macroeconomics
• Core Quantitative Analysis
• (A-level maths) or (no A-level maths)
• Mathematical Economics Quantitative Economics
  I
• Introductory Econometrics Quantitative
  Economics II
• Optional Modules
• European Economic Integration, Introduction to
  Industrial
• Economics, Introduction to Environmental
  Economics
• (and/or modules from other schools if you want)

International Economics I International Economics
II
and
CHOICE
CHOICE
13

• What about Years 2 and 3?
• Year 2
• Same structure as Year 1, with a mixture of
  compulsory modules and optional modules
• Year 3
• Choice from a broad variety of modules tailor
  your degree to your interests and employment
  intentions
• Health Economics, International Trade,
  Econometrics, Labour Economics, Monetary
  Economics, Environmental Economics and many
  more.
• BA or BSc?
• Some year 2 and 3 modules are more technical
  than others. These have a BSc label, so those
  that choose to can graduate with a BSc.
• Degree Result Based upon performance in Years 2
  and 3
• First year is a qualifying year your finals
  are spread over 4 exam periods and thus you can
  have a bad day and still get First Class
  Honours!

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• Why choose the Nottingham School of Economics?
• Strength and Depth
• We are a large school with experts across the
  spectrum of specialisms within economics. This
  gives you more choice, makes your degree more
  flexible and means you are taught by leading
  specialists.
• High Quality Provision
• - Top rated teaching (24/24 in the QAAHE
  teaching inspection)
• - Top rated research (Rated 3rd in UK Economics
  on Research Power).
• - Enviable league table performance. Always top
  10, normally top 5.
• - 1 staff to 16 students small group tutorials
  central to our programmes.
• Prestigious University
• - Top 10 in UK
• - Top 1 in the world
• - We are World-Class and so will be your
  education.

15

• Why choose the Nottingham School of Economics?
• Excellent Study Environment
• Guaranteed place in Hall, flexible modular
  degrees, study abroad opportunities
• Take a Semester overseas and experience a new
  culture
• University of British Columbia, Vancouver, Canada
  
• University of Nottingham, Malaysia Campus

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• Why choose the Nottingham School of Economics?
• Graduate Salaries
• Our graduates are sought after by the best
  employers and are well paid.
• Starting Salary, Nottingham graduates 2007
• Economics 29,781
• Management 23,641
• Law 20,272
• Geography 20,660
• Nottingham 21,603
• Source Nottingham University Careers
  advisory Service
• Various Career Options
• Investment banking, financial services,
  accountancy, management programmes in industry,
  civil service, journalism, teaching and research,
  NGOs..
• Blue-Chip Employers

17

• Sound interesting?....What next?
• Pick up a School brochure and university
  prospectus
• Visit www.nottingham.ac.uk/economics
• Speak to students our students speak very
  highly of their time here
• E-mail any questions to us jo.morgan_at_nottingham.
  ac.uk
• Competition for places is fierce (7 applications
  per place)
• Our standard offer is AAA/AABB (maths preferred).
  All our offers are made after the mid-January
  deadline.
• If you apply and are offered a place, you will be
  invited to a School open day so come and see us
  again to find out more about our degrees.

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• and finally
• Whatever you do, go to University!
• A life-changing experience and one of the best
  investments out there

Graduate Premium by Discipline ()
Source Labour Force Survey, HMSO 2007
19

• Thank you for coming to see us

20

• The Valuation Problem Explaining the logic
• Possible Offers 0 1 2 3 4 5
  6 7 8 9
• Expected profit 0 -0.05 -0.15 -0.30 -0.50
  -0.75 -1.05 -1.40 -1.80 -2.25

With seller valuations (v) uniformly distributed
with the range 0 to 9m, the average seller
valuation for any offer (f) is half way between
0 and the offer, so conditional on the offer
being accepted, the expected value of the
business for the seller is 0.5f and because of
his superior management, it is 1.50.5f for the
buyer. Bearing in mind that the buyer must pay f,
then the expected profit is 1.5x0.5f-f. Since
this is always negative, any positive non-zero
offer f will yield a loss on average. A bid of
zero, i.e. No offer at all is the optimal offer
under standard assumptions about risk
preferences. The higher the bid is, it is both
more likely that the owner will sell the business
to you and that you will make a loss on the
transaction (your offer being higher than 1.5
times the sellers valuation), thus expected
losses rise with the bid. Of course, given that
there are some combinations of bids and
valuations that yield profits, if you happen to
be lucky you can make a profit, but on average
you would always loose . . . and thats why you
should not enter into trade. Allowing for
risk-loving preferences can change things . . .
But thats another story. Where did those numbers
come from? The following slides gives an example
if you bid 2m but the same procedure can be
applied for all other bids. We know that profit
is the difference between the new value and the
offer. Since the new value is 1.5 times the
current value, and the last part is not know we
have to perform the calculation over all possible
current values, weighting each by probability of
occurrence. We are told that each current value
can occur with equal probability hence any one
will occur 10 of the time on average.
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• To see how we got the numbers . . .
• For each offer, we calculate the expected profit.
  To give a flavour of the analysis, assume you
  offer me 2m
• Offers you could make 0 1 2 3 4
  5 6 7 8 9
• My current valuation 0 1 2 3 4 5
  6 7 8 9 (each with probability of
  0.1)
• Analytically, we work out the expected profit
  for each offer over all possible valuations (here
  zero)
• Expected profit probability of current
  valuation new value offer
• 0.1 (0 x
  1.5) 2
• -0.2
• Expected profit (-0.2)

22

• And then we calculate it for a current valuation
  of 1m.
• Offers you could make 0 1 2 3 4
  5 6 7 8 9
• My current valuation 0 1 2 3 4 5
  6 7 8 9 (each with probability of
  0.1)
• Expected profit probability of current
  valuation new value offer
• 0.1 (1 x
  1.5) 2
• -0.05
• Expected profit (-0.2) (-0.05)

23

• And finally for 2m. Note that I would not sell
  the firm to you if my valuation was greater than
  your offer so the calculation below is the last
  for an offer of 2m.
• Offers you could make 0 1 2 3 4
  5 6 7 8 9
• My current valuation 0 1 2 3 4 5
  6 7 8 9 (each with probability of
  0.1)
• Expected profit probability of current
  valuation new value offer
• 0.1 (1 x
  1.5) 2
• -0.05
• Expected profit (-0.2) (-0.05)

24

• And finally for a current valuation of 2m. Note
  that I would not sell the firm to you if my
  valuation was greater than your offer so the
  calculation below is the last for an offer of 2m
  (but there would more sums for successively
  higher offers).
• Offers you could make 0 1 2 3 4
  5 6 7 8 9
• My current valuation 0 1 2 3 4 5
  6 7 8 9 (each with probability of
  0.1)
• Analytically, we should work out the expected
  profit for each offer
• Expected profit probability of current
  valuation new value offer
• 0.1 (2 x
  1.5) 2
• 0.1
• Expected profit (-0.2) (-0.05) (0.1)
• -0.15 i.e. on
  average youd make a LOSS of 150,000 if you bid
  2m.