Unit 1 5 Understanding the Economic Context

Unit 1. 5 Understanding the Economic Context

Starter … • As an adult, if you were out in town and you had no money to pay for your taxi home, what could you do? • Could you use a cash till and take money out of your bank account even if you had no money in your account? • As an adult, what source of finance could you use if you wanted to buy yourself a new car?

Buying on Credit Bank Loan Borrowing an amount of money from a bank and paying it back in instalments. Overdraft Taking more money out of your bank account than you have in it. Interest The cost of borrowing – usually calculated as a percentage.

Bank Loan You want to buy a car and need to borrow £ 6, 000 You go to the bank and ask for a loan for £ 6, 000 They agree and charge 10% interest You now owe them £ 6, 600 You pay this back in monthly instalments

Overdraft The bank gives you an overdraft limit of £ 5, 000 You are out shopping and want to buy a new TV for £ 2, 000 You only have £ 500 in your bank account but you can still buy the TV You will be overdrawn by £ 1, 500 and will get charged interest for every day you are overdrawn

Interest Rates • Interest rates change – the banks decide what interest rate they want to charge • The higher the interest rate, the more you have to pay back to the lender • The lower the interest rate, the less you have to pay back to the lender

Repayments on a £ 10, 000 loan over 5 years Interest Monthly payment Total to pay back: Loan + Interest Source: Gocompare. com

Interest Rate Fall – a Business A business pays £ 900 a month on their mortgage repayment. If interest rates fall, the monthly repayment may, for example, fall to £ 850 a month The business will then make more profit because their business costs are less.

Interest Rate Rise – a Business A business pays £ 900 a month on their mortgage repayment. If interest rates rise, the monthly repayment may, for example, fall to £ 1, 000 a month The business will then make less profit because their business costs are more.

Answer these Questions in your book – in sentences: 1. Do interest rates change? 2. If interest rates rise, what will happen to your monthly repayments on a loan? 3. When interest rates rise, what happens to the cost of running a business? 4. When interest rates fall, what happens to the cost of running a business? 5. Page 122 + 123 – answer the multiple choice questions.

Interest Rates Starter Bank Loan Overdraft Inte Monthly repayment Fall res t. R ate Rise

Interest Rates affect businesses and consumers

Consumers are people who buy goods and services

Interest Rate Fall – Consumers I pay £ 900 a month on my mortgage repayment. If interest rates fall, the monthly repayment may, for example, fall to £ 850 a month I will then have more disposable income – more money to spend on other items Businesses will benefit because consumer spending will rise

Interest Rate Rise – Consumers I pay £ 900 a month on my mortgage repayment. If interest rates rise, the monthly repayment may, for example, fall to £ 1, 000 a month I will then have less disposable income – less money to spend on other items Businesses will lose out because consumer spending will fall

Answer these Questions in your book – in sentences: 1. When interest rates rise, what happens to consumer spending? Explain your answer. 2. What impact will this have on small businesses? 3. When interest rates fall, what happens to consumer spending? Explain your answer. 4. What impact will this have on small businesses?

Exchange Rates

Exchange Rates • When you go on holiday abroad, can you use £ sterling to buy goods and services? • If you went to the USA, what currency would you have to use? • If you went to Italy, France, Spain or Germany, what currency would you have to use? • Do you exchange £ 1 for € 1 and $1?

Exchange Rates An exchange rate is the price of buying a foreign currency. It tells you how many of a currency you get for £ 1. eg: £ 1 = € 1. 2 = $1. 5

Activity: Using the worksheet provided, calculate how much you would receive in each situation

To convert £ to € or $ Multiply the amount by the exchange rate: Exchange Rate: £ 10 x £ 1 = 1. 2 € 1. 2 = € 12

£ to $ and € Answers

£ to $ and € Answers

To convert € or $ to £ Divide the amount by the exchange rate: Exchange Rate: € 10 £ 1 = 1. 2 = € 1. 2 £ 8. 33

$ and € to £ Answers

$ and € to £ Answers

Imports and Exports Imports Exports Which is more important to the UK?

The Effect of Exchange Rates on Small Businesses • When exporting products, the exchange rate will affect the price you charge in the foreign country • When importing products, the exchange rate will affect how much you have to pay for the foreign goods • Exchange rates fluctuate so the prices you pay/receive change

Exchange Rates Exchange rates fluctuate: April 28 £ 1 = 1. 2 euros April 30 £ 1 = 1. 3 euros May 1 £ 1 = 1. 1 euros The value of the £ is increasing The value of the £ is decreasing

Exchange Rates Exchange rates fluctuate: April 28 £ 1 = $1. 5 April 30 £ 1 = $1. 4 May 1 £ 1 = $1. 6 The value of the £ is decreasing The value of the £ is increasing

Example One Exchange Rate: £ 1 = € 1. 2 1. A business exports their table to Germany. They want to charge £ 10 so they sell the table in Germany for: € 12 If the value of the £ increased: £ 1 = € 1. 3 2. The business would now have to charge? € 13 Is the business better or worse off? WORSE - The Germans may not pay the higher price.

Example Two Exchange Rate: £ 1 = € 1. 2 1. A business exports their table to Germany. They want to charge £ 10 so they sell the table in Germany for? € 12 If the value of the £ decreased: £ 1 = € 1. 1 2. The business would now have to charge? € 11 Are they better or worse off? BETTER - The Germans will like the lower price.

Example Three Exchange Rate: £ 1 = € 1. 2 1. A business imports raw materials from Germany and it costs € 12. What will they have to pay in £? £ 10 If the exchange rate changed: £ 1 = € 1. 3 2. The business would now have to pay: £ 9. 23 (€ 12 1. 3) Are they better or worse off? BETTER – the price of the imports has fallen.

Example Four Exchange Rate: £ 1 = € 1. 2 1. A business imports raw materials from Germany and it costs € 12. What will they have to pay in £? £ 10 If the exchange rate changed: £ 1 = € 1. 1 2. The business would now have to pay: £ 10. 90 (€ 12 1. 1) Are they better or worse off? WORSE – the price of the imports has increased.

Mrs Wright’s Top Banana Method of Remembering all this … If the value of the £ Increases, Imports are cheaper, therefore Exports are more expensive. So the opposite is then true; If the value of the £ decreases, Imports are more expensive, therefore Exports are cheaper.

Starter Activity Exchange Rate Interest Rate Value of £ Sterling is rising Bank Loan Overdraft Value of £ Sterling is falling Export Interest Sales will rise Import Disposable Income Sales will fall

Italian Company A imports cameras into the UK at a price € 120. UK Business B exports coats to Italy at a price of £ 50. Import Price in £ Export Price in € Value £ £ 1 = € 1. 2 £ 1 = € 1. 3 Sterling is Increasing* £ 100 £ 92. 30 € 65 Value £ £ 1 = € 1. 2 £ 1 = € 1. 1 Sterling is decreasing £ 100 £ 109. 09 € 60 € 55 Exchange Rates Overall UK firms are worse off. Imports are cheaper to buy so consumers buy Italian goods and not UK goods; exports are more expensive to sell in Italy so Italians don’t buy them. UK firms are better off. Imports are more expensive to buy so consumers do not buy Italian goods – they buy British. exports can be sold at a cheaper price abroad so UK firms sell more. * But imports are cheaper to buy so if you are a factory that import raw materials, then you are better off. Also, if you are going on holiday, you are also better off

Multiply or Divide? We change £ into $/€ when we go on holiday 3 times a year. When we come home, we change $/€ back into £ and divide the money between the family.