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 LoanBorrowing an amount of money from a bank

and paying it back in instalments.OverdraftTaking more money out of your bank

account than you have in it.InterestThe 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

You now owe them £6,600

They agree and charge 10% interest

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 topay 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

Interest RateMonthly repayment

Bank Loan Overdraft

RiseFall

Interest Rates affect businesses and

consumers

Consumers are people who buy goods and

services

Interest Rate Fall – ConsumersI 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 – ConsumersI 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?

ExchangeRates

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: £1 = €1.2

£10 x 1.2 = €12

Answers£ to $ and €

Answers£ to $ and €

To convert € or $ to £

Divide the amount by the exchange rate:

Exchange Rate: £1 = €1.2

€10 \ 1.2 = £8.33

Answers$ and € to £

Answers$ and € to £

Imports

and Exports

Imports

Exports

Which is more importantto 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 RatesExchange Rates

Exchange rates fluctuate:

April 28 £1 = 1.2 euros

April 30 £1 = 1.3 euros

May 1 £1 = 1.1 euros

The valueof the £ is increasing

The valueof the £ is decreasing

Exchange RatesExchange Rates

Exchange rates fluctuate:

April 28 £1 = $1.5

April 30 £1 = $1.4

May 1 £1 = $1.6

The valueof the£ is decreasing

The valueof the£ is increasing

Example OneExchange 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:

€12If the value of the £ increased: £1 = €1.32. The business would now have to charge?

€13Is the business better or worse off?WORSE - The Germans may not pay the higher

price.

Example TwoExchange 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?

€12If the value of the £ decreased: £1 = €1.12. The business would now have to charge?

€11Are they better or worse off?BETTER - The Germans will like the lower price.

Example ThreeExchange Rate: £1 = € 1.2

1. A business imports raw materials from Germany and it costs €12. What will they have to pay in £?

£10If the exchange rate changed: £1 = €1.32. 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 FourExchange Rate: £1 = € 1.2

1. A business imports raw materials from Germany and it costs €12. What will they have to pay in £?

£10If the exchange rate changed: £1 = €1.12. 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, thereforeExports are cheaper.

Starter ActivityExchange Rate

Bank Loan

Interest Rate

Interest

Import

Overdraft

Export

Sales will fallSales will rise

Disposable Income

Value of £ Sterling is rising

Value of £ Sterling is falling

Exchange

RatesImport

Price in

£

Import

Price in

£

Export Price in

€

Export Price in

€

Overall

Value £ Sterling is Increasing*

£1 = €1.2 £1 = €1.3 £1 = €1.2 £1 = €1.3

Value £ Sterling is decreasing

£1 = €1.2 £1 = €1.1 £1 = €1.2 £1 = €1.1

Italian Company A imports cameras into the UK at a price €120. UK Business B exports coats to Italy at a price of £50.

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.

£100 £92.30

£100 £109.09

€60 €65

€60 €55

* 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.