Interest Rates, Unemployment & Exchange Rates

A2 Business Studies Unit 4

Aim:• Understand how businesses affected by interest rates,

unemployment and exchange rates.Objectives:• Define unemployment and exchange rates.• Explain how businesses are affected by interest rates,

unemployment and exchange rates.• Analyse business strategies to combat interest rates,

unemployment and exchange rates.• Evaluate business strategies to combat interest rates,

unemployment and exchange rates.

Aims and Objectives

• http://www.bbc.co.uk/news/business-16964069

• Why as a business, would you be concerned with the interest rate?

Starter

Task: Brainstorm in groups, business

strategies which could be used to combat high interest rates.

You may want to consider gearing, credit, products portfolios, expansion.

Interest Rate Strategies

Interest Rate Strategies

Reduce gearing ratio by selling assets

Reduce gearing ratio by raising capital from sale

of shares

Alter product portfolio to make products which

appeal to customers with less disposable

income.

Postpone expansion projects needing large

investments

Interest Rate Trends

Number of people willing and able to work but unable to find work.

http://www.bbc.co.uk/news/uk-17043305

2.67 million 8.4%

Unemployment

Structural UnemploymentUnemployment due to

declining industries such as mining or ship building

Frictional UnemploymentPeople who are unemployed

between jobs

Cyclical UnemploymentGeneral unemployment

which follows the business cycle

Seasonal UnemploymentUnemployment from seasonal jobs,

e.g. Fruit picking

Effects of Unemployment on Firms

Demand for most goods will fall as

average incomes fall

May lead to further redundancies.

Workers will be less inclined to demand

higher wages

Less willing to take industrial action,

business wage costs may fall or not

increase.

Unemployment Trends

The price of one currency in terms of another

Significant for importers and exporters

Exchange Rates

An increase in the value of a country’s currency in relation to another.Lowers price of imported goods but may force exporters to raise prices.

A fall in the value of a country’s currency in relation to another.Raises the prices of imports but may allow exporter to reduce prices.Ex

chan

ge R

ate

Appr

ecia

tionExchange Rate D

epreciation

Exercise:a) In year 1, £1 = $2. Firm A exports

goods valued at £10,000 to USA. What will the USA $ price be?

b) Firm B imports goods valued at $15,000 from the USA. How much will it pay in £?

Answers: a) $20,000 b) £7,500

Exchange Rates

Exchange Rates

Exchange rate French car (€15,000) UK car (£12,000) French raw materials (€4 per kilo)

Originally £1:€1.5 £ in the UK € in France £ to UK businesses

£ appreciates £1:€1.8 £ € £

£ depreciates £1:€1.2 £ € £

Exchange Rates

Exchange rate French car (€15,000) UK car (£12,000) French raw materials (€4 per kilo)

Originally £1:€1.5 £10,000 in the UK €18,000 in France £2.67 to UK businesses

£ appreciates £1:€1.8 £8,333 €21,600 £2.22

£ depreciates £1:€1.2 £12,500 €14,400 £3.33

Exchange Rate Trends

£1 = €1.2

£1 = $1.56

Exchange Rate Strategies• As value of £1 fell to its lowest level ever against

the Euro in 2008, Thomas Cook cancelled some of its short haul European holidays, and increased the number of deals across the Atlantic – the $ had depreciated against the £!

• What strategies can you think of in time of currency appreciation and depreciation?

Depreciation Exchange Rate Strategies

Reduce reliance on components imported

as imports more expensive.

Focus on marketing exports as now cheaper and more attractive to

other countries.

Sell assets overseas as these are now worth more in terms of £.

Expand operations in UK as apposed to

abroad as foreign assets are now more

expensive.

OPPOSITE FOR APPRECIATING

EXCHANGE RATES