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

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

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.  k k  2.67 million  8.4% Unemployment

Structural Unemployment Unemployment due to declining industries such as mining or ship building Frictional Unemployment People who are unemployed between jobs Cyclical Unemployment General unemployment which follows the business cycle Seasonal Unemployment Unemployment 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. Exchange Rate Appreciation Exchange Rate Depreciation

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 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