UNIT 11: PERSONAL ECONOMICS - PowerPoint Presentation

UNIT 11: PERSONAL ECONOMICS MONEY WORK THE NATIONAL & GLOBAL ECONOMY

Exam Instructions: reminders Answer all questions Have at least two black pens and a calculator You must answer the questions in the spaces provided Do not write outside the box around each page or on blank pages Make sure your writing is clear, large enough to read and free from spelling and grammar errors

Tips on how to do well in the exam! Firstly , you must remember to relate your answer to the question being asked If you are asked to explain two factors do exactly that, explain two! – and try to ensure they are different! You are rewarded for application as well as knowledge Thorough reading and using the data in Items A–C will help you to put your answers into context Secondly , you should put effort into ensuring your essay questions follow a logical structure (see next slide)

How to structure your essay questions Mini-judgement which addresses and answers the question directly Three or four detailed paragraphs of analysis and evaluation (positives and negatives; pros and cons) which support your mini judgement and include evidence from the Items Final judgement/conclusion which supports your analysis and evaluation (see next slide)

How to write good conclusions! Try to avoid very short conclusions; instead , recommendations should always be justified It could, for example , be justified by saying why one option is chosen and another rejected It could also be by saying why certain option(s) have more effect(s) than others Alternatively it could be by linking any conclusion very clearly to the situation that has been described in the question In simple terms you need to make a judgement and support it with a series of simple points, some from your analysis and evaluation but also any new points you have not mentioned so far! Finally, read questions carefully so that key words are not missed as you plan your answers

To summarise… Read the question carefully to ensure you answer them and don’t veer off course! Answers need to be in context (i.e. related to the Case Study Item) A conclusion paragraph is really really (yes, really) important in the final 12 marks questions! This concluding paragraph includes a final judgement, answering the question directly

GCSE Economics: recap on topics Warm-up!

MONEY THE PERSONAL LIFE CYCLE

Most people will experience leaving home, working, establishing their own families and retiring This is known as the personal life cycle Throughout the cycle incomes, needs and wants change significantly.... Personal Life Cycle: stages Childhood (0-12) Adolescence (teenagers) Young Adult Middle Adult (Middle Age) Late Adult (Old Age) Personal Life Cycle

Key milestones in the personal life cycle Important events (‘milestones’) in the personal life cycle will affect our finances Leaving school Gaining employment Promotion Unemployment Retirement

How the government affects stages of the personal life cycle There are many points in people’s lives when they may need additional financial help from the government. This is provided through the benefits system: Working Tax Credits (reduces income tax that low-paid workers have to pay) Jobcentre Plus offices provide benefits and services to help people to find work (Jobseeker’s Allowance), start their own business, help individuals manage in low-paid jobs or help with work-related accidents or illness Child and housing benefits Pensions, winter fuel payments and a free TV licence Recent changes mean that all these benefits are paid in one lump sum (aka Universal credit)

What is the difference between needs and wants? Needs are those things people need to survive Wants are the things that make life more enjoyable and also change as circumstances change

What is the difference between needs and wants? At all stages of the personal life cycle, incomes are likely to be limited; as such we say income is a ‘ SCARCE RESOURCE’ Needs and wants, however, are likely to be UNLIMITED People have to decide between the purchases that are essential (NEEDS) and those that are not (WANTS) For example, one needs clothes, but one may not need designer clothes

MONEY MAKING DECISIONS

Why do we have to make ‘Choices’? All economic questions and problems arise from scarcity Economics assumes people do not have the resources, income and time (i.e. they are scarce) to satisfy all of their wants and needs Therefore, we must make choices about how to allocate those limited resources We make decisions about how to spend our money and use our time

What is meant by ‘opportunity cost’? OPPORTUNITY COST is the highest-valued forgone activity (the second choice given up in making our first choice) It is not all the possible things you have given up For example, if you go to the movies you have to give up a certain amount of gum and pop If you are a sodaholic , you have to give up five sodas If you are gum fanatic, you surrender twenty packs of gum But, the opportunity cost of a movie is not five sodas and ten packs of gum; it is five sodas OR twenty packs of gum.

Costs and Benefits When making any decision, no matter how big or small it’s important to weigh up the costs and benefits Example: A teenager’s decision to spend £30 going out with friends, perhaps to the cinema, or to buy a new top or pair of jeans would involve weighing up the benefits of enjoying a good night out against the cost of not being able to buy the new garment What are the costs and benefits of going out with friends? (look at the next slide)

Costs and Benefits of going out... Benefits of going out: enjoying a good night enjoying the company of friends avoiding offending friends by refusing to go out, and so on Costs of going out: the enjoyment would only last for a single evening, whereas clothes would last for several months a teenager might worry about reaction of friends if they felt their clothes were ‘un-cool’ the ‘feel-good’ factor from wearing new clothes would be lost

MONEY CHOOSING TO SPEND

Demand and factors that affect spending Demand is the quantity of all goods and services purchased at any given price Look at the demand schedule below for mars bars Price Quantity Demanded £0.20 400 £0.25 350 £0.30 300 £0.35 250 £0.40 200 £0.45 150 £0.50 100

Demand and factors that affect spending D D Law of demand: The higher the price the lower the quantity demanded & vice versa

Demand and factors that affect spending So, as the price increases for a good, the quantity demanded will fall, and vice versa For example consumers will probably start using more gas as British Gas have dropped their prices by 10 per cent

What factors affect our demand for certain goods and services? There are many other factors affecting demand apart from price, however, that affect our spending decisions income level – the most important advertising and branding influence desire and loyalty for a product prices of substitutes (similar goods) and complements (for example fuel is a complement of cars) fashion and peoples’ tastes

How will your demand change over the personal life cycle? Needs, wants and incomes change significantly over a lifetime Initially, a person’s demand is likely to be more for basic household goods With a family, the demand will change to goods and services for the children Once children have left home, people may start to take more meals out or more expensive holidays as demands on income will be lower In retirement, incomes fall so people may need to cut back on expenditure

Market supply and prices Businesses produce goods and services for people to buy so that the business can make a profit The amount they offer for sale is called ‘ supply ’ Supply is the quantity of all goods and services firms are willing to produce at any given price

Market Supply and prices Look at the supply schedule below for mars bars Price Quantity Supplied £0.20 100 £0.25 150 £0.30 200 £0.35 250 £0.40 300 £0.45 350 £0.50 400

Market Supply and prices Businesses tend to supply more, the higher the price The price they charge has to cover the costs of the resources used in production S S Law of supply: The higher the price the greater the quantity supplied & vice versa

Market supply and prices Factors affecting supply and how much businesses charge include: cost of raw materials wage rates – overtime may need to be paid for higher output productivity of the workers The price of similar products VAT (Value Added Tax)

Markets and why prices might change When buyers and sellers come together, a market is formed For very expensive items, like a house, the buyer and seller negotiate a selling price individually For most goods and services, however, the market price is determined by the amount buyers are willing to pay and the price that businesses need to be paid to cover their costs If a good does not sell well, suppliers have to lower their price. Eventually, the price will settle at a point where supply equals demand, known as the market price (the intersection of demand & supply on your graphs)

Markets and why prices might change cont. Prices change when there are changes in demand or supply For example, when oil prices are rising, costs for all companies rise, as oil is needed for energy, transport and heating Businesses will have to raise their prices to cover increased production costs A serious health scare can cause a big fall in demand, and prices will have to fall to maintain sales

The effects of competition Usually there is more than one supplier for each type of good, so businesses face competition They have to fight to win consumers from other businesses by: advertising and branding (e.g. the Andrex puppy and toilet rolls) improving quality changing the design and features (e.g. frequent updates of mobile phones) lowering the price by improving production methods (e.g. by being more energy efficient)

The effects of competition Consumers can benefit greatly from competition through: lower prices (e.g. price wars– supermarkets compete to provide better value) greater variety (e.g. supermarkets stock value, branded and premium versions of the same good) better quality (e.g. McDonald’s improved the quality of its coffee by buying better quality beans)

The effects of competition There can also be disadvantages: Quality can be lowered as businesses try to cut costs (e.g. some companies sell clothes and electrical goods that are cheaper now than they were 15 years ago, but do not last so long) After-sales service can suffer if too many resources are put into sales

MONEY CHOOSING TO SAVE

Why do people save?

Methods of saving If someone is in a position to save (i.e. their net income after tax is higher than their regular outgoings), they have a wide selection of places where they can deposit money. These include: High-street banks (such as NatWest and HSBC) and building societies (like West Bromwich or Derbyshire) I nternet-only banks (such as Smile, Cahoot ) National Savings and Investments Post Office card account – a simple account mainly for pensioners or those receiving benefits; it only allows you to withdraw cash using the card. You cannot go overdrawn, but you won’t get any charges

Current Account V Savings Account Money (i.e. wages from employment) tends to be paid directly into a person’s Current Account before being transferred into a Savings Account, like the ones mentioned

Types of saving accounts There are many different types of account within each of the main savings institutions: Savings accounts and Individual Savings Accounts (ISAs) – savings on which interest payments are tax free Fixed-term investment accounts – savings cannot be withdrawn for an agreed length of time (term) Share-based savings (e.g. unit trusts) – these are savings products that spread risk by investing in a range of shares  Government securities – bonds issued by the government through National Savings and Investments

Restrictions from the government Unfortunately, the government charges tax on interest from all savings accounts apart from ISAs You will often see savings interest rates advertised as ‘gross’ or ‘net’. Gross interest is the interest rate before tax has been deducted. Net interest is the rate you receive after tax has been taken off.

Saving products Account Reward Risk Short- , medium- or long-term Ease of withdrawing money Savings accounts Low–medium Low Short–long Easy – unless notice of withdrawal is required ISA accounts Low–medium Low Medium–long Easy National Savings and Investment account Low Very low Medium–long Often requires written notice of withdrawal Unit trusts Medium–high Medium-high Long Obtaining your money may take some time

Interest Rates on savings accounts The table on the previous slide shows that the rate of interest obtained on savings partly depends on the length of time the money is tied up (the ‘term’) Generally, if you can leave your money longer, you will get a higher rate of interest (a higher return) – though this is not always the case You can also obtain higher rates of interest if you save larger amounts or if you have to give notice, which means telling the bank in advance that you wish to withdraw your savings

Interest Rates on savings accounts The table below shows an internet comparison of savings accounts from December 2008 The lower running costs of internet-only accounts mean that these offer higher interest However not everyone will want to use these online accounts, believing that they are less safe or secure than going to their local bank or building society. Provider Type of account AER Notice Interest paid Minimum balance AA Internet saver 6.46% Instant Monthly £1 Alliance and Leicester Online tracker 4.75% Instant Annually £1

Interest Rates on savings accounts The table below shows that by saving regular amounts every month or saving money for a fixed term, you usually get a higher interest rate In the latter case, you get a guaranteed interest rate for the length of the term These are suitable for people who do not need access to their money for the length of the term Provider Account AER Duration Interest paid Minimum balance Halifax International regular saver 8% Fixed tern for 1 yr On maturity £100 ICICI bank 2-year HiSave (Fixed rate) 5.42% Fixed term for 2 yrs Annually £1

Annual Equivalent Rate (AER) The savings accounts mentioned all quote the Annual Equivalent Rate (AER) of interest An AER is given so that the interest rate on different savings accounts can be accurately compared It shows what the interest rate would be if interest was paid and compounded once each year For example, on some accounts interest is added each month (such as seen for the AA Internet Saver account). In this case you would get interest being earned on interest throughout the year; this is known as compounding (when interest is earned on interest already received)

Annual Equivalent Rate (AER) As a result of compounding, the total amount of interest you receive in one year would be higher if credited monthly than if calculated only once, at the end of the year. The AER converts the monthly rate into a figure equivalent to the annual rate The AER also removes the effect of any temporary promotional offers, that disappear within a few months, but which distort ‘Best Buy’ comparison tables

MONEY CHOOSING TO BORROW MONEY

What would you borrow money for?

Methods of borrowing Mortgage - a loan to finance the purchase of property e.g. a semi-detached house; it is secured against the property Credit card – allows you to buy goods and services on credit up to a pre-arranged amount/limit; you have to pay a minimum amount based on your outstanding balance; interest rates are high Store card – these are cards which are used to pay for goods and services in a particular shop/store; similar to credit cards in terms of charges and high interest Personal loan – used for personal or household use e.g. property extension, expensive furniture, new car Hire purchase – an instalment plan, where payments are maid usually on a monthly basis; you don’t own the good until a final payment is made and the debt is fully paid off Overdraft – a facility on your current account which allows you to borrow up to an agreed amount; Interest & APR : the Annual Percentage Rate (APR) is the cost of borrowing the money; the higher the rate the higher the monthly repayments – the APR allows you to compare the cost of different loans

Case Study: Why Borrow Money There are times in our lives when we need to buy something but may not have the cash to pay for it there and then At times like that we may decide to borrow the money   Becky was buying a car and needed to borrow some money

The impact of interest rates on Borrowing/saving money… The bank’s interest rate is the PRICE or COST of borrowing money AND the REWARD for saving money For example you might borrow £1,000 from a bank… …however, they will not give you the money for free you will have to repay the £1,000 plus interest If you put money into a bank you will gain interest as a ‘thank you’ for saving your money with them

The impact of changing interest rates on Borrowing/saving money… Banks and building societies regularly change their interest rates A change will have a major impact upon consumers, savers, borrowers, homeowners and businesses What would be the impact on homeowners who have a mortgage if the interest rate were to increase? A. If they have a variable rate mortgage their repayments with change directly with the interest rate set by the bank; therefore a rise in interest rates will increase repayments, meaning they have less disposable income!

MONEY MANAGING YOUR MONEY

Planning, Budgeting & the personal life cycle… Planning is the basis of every activity you undertake in your life At each stage of the personal lifecycle the form in which financial planning and budgeting takes place, will change For example Young Adults may be planning how they will financially support a young family and a new home, budgeting for what they can afford each month An ideal financial plan should incorporate short term gains as well as long term security

Managing debt… As part of financial planning and budgeting, it’s important that people are able to manage the debt they experience during the different stages of their personal life cycle What is debt? A. Debt is where something (usually money in the form of a loan) is owed, where there is an obligation to pay it back (i.e. to the bank) Q. What kind of debt might a person have? A. Mortgage, Car loan, Personal Loan, High-priced electronic and white goods

Ethical Spending…. How might a person spend their money ethically? (use the images below for inspiration)

What is meant by ethical/moral spending? Ethical spending is a personal decision for consumers The kinds of issues that people might consider under ethical spending include: Buying Fairtrade goods which ensure those involved in the manufacture are given a fair wage Choosing organic products in the supermarket Switching to a green energy supplier, or installing energy-efficient electrical appliances and light bulbs Not buying chocolate or other products which have depended on child slavery in their manufacture Choosing locally produced products to avoid food miles, and supporting local communities Choosing not to invest in the shares of a company which produces goods designed to harm people (e.g. armaments)

What do the Newspapers have to say? “Ethical consumer spending bucks recession with 18% growth” “ UK households spent almost twice as much on ethical goods last year as they did five years ago, a report from the Co-operative Bank has found. ” “Ethical spending soars”

Starter Activity…. Look at the types of Government Taxes and Benefits below and identify who is likely to be most affected by them National Insurance (NI) Sickness Benefit

Government Influence & The Personal Lifecycle Through taxation the government will directly influence a person’s income For example, each month the government deducts National Insurance (a direct tax) from a person’s wage Through indirect taxes, duties and benefits the government also influences decisions to spend and save At each stage in the personal lifecycle the government has significant influence over the income, expenditure and saving habits of people

WORK PURPOSE & NATURE OF WORK

Why do people work? There are a number of reasons why someone will choose to work Pay Job Satisfaction

Why might people not work? A large section of the UK adult population do not work Can you identify the main reasons for not working?

What is meant by Specialisation? Also known as ‘ division of labour ’ Workers are employed on a specific aspect of work e.g. installing the steering wheel in a car manufacturer Workers then become interdependent (depending on each other to complete the production process)

The benefits of Specialisation Workers become more skilled More output produced as workers do their task quicker through practice Goods are produced cheaper as more can be made in the same amount of time

The drawbacks of Specialisation Workers become interdependent so if one is ill, they cannot complete Jobs become boring if doing the same thing all the time Morale/motivation falls so labour turnover and absenteeism increases Workers are not as flexible to try new things

Information Communication Technology & Work Improvements in technology, especially in ICT have had a huge impact on those who work The invention and increasing use of the internet for example has affected the way in which businesses operate Businesses no longer need to have a physical shop on the high street to sell their goods and services, where they employ shop assistants to serve their customers

Information Communication Technology & Work Schools continue to embrace the improvements in technology, making lessons more interactive and keeping parents more informed on their child’s progress

Changes in the way we work... The way in which people work is changing With improvements in technology, a 24-hour business culture and global operations, employers require a more flexible workforce Employees are also looking for employment and hours which suit their own personal lifestyle and outside responsibilities

Changes in the way we work... In recent years Lloyds TSB has looked to create a more flexible workforce in order to give it a competitive edge in the market

WORK THE REWARD FOR WORK

How people are paid: Salary Salaries are stated as yearly earnings The salary is then divided by 12 and this amount is paid monthly For example an employee on a salary of £36,000 will be paid £3000 a month Salaries tend to be paid to full time workers although it is not uncommon for part-time employees to be paid a salary Jobs which pay salaries tend to be skilled and non-manual in their nature e.g. teachers, nurses and doctors

How people are paid: Wage Wages are calculated as an hourly rate and multiplied by the number of hours worked Wages tend to be paid weekly Wages tend to be paid for lower-skilled jobs, part-time or temporary work

How people are paid: Commission Employees who are paid commission receive payments for meeting certain targets These targets are often linked to sales e.g. selling 10 cars in a month may mean a car salesman receives 10% commission An employee who adds to a company’s sales will often receive a percentage of the sales value as reward e.g. 10% of the value of the 10 cars they sold Commission acts as an incentive to employees to achieve more sales Employees can be paid partly or fully on commission

How people are paid: Overtime payments Businesses sometimes require employees to work longer hours This is usually the case when production of a product needs to be higher than usual Rather than hiring more workers, a company will encourage its workforce to work longer hours In order to give up their leisure time employees are paid at a higher wage rate for these extra hours These extra payments are known as overtime payments

How people are paid: Shift work payments Some workers will not work the traditional ‘9 until 5’ but rather work shifts This often occurs when a business needs to be kept open for longer than the normal working day As a result of working unsociable hours employees can be compensated through higher wages

How people are paid: BACS BACS stands for the Bankers’ Automated Clearing Services and is a system used within the UK for allowing the electronic transfer of money between banks This means that it avoids the need for paper-based documents when making payments The payments can take up to three days to move from one bank to another

How people are paid: Fringe Benefits Fringe benefits are when workers are Paid in ways other than money Examples include; Company car Private healthcare Staff discounts Employer Pension contributions Fringe benefits have a financial value and are often paid for highly skilled and highly paid jobs

Gross Pay Gross pay refers to the total amount of pay that a job will pay However the employee will not be allowed to keep the full amount of gross pay Deductions will be made which will reduce the amount the employee actually receives

Net Pay Net pay refers to the pay after all deductions for tax, national insurance and pension contributions have been made Net pay is sometimes known as ‘take-home pay’ as it is the final amount Gross pay is useful to know for job comparisons Net pay is not strictly comparable between jobs as the amount of deductions will depend on various factors such as the level of income and pension contributions

Deductions from pay: Income Tax Income tax is a tax on money paid to an employee Although not all income is taxed, the income tax will be paid as a percentage of earnings People only pay income tax on earnings above a tax-free allowance The percentage rate paid in income tax depends on the level of income, which is indicated by a tax code As incomes rise, the percentage rate of income tax paid will rise Income tax in the UK is paid in two ways Pay as you earn (PAYE), where tax is deducted by the employer before income is paid to the employee Self-assessment (SA) for workers who are self-employed - tax is paid by the worker

Deductions from pay: National Insurance National Insurance Contributions (NIC) a re paid by employees on incomes to build up an entitlement to certain benefits and the state pension Like income tax, national insurance is paid as a percentage of income earned The rates at which it is paid are different to those of income tax

Deductions from pay: Pension Contributions Some employees will pay fewer NICs because they make payments to either a private or a company pension scheme Employees pay a percentage of their income, which will then be invested The employee will receive the pension when reaching retirement age

Deductions from pay: Other deductions There may be other deductions from an employee's income, such as ; Trade union subscriptions Staff association membership fees Student loan repayments

Payslip: Extra key items Tax code : employees have different tax codes which relate to the different amount of tax-free allowance each employee has P45 : this is a document provided by an employer when a employee leaves the organisation P60 : this is a document provided by an employer on a yearly basis showing total pay and deductions for the year

The Supply of labour The supply of labour refers to the amount of work each employee is willing to perform Each employee has a decision about whether or not to work In effect, each employee can decide how to split their time between work and leisure

Factors which affect the Supply of labour The supply of labour is affected by both monetary (money) and non-monetary factors The main factor which determines the supply of labour is the level of wages offered The higher the wage or salary, the more willing an employee will be to supply their labour This is because each hour worked becomes more valuable to the employee and as a result it becomes more tempting to work

Factors which affect the Supply of labour In addition to the wage rate, there are various non-monetary factors that influence how much an employee wants to work Gender : traditionally women were less willing to enter the labour force than men, but this trend has changed Why have increasingly more women entered the labour force?

Factors which affect the Supply of labour Ethnic origin : traditionally workers of non-white origin were less likely to be employed; but this trend has changed over the last two decades Taxation : Income tax reduced the amount of a wage or salary an employee is allowed to keep; if reduced people with have a greater incentive to work and therefore the supply of labour will increase State benefits : benefits are provided in the UK for those looking for work but currently unemployed; if they are sufficiently low people will be more willing to supply their labour, than if they were higher

The Demand for labour The demand for labour comes from businesses that need employees to produce their goods and services However, the demand for labour is unlike the demand for most goods and services

The Demand for labour Derived demand Businesses don’t demand workers for their own sake but because they need them to produce goods and services for the firm to sell This is known as derived demand; where the demand for labour (i.e. workers) is a derived demand!

Government influence and the Demand for labour The UK government will indirectly affect the demand for labour This is because it will influence through legislation how much a business must spend on an employee in addition to paying their wages These influences include; Right to paid holiday Maternity/paternity pay

Mini plenary: Government Influences National Minimum Wage (NMW) Benefits Taxation Workplace legislation How does the government influence pay and working conditions?

Labour Market: National Minimum Wage (NMW) The National Minimum Wage rate per hour depends on your age and whether you’re an apprentice - you must be at least school leaving age to get it

Labour Market: National Minimum Wage (NMW) Advantages Reduce the exploitation of lower paid workers (e.g. where there is little or no trade union protection) Reduce the scale of relative poverty & inequality by boosting incomes of low income households Reverse the effects of employer discrimination (e.g. help to close the gender pay gap) Improve incentives for people to find work and reduce benefit dependency by raising the “return to working”

Labour Market: National Minimum Wage (NMW) Disadvantages Fall in employment due to higher wage costs Risk of cost push inflation from higher wages Damages competitiveness of some firms The NMW is not the most effective way to reduce poverty The NMW only affects low-skilled job markets

Labour Market: Trade Unions, Gov. Influence… Trade Unions protect and improve the real incomes (living standards) of their members provide job security, protect workers against unfair dismissal (employment rights) promoting improvements in working conditions and health & safety issues promoting improvements in workplace training and education, accumulation of human capital campaigning for protection of pension rights of union members

Labour Market: Trade Unions, Gov. Influence… Trade Unions: drawbacks Trade unions drive wages higher meaning firms are unable to afford as many staff causing unemployment They may prevent the introduction of new flexible working practices They may delay the introduction of new technology as it may replace labour Through collective bargaining they force wages and firm’s costs higher leading to cost-push inflation

THE NATIONAL & GLOBAL ECONOMY INTERNATIONAL TRADE

International Trade Each year the UK trades a high value of goods and services with other countries Exports (X) are goods and services that the UK sells to buyers in foreign countries e.g. Jaguar cars Imports (M) are the goods and services the UK buys from other countries

What are goods & services? Goods are things like televisions or cameras, which can be physically handled Goods are often referred to as visibles Services are things like tourism, financial services or insurance, which cannot be physically handled or seen, often called invisibles

Is International Trade important for the UK? By the end of 2010 UK international trade accounted for 3.4% of World Trade Forecasters predict that UK trade with the rest of the world will grow substantially over the next 15 years It is anticipated that merchandise trade volumes in 2025 will be $1,360.7billion increasing from their levels at the end of 2010 of $933.7billion On these figures alone you can see how much international trade is worth to the UK Economy A huge number of businesses rely heavily on selling their products and services to international customers, providing a large number of jobs to UK citizens

The importance of trade to the UK Economy As we have seen international trade is very important to the UK economy Each and every country in the world has a different set of raw materials, climates, cultures, labour skills etc giving them an advantage in producing certain goods and services This is known as Comparative Advantage Through trade the UK can specialise in produce those goods and services it has a comparative advantage in The surplus goods are then sold abroad (i.e. exported), creating jobs for UK citizens

The Social Impact of Trade We all enjoy having better choice and paying the lowest possible price, however international trade carries a higher price in terms of its impact on the environment We call this impact the carbon footprint Many products, such as clothes, toys and cars now carry measurements of their carbon footprint Goods bought from other countries will inevitably require more energy to transport them, increasing their carbon footprint

THE NATIONAL & GLOBAL ECONOMY EXCHANGE RATES

Exchange Rates Every time a UK citizen or business wants to buy something from abroad, they need to pay for that product in the currency where it is produced Example: When Helen buys original Ugg Boots from Australia and imports them to the UK she needs to buy Australian dollars to pay for them $150

Exchange Rates cont… The amount a person has to pay for this foreign currency depends on the Exchange Rate This is the rate at which one currency (e.g. £’s) exchanges for another (e.g. €’s) Exchange rates change every day, so the foreign currency you could buy for £1 today may not be the same tomorrow The exchange rate, and the fact that it changes on a daily basis, has serious financial consequences for businesses and consumers

In October 2000 you could buy €1.75 for £1 In December 2008 the value of the pound had fallen, meaning that you could only buy €1.14 for £1 How would this fall in the value of the pound (i.e. the exchange rate) affect importers of goods and services to the UK? The effects of the exchange rate on importers …

Exchange Rates cont… Example: Imagine you want to buy some perfume from France which is priced at €10 If the exchange rate means you get € 1 for every £1 then the perfume costs you £10 Q. If the exchange rate changes meaning you now only receive € 0.50 for every €1; how much will the perfume cost you in £’s? £20 Changes in the exchange rate therefore have huge consequences for what consumers can afford and want to buy (i.e. their demand for imports)

The effects of the exchange rate on exporters … When UK firms want to export their goods and services those foreign citizens who want them will have to buy pounds in order to pay for them Example 1: If the exchange rate is £1:$2, every pound they want to buy will cost $2 This means that for a good exported to the US for £10, a US citizen will need to pay $20 to buy the pounds necessary

Example 2: If the exchange rate changes to £1:$1, every pound they want to buy will cost $1 This means that for the same good exported to the US for £10, a US citizen will need now only need to pay $10 to buy the pounds necessary UK exports will therefore be more attractive to US citizens in the second example as they are half as expensive This is positive for UK exporters as they will sell more of their goods and services abroad The effects of the exchange rate on exporters …

THE NATIONAL & GLOBAL ECONOMY CONSUMER POWER

Consumer Power As an individual you may think you have little say or power over the goods and services that are made available by firms However through your choices, as a collective group, consumers can almost force producers to adapt their products to consumer demand As you researched last lesson, consumers can boycott products, services and even countries This is the result of consumer empowerment

Consumer Power cont. Consumers also demand cheaper products or more for the price they pay In response to this many UK firms have moved all or part of their operations overseas , in order to compete with lower prices UK imports Q. Other than price what else might influence you to buy or not buy a product? A. Online customer reviews/feedback; are they fair-trade?; organic?

Consumer Power cont. Consumers may choose to boycott products based on the following Are they fair-trade? Are they locally produced? Does their manufacture result in a huge carbon footprint? Does the product come with excessive packaging? Have humans or animals been detrimentally treated in its manufacture or supply?

The role of the UK Gov. in reducing poverty The UK Government is one of the foremost governments working to rid the world of extreme poverty The Department for International Development (DFID) is the part of the UK Government that manages Britain’s aid to poor countries

THE NATIONAL & GLOBAL ECONOMY THE IMPACT OF THE GLOBAL ECONOMY ON WORK

The effects of globalisation on the UK Labour market Globalisation is effectively making the world a smaller place Globalisation has both positive and negative effects on the UK labour market Workers are increasingly mobile, moving between countries to find work, especially in the EU

Benefits of globalisation for the UK labour market? Jobs are created in sectors where the UK does well e.g. financial services New migrant labour lowers the costs of firms and increases their competitiveness There are greater opportunities to export goods and services to new global markets

Drawbacks of globalisation for the UK labour market? Low-skill jobs are lost, particularly affecting manufacturing regions of the UK Increase in immigrant labour puts downward pressure on wages Relocating production overseas can cause unemployment

The effects of globalisation on the UK Labour market Firms look to locate their factories and operations abroad, often to take advantage of lower labour and production costs A wide range of British Industries have moved their manufacturing bases outside the UK Examples of UK companies moving their manufacturing operations abroad include; Vodafone BP

Advantages of UK firms operating overseas… UK firms could take advantage of lower labour costs in countries where labour is sufficiently skilled for the jobs in question If the exchange rate falls it will lower costs for the UK firm and provide incentive for them to operate part of their business abroad e.g. they will find that raw materials will be cheaper having to sacrifice less pounds Firms may find that there are cost savings from moving closer to their target customer markets, saving on transportation costs for example UK firms will have a better chance of competing in global markets, where they have base from which to quickly respond to changes in market conditions such as an increase in demand for their products or services or a change in peoples’ incomes

Disadvantages of UK firms operating overseas… Jobs will be lost in the UK, when firms decide to move their operations abroad Different countries have different legislation, languages and cultures which may restrict UK firms from making business decisions, reducing their ability to make a profit Exchange rates could change increasing the costs involved in manufacturing goods or providing services, making trading more expensive, reducing profits from overseas factories UK firms may find that labour in foreign countries are not as skilled, affecting the success of operations abroad

Why do foreign firms choose to operate in the UK? Highly skilled and productive labour Tax (tariff) free access to the European markets They can buy into existing UK brands and distribution networks The English language is the accepted international language of business, science and technology

What is the impact of migration on the UK economy? Positives Immigrants bring new ideas, knowledge and skills filling the gaps in the labour market e.g. Polish plumbers It reduces wage inflation, which increases the competitiveness of UK firms Provides more workers to support the UK’s ageing population Increases the number of consumers as well as producers

What is the impact of migration on the UK economy? Drawbacks Immigrant labour push down wages for all labour in the UK Immigrants can displace UK workers who may find themselves unemployed Increase burden on social services, health and education

What is the impact of people emigrating out of the UK? Loss of valuable skills and knowledge – the brain drain Should reduce unemployment if they are leaving to find work Less of a burden on social services Often barriers prevent the emigration of UK citizens, such as; Language barriers The requirement to hold a visa or work permit Restrictions by foreign governments

Government Action to control labour migration The UK government controls the flow of migration by; A points system – potential immigrants score points according to how well their skills and circumstances match those needed by the UK e.g. the ability to speak English E-borders system – monitors people coming in and out of the country The coalition government plan to place a cap on the number of immigrants from Non-EU countries; whilst also regulating the access immigrants have to key public services A more stringent student-visa, only allowing genuine students wanting to study, into the UK