How Interest Rates Affect Consumers, Investors and Businesses

Interest rates, consumers, investors, and governments

First Published: ADawnJournal.com April 14, 2010

The interest rate of a country is extremely important to the economy. The changing of the interest rate can have a great number of effects on how the economy performs, as well as on the people who benefit or are hurt by the economy.

Consumers

When the Federal government cuts the prime interest rate, it affects consumers as follows:

·   If the government cuts the interest rate, it can lower the cost of getting a mortgage for a consumer. This depends on whether or not the consumer has a fixed or variable interest rate mortgage though. If someone has a variable interest rate, their mortgage payments will go down as the interest rate goes down.

·   The lowering of an interest rate will also help credit card owners. If the rate goes up on a variable interest rate, the credit card owner pays more, while the opposite is true if the interest rate goes down.

·   While cutting an interest rate saves money on mortgages, it hurts a consumer’s savings. Less interest means less money in the bank. When the interest rate goes up, consumers get more out of their savings.

Investors

The changing interest rate will affect investors and make them change their investing habits. Some examples of this with a rising interest rate include:

·   When the interest rate goes up, credit card companies, financial companies, consumer staples and service companies that do not use a lot of debt will be good companies to invest in.

·   Conversely, when the interest rate is up, mortgage lenders, real estate developers and automakers are companies to avoid for investments.

Companies that benefit from high interest rates will typically suffer when the interest rate is slow. Conversely, companies that suffer when interest rates are high will benefit when the interest rate is low.

Businesses

Businesses around the country are significantly affected by changing interest rates. When the interest rate changes, it has an effect on how much, or how little, a company borrows. When there is a shortfall in payroll, or there is a need to buy equipment, a company will often take a short-term loan. If interest rates are high, it will cost the company more to pay back that loan, which can affect the profitability of that business. When interest rates are low, companies can borrow more and not be as hard pressed to pay back the interest.

Business strategy is also affected by interest rates. Since businesses are all about profit, knowing what the interest rate will be on loans is very important. If a company is implementing a new program that will bring in a profit of five percent per year, but interest rates are seven percent per year, then the company should put their money into the bank rather than investing it.

Interest rates are very important for consumers, investors and businesses. When they go up, some areas benefit while others suffer. When the interest rate goes down, other areas benefit while those that benefit on high interest rates suffer.

How the Loonie Affects the Canadian Economy

How Strong Canadian Dollar Affects Economy

First Published: ADawnJournal.com April 11, 2010

If you ask a Canadian what the dollar is at, they will probably tell you that it is near the American dollar in value. Most Canadians know where the dollar sits, and that when the dollar is good, so is the economy. However, many citizens do not truly understand just how important the Canadian dollar, or Loonie, is to our economy. So, let’s learn about the Canadian dollar and its effect on the Canadian economy.

For much of the 1990s, the Canadian dollar was well below the American dollar, often hovering around 65 cents. Things were at their worst on January 21, 2002, when the Canadian dollar hit 61.79 cents. From there, things began to improve and the Canadian dollar began to gain immense value, roughly 70 percent, within a few years. By September 20, 2007, the Canadian dollar did something it had not done in 31 years; it reached parity with the American dollar.

During the 1970s, the Canadian dollar was worth more than the American dollar, specifically in the years 1972, 1974 and 1976. On April 25, 1974, the Canadian dollar was actually worth four cents more than the American dollar. In August of 1957, the dollar was worth six cents more than the American dollar.

Typically the Canadian dollar will do better when commodity prices are higher. We have many resources, so when resources are more expensive, we make more money. Some of the resources that we have which are the most valuable are oil, copper, gold and wheat. When the price for goods and services increases, the value of the dollar also goes up, along with the Canadian economy. What does this mean for the Canadian economy then?

Well, when our dollar is at par with the American dollar, which means that goods in the United States are 60 percent cheaper than they were in 2002. This means that we can buy items in the United States for much less, and the government can then import items from the United States for less. For Canadian investors, things are not as good because the gains in the Canadian dollar wipe out the gains they have enjoyed. For example, when the Canadian dollar rose to par with the American dollar, the Dow Jones had enjoyed an 11 percent increase since the beginning of the year. In contrast, the Canadian dollar went up 23 percent in that same time period, thereby eliminating the gains felt by Canadian investors.

While it is cheaper to import goods from the United States, it is much more expensive to export goods, which makes Canadian exporters hurt. American companies are not coming up here as much because it is now more expensive to do business. Between 2002 and 2007, 250,000 manufacturing jobs were lost as a result of this surging dollar.

As we can see, there is a flip side to all of this. When the Canadian dollar is down, it costs more to import but more American businesses are funneling money into Canada because it is cheaper. In contrast, when the Canadian dollar is up, it is cheaper to buy from the states but exportation of our goods is more expensive which means less American companies buying from Canada.

Is It Our Last Chance To Avoid Getting Hit By High Interest Mortgage Rates?

High Interest Rates And How To Avoid Getting Hit By Them

First Published: April 15, 2010 ADawnJournal.com

The biggest concern for anyone currently looking for a mortgage to buy residential property is the volatility of the market. In the last couple of years, interest rates have fallen not just in Canada but all over the world as the financial situation leads to predictions of dire hardship. However, the measures in place to prevent a total and catastrophic meltdown (and however bad things are at the moment, the word “catastrophic” must be saved for situations that require a completely fresh start rather than a shifting of the boundaries) mean that, after a period of negative financial performance of the kind which we have seen recently, there will inevitably be a period of stabilization and then a recovery of sorts.

The outcome of this is that there is a narrow window, which is getting narrower as time passes, for anyone who has found themselves “recession-proof” to take advantage of the cuts in interest rates before the period of recovery kicks in and, inevitably, interest rates begin to rise again. The lessons of the past years have had the effect of encouraging us all to be a bit more careful, and any rise in rates will be gradual. But there seems to be very little doubt among market experts at the present time as to the feeling that rates will rise, and in five years’ time they will be higher than they currently are. Anyone hanging on to see how far the present rates drop may be disappointed.

High interest rates are used as an economic tool by governments and banks to control excessive market optimism. A few years ago the world in general was in a period of “boom” which was largely the mirror image of the “bust” in which it now finds itself. At that point, interest rates were rising and individuals hoping to get involved in real estate felt that they were being frozen out by “prohibitive” interest rates. Without the factual data, taken over a period of time, to prove a substantive change in the way the world sees economic issues, it is impossible to say how high interest rates may one day rise. If you are in a sound borrowing position, and if you are likely to be in a good situation to maintain your repayments going forward, now is the time to borrow for a house purchase. There may never be a better one.

Those who believe that there is scope for a further drop in interest rates would not currently be well served by waiting for it. It may come, it may not. More likely it will not, but if you like the odds it would at least be worth borrowing on a variable rate mortgage which will drop its rate as the banks drop theirs and rise when the banks do likewise. After five years, the terms of the mortgage can be renegotiated, and people with a good variable rate mortgage will be in the best position to do so.

What Is Supply and Demand?

Understanding Supply and Demand

First Published: ADawnJournal.com April 18, 2010

Two highly important concepts that drive economics around the world is the concept of supply and demand. Supply and demand is an economic model of price determination within an economic market. In supply and demand, it states that in a competitive market the price will function to equalize the amount of quantity demanded by the consumers, with the quantity available from producers. When supply and demand is equal, there is equilibrium between price and quantity.

The concept of supply and demand, and the power of it, has been understood for several centuries, all the way back to Muslim economists Ibn Taymiyyah, who lived during the 13th and 14th centuries, and wrote “If desire for goods increases, while its availability decreases, its price rises. On the other hand, if availability of the good increases and the desire for its decreases, the price comes down.”

The phrase of supply and demand was first used by James Denham-Steuart in a book published in 1767, and in the iconic economic book, The Wealth of Nations, by Adams Smith; supply and demand is mentioned as well. As things progressed into the 19th century, the idea set in that supply was not fixed but could change and the idea that the price was set by the most expensive price, which itself is the price of the margin. This was a big change from the previous concepts of supply. The famous supply and demand graph, which shows the curves of both, appeared for the first time in 1870 in an essay written by Fleeming Jenkin. This model of supply and demand was further popularized in 1890 in an essay in Alfred Marshall. In this graph, equilibrium is reached where the two points cross.

The Graphic Representation

The model of supply and demand is a partial equilibrium model, which shows the determination of the price of a good and the quantity of the good. On the graph, which most believe was created in its common form, by Alfred Marshall; you have the price on the vertical axis and the quantity of the product on the horizontal axis.

The supply curve represents the amount of a good that the producer is able to, or willing to, sell at a certain price. The demand curve represents the amount of a good that buyers are willing to purchase at a certain price. Usually, the demand curve is represented as a downward slope, so that when the price decreases, customers will begin to buy more of the good.

How It Works

So, how does supply and demand work? Well, when there is a greater demand for a product, and if the product is scarce, then the price of the product is going to go up as a result. In contrast, if the demand for a product is low and the product is abundant, then the price of the product is going to go down as a result. However, if the demand for the product is high, and the supply is high, then we should have reached equilibrium for the product.

Elasticity of Supply-Demand

Elasticity is a very important concept in supply and demand. Elasticity refers to how supply and demand works, and how the price is determined. Elasticity can be defined as the percentage change in one variable that is divided by the percentage change in other variables. So, elasticity is the relative change in supply and demand.

It is very useful to know exactly how much supply and demand will change when the price changes. This is known as the price elasticity of demand and the price elasticity of supply. This helps economists answer several questions including will a tax on a good increase the price, and will it affect the quantity that customers want? Will an increase in the price offset the decrease in sales volume and will someone who holds a monopoly be able to increase the price of a product and not affect the revenue from sales?

The slope of a line corresponds elasticity and it is typically shown as a percentage, so that the units of measure do not matter, only the slope does.

To calculate the elasticity of supply and demand, you take the percentage change in quantity over the percentage change in price. So, if the price moves up by five cents, and the quantity of product sold to go up by two, the slope will be 2/0.05, which is 40 products per dollar. This means that the quantity of the product increased by two percent, the price by five percent and that makes the price elasticity of supply to be 2/5, which is .4, or 40 percent.

Changes in the unit of measurement, or the currency, do not change the elasticity of supply or demand either because it is measured in percentages.

When the demand or supply quantity changes a great deal when the price has only changed slightly, then this is called elastic. However, if the quantity of supply or demand changes a little bit, and the price changes a lot, then it is inelastic.

In macroeconomics, supply and demand has been used to explain the variables in a market economy, including price level and total output. Within macroeconomics, supply and demand is often used in relation to money supply to demand and interest rates as well.

Another important concept within supply and demand is the demand shortfall, which results when the demand of a product ends up being lower than was originally projected as the demand for the product. These shortfalls are typically caused by the over-estimation in planning of new products. For example, when Coke created New Coke, they anticipated a huge amount of demand, but this never materialized. Hence, there was a demand shortfall to what they had expected.

When there is a demand shortfall from demand overestimation, it is typically caused by strategic misrepresentation in which the strategy of a company was flawed, or optimism bias.

Sydney Travel Blog 8: Evening Walk in Sydney

Australia Travel Blog: Sydney City Tour

2-Day Combo: Sydney City Tour + Sydney Harbour Lunch Cruise and Blue Mountains Day Trip

Just before the end of the Sydney Harbour Cruise, I was given 2 options: to disembark from the ferry at Circular Quay or at Darling Harbour. I asked one of the personnel at the ferry which stop would be closer for me to reach my hotel in Kings Cross and I was told to get off at Darling harbour.

After exiting the waterfront area, I was on the street and I checked the distance to my hotel on my phone. It was approximately a 35-minute walk or $20 taxi ride. Taking the subway was an option too, but I didn’t feel like riding the subway.

So, I decided to walk. It would be a long walk, but not too long. Later on, I realised that it was a very good decision because it gave me an opportunity to see downtown Sydney and take lots of pictures.

It was Saturday, so there were no office crowds downtown, but lots of tourists and locals were out to simply hang out. It pretty much looked like downtown Toronto on a weekend. That long walk was really beautiful and I enjoyed every minute of it. 

My haircut was long overdue, but I was unable to find a place where I could get a haircut and colour for a reasonable price. I attempted to in Auckland, but I could not find anywhere below $80. When I was close to my hotel, I checked a few barber shops and the cheapest one I was able to find in downtown Sydney was in front of my hotel for $50.

I spent an hour at the barbershop. Once done, I finished my dinner at a nearby fast-food restaurant. The next day, I would be picked up in front of the hotel in the early morning for part 2 of my trip – the Blue Mountains Day Trip.