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Think about a time where lots of South Africans are visiting the United Kingdom, and other South Africans are importing goods from the United Kingdom. That means there are lots of Rands (high supply) trying to buy Pounds. Pounds will start to become more expensive (compare this to the house price example at the start of this section if you are not convinced), and the exchange rate will change. In other words, for R1 000 you will get fewer Pounds than you would have before the exchange rate moved.
Another context which might be useful for you to understand this: consider what would happen if people in other countries felt that South Africa was becoming a great place to live, and that more people were wanting to invest in South Africa - whether in properties, businesses - or just buying more goods from South Africa. There would be a greater demand for Rands - and the “price of the Rand" would go up. In other words, people would need to use more Dollars, or Pounds, or Euros ... to buy the same amount of Rands. This is seen as a movement in exchange rates.
Although it really does come down to supply and demand, it is interesting to think about what factors might affect the supply (people wanting to “sell" a particular currency) and the demand (people trying to “buy" another currency). This is covered in detail in the study of Economics, but let us look at some of the basic issues here.
There are various factors which affect exchange rates, some of which have more economic rationale than others:
The exchange rate also influences the price we pay for certain goods. All countries import certain goods and export other goods. For example, South Africa has a lot of minerals (gold, platinum, etc.) that the rest of the world wants. So South Africa exports these minerals to the world for a certain price. The exchange rate at the time of export influences how much we can get for the minerals. In the same way, any goods that are imported are also influenced by the exchange rate. The price of petrol is a good example of something that is affected by the exchange rate.
Country | Currency | Exchange Rate |
United Kingdom (UK) | Pounds(£) | |
United States (USA) | Dollars ($) |
Principal (the amount of money at the starting point of the calculation) | |
Closing balance (the amount of money at the ending point of the calculation) | |
interest rate, normally the effective rate per annum | |
period for which the investment is made |
The following three videos provide a summary of how to calculate interest. Take note that although the examples are done using dollars, we can use the fact that dollars are a decimal currency and so are interchangeable (ignoring the exchange rate) with rands. This is what is done in the subtitles.
Khan academy video on interest - 1
Khan academy video on interest - 2
Note in this video that at the very end the rule of 72 is mentioned. You will not be using this rule, but will rather be using trial and error to solve the problem posed.
Khan academy video on interest - 3
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