Every time you receive or spend money, there is an impact on the economy. Let us start by looking at the money you receive from work, savings, investment or other benefits.

Before you get your pay, tax is deducted and paid to the Inland Revenue, which subsequently funds the Government. What is more, there is a goods and services tax known as Value Added Tax (VAT), which is added to most things we buy and paid to the Inland Revenue.

You Choose How to Spend

When you spend your money to buy goods and services, the business you are buying from can then pay out wages to its employees, buy raw materials and equipment, pay taxes, and make a profit, so they can stay in business.

If you choose not to spend all your income and have some left over at the end of each week or month, you can save or invest it. If you save with a bank, building society or other financial institution it may be lent to:

Prospective homeowners as a mortgage for them to buy property. The borrower pays interest to the lender
Businesses also pay intrest on money borrowed

Should you choose to buy shares, bonds, or other securities from a company when they are issued, you are providing that company with the money it needs to buy its equipment and building and to expand, if necessary. If you buy existing assets, such as shares or property, you may free up money for the former owners to spend.

Why Inflation and Exchange Rates Are Important

How much your money buys this year, compared with last year, is determined by the rate of inflation. If inflation is high, which means that the average price is rising faster than the pound in your pocket is worth, you will eventually buy less. If interest rates are high, which may go hand in hand with high inflation, people from overseas may want to invest more money in the UK.

That in turn can increase the value of the pound in relation to other countries’ currency, which help people in the UK to buy imported goods. At the same time, it makes it more difficult for our exporting businesses to sell overseas because their prices are already higher. This can result in people losing their jobs and having less money to spend.

If the pound falls in value, importing raw materials and other goods become more expensive which has the effect of fuelling inflation.

The Bank of England tries to influence our inflation by increasing or lowering the interest rate and everyone is affected by the effect of the changing interest rate.