The economy and you

Every time you receive or spend a dollar there is an impact on the economy. Let's start by looking at the dollars you receive from work, investment, or benefits.

Before you get your pay, tax is removed and paid to Inland Revenue which funds the government. What's more, 12.5% Goods and Services Tax (GST) is added to most things we buy and paid to Inland Revenue.

• You choose how to spend
• Why inflation and exchange rates are important
• How interest rates affect us
• Summary

You choose how to spend

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

If you choose not to spend and have money left over at the end of each week or month you can save or invest it. If you save money with a bank or other financial institution it may be lent to homeowners as a mortgage for them to buy property, or lent to businesses.

Or if you 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 buildings 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 dollar buys this year compared with last year is determined by the rate of inflation.

If inflation is high, which means average prices are rising faster, then your dollar is worth less over time, eventually buying less. But it's likely if interest rates are high – which may go hand and hand with high inflation – then people from overseas may want to invest money here.

That in turn can push the value of our dollar up in terms of other countries’ currencies, which makes it cheaper for people in New Zealand to buy imported goods. At the same time it makes it more difficult for our exporting businesses to sell overseas because their prices are relatively higher. This can result in people losing their jobs and having less money to spend.

If the dollar falls in value, imported raw material and other goods are dearer and that fuels inflation. 

The Reserve Bank tries to influence our inflation by raising or lowering the Official Cash Rate (OCR).

Everyone is affected by changing interest rates.

How interest rates affect us

If interest rates go up then it costs us more to borrow money for houses, cars, business and personal loans. If we're paying higher interest rates we have less money to spend on other goods and services, which can result in the businesses that produce them earning less and the economy slowing down. But high interest rates are good for those people who have savings.

In turn, if the economy slows down and inflation falls, the Reserve Bank may reduce the OCR to stimulate demand again.

Interest rates affect the exchange rate. For example, high interest rates may encourage overseas people to invest here to get a higher return on their money than they may get in their own country.

What this all means is that the dollars we receive or spend can have an effect on everything from the interest rates on business and personal loans and mortgages, to how people living in far-flung countries choose to invest their money.

Summary

• The saving or spending decisions we make affect the economy.
• The more we spend in New Zealand the more our businesses earn – allowing them to employ staff or expand their business.
• The more we save, the more money is available for lending to other individuals and businesses who want to borrow it.
• The Reserve Bank may try to influence our spending by raising or lowering interest rates.
• High interest rates can be good news for savers and bad news for borrowers.