Currencies (Grade 11 NSC Matric Tourism): Revision Notes
Currencies
Introduction
When tourists travel to a foreign country, they cannot use their home country's money. For instance, an Australian visitor to South Africa cannot spend Australian dollars here. This is where foreign exchange becomes essential for international tourism.
Foreign exchange is a fundamental requirement for international tourism - without it, tourists would be unable to purchase goods and services in their destination countries.
Understanding currency concepts
Local currency
Local currency refers to the official money used by people within a specific country. Each country has its own local currency. For example:
- Americans use the American dollar
- South Africans use the rand
- British people use the pound sterling
Think of local currency as the "home money" that people use for everyday purchases in their own country.
Foreign currency
Foreign currency is any money used in a country different from the tourist's home nation. The same currency can be local or foreign depending on where you are.
Understanding Currency Perspectives
The designation of a currency as "local" or "foreign" depends entirely on your location:
- For a South African tourist visiting England, the British pound is foreign currency
- For a British tourist visiting South Africa, the rand is foreign currency
- The US dollar is foreign currency for both South Africans and British tourists
Foreign exchange (Forex or FX)
Foreign exchange is the process of swapping one country's money for another country's money. This exchange is necessary for international travel and business. The terms Forex or FX are commonly used abbreviations.
Example: Planning an American Trip
A South African tourist planning to visit America must exchange their rands for American dollars before or during their trip. If they need $1,000 for their vacation and the exchange rate is $1.00 = R8.38, they would need to exchange R8,380 to obtain the required US dollars.
Exchange rate
The exchange rate tells you how much one currency is worth compared to another currency. It acts like a price tag for money. Exchange rates can be expressed in two ways:
Method 1: Local currency per unit of foreign currency
This shows how many rand you need to buy one unit of foreign money.
Method 1 Example: Calculating Trip Costs
Exchange rate: US$1.00 = R8.38 (on a specific date)
If a tourist needs US$10,000 for a trip, they would calculate:
Method 2: Foreign currency per unit of local currency
This shows how much foreign money you get for one rand.
Method 2 Example: Finding the Inverse Rate
Exchange rate: R1.00 = Australian $0.1196 (on a specific date)
To find the value of an Australian dollar in rand:
Rounding Rules for Currency Calculations
In South Africa, exchange rates are always quoted in rand. Always round your final answers to two decimal places when working with money. This ensures accuracy in all financial transactions.
Informal fluctuations
Informal fluctuations are the daily changes in currency values. Exchange rates never stay exactly the same - they move up and down constantly based on global economic conditions.
Key Points About Currency Fluctuations:
- Currency values change every single day
- Today US$1.00 might equal R6.95, but tomorrow it could equal R7.00
- These changes can be shown using graphs or tables
- Demand drives price: When many people want a specific currency, its price increases
- Less demand lowers price: When fewer people want a currency, its price decreases
Understanding strong versus weak rand
The strength of the rand affects how much foreign currency you can buy:
Strong Rand vs. Weak Rand
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Strong rand: It costs fewer rands to purchase foreign currency. This is good for South African tourists travelling abroad because their money goes further
-
Weak rand: It costs more rands to purchase foreign currency. This makes foreign travel more expensive for South Africans, but can attract more foreign tourists to South Africa
Buying power
Buying power measures the amount and quality of goods or services that one unit of money can purchase. A currency with strong buying power allows you to buy more items or better quality products with the same amount of money.
Major currencies of the world
Tourists need to recognize important world currencies, their symbols, and their ISO codes (international standard codes).
| Currency and country | ISO code | Symbol | Rand value (July 2011) | Rand value (Dec 2011) |
|---|---|---|---|---|
| US dollar – USA, El Salvador, Panama, Ecuador | USD | $ | 6.97 ZAR | 8.25 ZAR |
| Euro – 23 countries in Europe | EUR | € | 9.86 ZAR | 10.88 ZAR |
| British pound or pound sterling – Great Britain | GBP | £ | 11.22 ZAR | 12.86 ZAR |
| Australian dollar – Australia, Kiribati, Nauru, Tuvalu | AUD | $ | 7.43 ZAR | 8.36 ZAR |
| Japanese yen – Japan | JPY | ¥ | 0.09 ZAR | 0.11 ZAR |
| South African rand | ZAR | R | 1.00 ZAR | 1.00 ZAR |
Observing Exchange Rate Fluctuations
The table shows how exchange rates fluctuate over time. Between July and December 2011, most foreign currencies became more expensive in rand terms, indicating the rand weakened during that period. This type of comparison helps understand currency trends and their impact on travel costs.
Where to exchange foreign currencies
Tourists have several options for exchanging their money, either before leaving their home country or upon arrival at their destination. These exchanges happen at foreign exchange bureaus (FXBs).
Exchange locations in South Africa
International visitors to South Africa can exchange their foreign money at:
Foreign Exchange Locations
- Major commercial banks in large cities (such as ABSA and Nedbank) that have currency exchange desks
- Travel agencies that offer foreign exchange services
- Most major airports which have exchange facilities for arriving and departing passengers
- Specialist foreign exchange retail branches (such as Rennies Foreign Exchange)
- Major hotels and cruise ships that provide exchange services for guests
Exam Tip: Comparing Exchange Rates
Remember that not all locations offer the same exchange rates. Tourists should compare rates to find the best deal. Exchange rates can vary significantly between providers, and this comparison can save considerable money, especially for large transactions.
The multiplier effect
The multiplier effect describes how money spent by tourists circulates through a country's economy multiple times, creating benefits beyond the initial spending.
How the multiplier effect works
When international tourists spend money in South Africa, their expenditure creates a ripple effect throughout the economy:
- Tourists spend money at tourism businesses (hotels, restaurants, attractions)
- These businesses use the money to pay employees, suppliers, and other expenses
- Employees then spend their wages on food, housing, transport, and other needs
- This spending continues to circulate, benefiting many more people and businesses
The multiplier effect demonstrates the interconnected nature of the economy - one person's spending becomes another person's income, which then becomes spending again, creating a chain reaction of economic activity.
Benefits to the local economy
Tourism spending generates both direct benefits and indirect benefits:
Direct benefits:
- Improvements and investments made by tourism businesses using revenue from tourists
- Job creation in the tourism sector
- Infrastructure development at tourist facilities
Indirect benefits:
- Money that tourism workers spend on meals, accommodation, and transport
- Development of medical and educational facilities funded by tourism revenue
- Construction of roads and other infrastructure that benefits everyone
- Support for local suppliers and service providers
The multiplier effect demonstrates why tourism is so valuable to South Africa's economy - one rand spent by a tourist generates more than one rand of economic activity. This amplification of economic impact makes tourism a powerful tool for economic development and job creation.
Currency rate sheet
A currency rate sheet displays the prices at which an exchange bureau will buy and sell different currencies. These sheets are updated regularly (sometimes daily) to reflect current exchange rates.
Important points about rate sheets
- Different exchange bureaus may offer different rates for the same currencies
- Tourists should research and compare rates before exchanging money to get the best value
- Exchange bureaus make their profit from the difference between buying and selling rates
Understanding the rate sheet columns
Let's examine a sample currency rate sheet from an exchange bureau:
| Currency | We buy TCs (Traveller's cheques) | We buy notes (BBR) | We sell (BSR) |
|---|---|---|---|
| AUD | 8.0678 | 8.0678 | 8.5400 |
| EUR | 10.6290 | 10.6290 | 11.1520 |
| GBP | 12.6590 | 12.6590 | 13.2690 |
| JPY | 0.0966 | 0.0966 | 0.0901 |
| USD | 8.1594 | 8.1594 | 8.5781 |
We buy TCs (Traveller's cheques):
This shows the rate at which the bureau will buy traveller's cheques from international tourists. Traveller's cheques are pre-paid documents that can be exchanged for cash.
Example: Exchanging Traveller's Cheques
If a traveller has a cheque worth €1,000, they will receive:
We buy notes (Bank Buying Rate - BBR):
This is the rate the bureau will pay when purchasing foreign cash notes from tourists. This applies when tourists return home with leftover foreign currency.
Example: Selling Leftover Foreign Cash
A tourist returning from Australia with AUD $700 will receive:
We sell (Bank Selling Rate - BSR):
This is the rate at which the bureau sells foreign currency to tourists who need it for their travels. Notice this rate is always higher than the buying rate - this is how the bureau makes profit.
Example: Buying Foreign Currency
A South African planning to take £1,000 to England will pay:
Understanding the Profit Margin
Remember that the bureau always buys at a lower rate and sells at a higher rate. The difference between these rates is their profit margin. This is why it's crucial to compare rates between different exchange providers - the profit margin can vary significantly.
Currency conversions
Anyone working with foreign exchange must know how to convert between currencies accurately. These calculations are essential for tourists, tourism workers, and travel planners.
Converting major currencies to South African rand
Rule: When converting FROM a foreign currency TO South African rand, multiply by the exchange rate.
Steps:
- Identify the foreign currency amount you want to convert
- Find the current exchange rate (how many rand per unit of foreign currency)
- Multiply the foreign amount by the exchange rate
- Round your answer to two decimal places
Example: Converting AUD to Rand
Convert AUD $300 to rand using a rate of R8.0678 per dollar
Calculation:
Converting South African rand into foreign currencies
Rule: When converting FROM South African rand TO a foreign currency, divide by the exchange rate.
Steps:
- Identify the rand amount you want to convert
- Find the current exchange rate
- Divide the rand amount by the exchange rate
- Round your answer to two decimal places
Example: Converting Rand to GBP
Convert R750 to British pounds using a rate of R13.2690
Calculation:
Memory Aid
Think "multiply TO rand, divide FROM rand"
This simple rule helps you remember which operation to use in currency conversions.
Exam Tip: Checking Your Work
Always show your working and remember to round to two decimal places in your final answer. Check that your answer makes logical sense - if the rand is weak, you should get less foreign currency for your rands. If the rand is strong, you should get more foreign currency for the same amount of rands.
Remember!
Key Concepts to Remember:
-
Local currency is the money used in your home country, while foreign currency is money used in other countries you visit
-
Exchange rates show how much one currency is worth compared to another and change daily due to informal fluctuations
-
A strong rand means it costs less rand to buy foreign currency (good for South Africans travelling abroad), while a weak rand means it costs more rand (making foreign travel expensive)
-
Major world currencies include USD ($), EUR (€), GBP (£), AUD ($), and JPY (¥) - know their ISO codes and symbols
-
Exchange bureaus have two rates: BBR (Bank Buying Rate - what they pay you) and BSR (Bank Selling Rate - what you pay them)
-
To convert foreign currency to rand: multiply by the exchange rate; to convert rand to foreign currency: divide by the exchange rate
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The multiplier effect shows how tourist spending circulates through the economy, creating benefits for many people and businesses beyond the initial transaction