Exercises: The financial system, business and innovation

Explain what the financial system is and what its basic function is: what does it do with the money of people who save, and to whom does it lend it? Give an example from your neighbourhood.

Distinguish product innovation from process innovation using two examples from a bakery: (a) inventing a gluten-free bread that did not exist before; (b) changing the kneading method to take half the time. Add your own example of each type applied to your school.

The diagram shows how money travels from savers to a business through a bank, but one of the streams is covered with a question mark.

1. a) State what travels along the covered stream (the firm returns something to the bank, and from there something reaches the households) and explain what the price of that loan is called.
2. b) Explain what the households, the bank, and the firm gain in this circuit.

Explain the difference between a current account and a savings account (or deposit): what each one is for and why the second usually pays some interest while the first does not. Give an example of using each one with your pocket money.

Name three common ways of paying (cash, card, transfer or paying by phone) and write one advantage and one risk of each for a teenager buying at the school fair.

Explain what a cooperative is and how it differs from a firm with a single owner: who decides, who keeps the profits and what happens if expenses have to be cut. Give an example of a cooperative that could exist at your school.

Match each innovation with its type — product, process or business model: (a) a pizzeria invents the cauliflower base; (b) a bookshop switches to charging a monthly book subscription instead of selling books individually; (c) a bicycle factory reorganises the line to assemble each bike in half the time. Explain your choice in one of the cases.

Explain in your own words what a company's social responsibility is and give three concrete examples your school cooperative's breakfast stall could have (suppliers, waste, treatment of the team).

The local bakery wants to buy an oven worth $6.000\ \text{€}$ that would allow it to sell twice as much bread. It does not have that money saved. Explain its options (a bank loan, waiting years to save up, looking for business partners) and what it gains and risks with each option.

A business is socially responsible when it thinks about more than just profit. Classify these actions by a juice factory as responsible or irresponsible and justify your answer: (a) buying fruit from local farmers at a fair price; (b) dumping pulp residue into the river to save money; (c) hiring local residents with training included; (d) advertising 'natural juice' when it contains $40\ \%$ added sugar.

Ten years ago in your town hardly anyone travelled by bike; today there are cycle lanes and bike-sharing schemes, and thousands of car journeys have disappeared. Explain what that innovation consisted of (was it technological, business model, or social?) and name two social transformations it has brought about.

A neighbourhood bakery wants to renovate its workshop ($18.000\ \text{€}$). The bank offers it a $5$-year loan with instalments of $340\ \text{€}$ a month.

1. a) Calculate how much it will pay in total for the loan and how much financing itself costs it.
2. b) Analyse two alternatives (saving up for years, finding a partner who puts in the money) and explain what the bakery gains and loses with each one compared with the loan.

Your school cooperative opens a bank account. The bank offers two options: an account with a $2\ \text{€}$ monthly fee and free transfers, or an account with no fee and $0,50\ \text{€}$ per transfer.

1. a) Calculate from how many transfers a month the fee-based account is worth it.
2. b) Argue what other conditions you would look at before choosing a bank (hidden charges, nearby cash machines, the bank's values) and why.

The council offers the neighbourhood shops two forms of help to go digital: a non-repayable grant of $500\ \text{€}$ or an interest-free loan of $2.000\ \text{€}$ to be repaid over $4$ years. Explain the difference between the two, why the council offers this (what innovation it is seeking) and which one a small stationer's needing a simple website would choose. Justify the choice.

Read this mini-news item: 'A local yoghurt company installs solar panels with a bank loan; in $6$ years it will have saved on electricity what it paid for the loan and afterwards its energy will be almost free.' Identify in the news item the financial intermediation, the innovation (of process? of business model?) and the social responsibility, and explain what would have happened if no bank had lent it the money.

Compare these two companies from your imaginary city: a bank finances the expansion of an animal feed factory employing $40$ residents, and an investment fund buys that same factory to close it and keep the land. Explain what each type of financial actor does with its money, what effect it has on the area, and what questions a village should ask before celebrating an 'investment'.

The student cooperative at the school asks the PTA for a microloan of $200\ \text{€}$ to buy materials for the market, to be repaid in $4$ months at a simple interest rate of $5\ \%$ per annum.

1. a) Calculate how much interest the cooperative will pay in total and how much it will return to the PTA.
2. b) Analyse whether you think this is a good way to secure funding compared to selling advance tickets or having each member contribute money, stating one risk of each alternative.

Your family has $12.000\ \text{€}$ in savings and is hesitating between three institutions to open a $1$-year fixed-term deposit:

• Listed commercial bank: offers a return of $3,0\ \%$ APR. Its loans finance large corporations and global projects seeking maximum profit for its shareholders.

• Credit cooperative (caja rural): offers $2,2\ \%$ APR. By statute, it reinvests most of its funds in SMEs and cooperatives in the local area, and customers can become members with voting rights.

• Ethical bank: offers $1,2\ \%$ APR. It publishes the destination of all its loans, which exclusively finance social impact and ecological transition initiatives.

1. a) Your cousin claims: "The only rational choice is to pick the institution that pays the most; it doesn't matter what the bank does with the money as long as it's covered by the Deposit Guarantee Scheme". Refute his stance by explaining what externalities (positive or negative) each of the three institutions' credit allocation models generate in the real economy of your local area.
2. b) Calculate the annual opportunity cost (in euros) of choosing the credit cooperative and choosing the ethical bank instead of the commercial bank. Justify under what economic conditions and family values it would make sense to forego that return.

A highly profitable fashion company applies for a large loan. It manufactures in sweatshops with harsh conditions and pollutes heavily, but it is guaranteed to repay the money.

1. a) Argue for and against the bank lending them the money.
2. b) Explain what a bank that claims to be socially responsible would do in this case, and what pressures it would face internally (profit) and externally (customers, regulations).

Two cafés in the same village need $10.000\ \text{€}$ to refurbish. The first gets a loan at $6\ \%$ because it had been keeping orderly accounts for $5$ years; the second is turned down because it never recorded its sales.

1. a) Explain why the bank looks at the track record and 'financial culture' of whoever applies, and what lesson there is here for your school cooperative even if it only asks for $300\ \text{€}$.
2. b) Design the 'dossier' your cooperative would present to the PTA to ask for a microloan: which three documents or pieces of data would make it credible.

The clothing chain 'Baratísima' sells T-shirts at $3\ \text{€}$ and is the company employing the most young people in your city, with $4$-hour contracts and high turnover. Its defenders say it gives work to those without qualifications; its critics, that such work is not enough to live on.

1. a) Analyse what social responsibility can be demanded of a company beyond 'providing jobs' (job quality, training, stability).
2. b) Take a stance: is a precarious job better than no job? Argue and propose one measure that would improve the situation without closing the shop.

An ethical bank publishes every loan it grants: organic allotments, a cooperative care home for the elderly, a bicycle repair workshop. A traditional bank publishes nothing and earns more money for its shareholders.

1. a) Compare what each bank does with its customers' savings and what 'product' each one's customer is really buying (return versus return plus consistency with their values).
2. b) Decide where you would put the school cooperative's savings ($600\ \text{€}$) and defend it in front of a classmate who says 'all that matters is that they don't charge fees'.

The school wants to install a solar panel array on the roof ($30.000\ \text{€}$) that would save $4.000\ \text{€}$ a year on the electricity bill. The PTA proposes funding it with a loan; a group of families proposes a micro-contribution campaign; the electricity company offers to pay for it itself in exchange for keeping the profits for $15$ years.

1. a) Calculate in how many years the investment is recovered with the first option and compare the three sources of funding: what it costs, what is given up and what is gained in each.
2. b) Choose one and defend it in front of the school community with two economic arguments and one based on values.

'Banks are too important to be allowed to fail: if they go bust, they get bailed out with public money.'

1. a) Explain with the circular flow what would happen in a neighbourhood's economy if its only bank suddenly closed (savings, loans, payments).
2. b) Analyse what perverse incentive is created by knowing that 'you will be bailed out no matter what' (moral hazard) and propose two rules that would make the financial system more prudent without turning off the credit tap.

Unit challenge. Design your neighbourhood business model: from need to investment.

You are going to create an innovative and sustainable business proposal for your local area, integrating all economic agents.

1. Market and opportunity: Survey $5$ neighbours or relatives to identify a service or product that is missing in your area (for example, tech repair or eco-friendly delivery).

2. Circular flow: Draw a diagram of the circular flow of income placing your company at the centre; detail the physical and monetary flows with households, the public sector, and other firms.

3. Financing and innovation: Imagine you need €$2.000$ in initial capital. Access the official simulator of the Banco de España or that of a financial institution, find the current average interest rate (around $5,5\,\%$), and calculate the monthly payment to repay it in $12$ months. Explain what innovative feature your project incorporates to minimise risk.

4. Final product: Write a reasoned proposal (maximum one page) that summarises the detected opportunity, includes the flow diagram, and assesses the viability of the requested loan.

Assessment criteria:

• Accurate and complete identification of agents and flows in the circular flow.

• Creativity, viability, and innovative nature of the business opportunity.

• Correct use of real data and rigour in financial calculations.

• Structure, synthesis, and formal clarity of the final proposal.