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PurpleHaze69
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Why is holding less cash an example of a shoe leather cost?
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beachpanda
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'Shoe leather costs' is a really old term. It describes the wear and tear on shoes incurred from having to keep walking to the bank (maybe miles away in the next town) every time prices went up due to inflation. You'd have to keep paying the cost of repairing the leather on your shoes.

Why? Because if you held onto physical cash (or keep money in a current account nowadays) your money would effectively depreciate in value due to the increase in the price of goods. So instead of holding onto your weekly pay in cash you'd earned from your job at the mill, you'd want to go to the bank and keep the money in a savings account with interest. At least in a savings account your money is earning interest and isn't depreciating as much. If interest rates are high, the value of your savings may even gain value relative to inflation. So 'shoe leather costs' explain the likelihood of people holding onto less cash (and ultimately consuming less, decreasing AD in the economy) due to inflation. The higher or less stable inflation is, the more 'shoe leather costs' incurred as you'll keep having to run to the bank (or opening your banking app and transferring more money into your savings).

Hope this helps!

(Original post by PurpleHaze69)
Why is holding less cash an example of a shoe leather cost?
Last edited by beachpanda; 1 week ago
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PurpleHaze69
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Thank you so much that was a great explanation. Do you mind me asking if your are AS OR A2 and what exam board do you do?
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beachpanda
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You're welcome! It took me a while to work that one out too.

I'm A2 AQA - what about you?

(Original post by PurpleHaze69)
Thank you so much that was a great explanation. Do you mind me asking if your are AS OR A2 and what exam board do you do?
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beachpanda
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By the way, it can also be used to describe the extra time people end up spend looking for up-to-date pricing information too, due to volatile changes in the general price level. I read that today and thought I ought to mention it!

But I think the term comes from the banking idea I mentioned.

(Original post by beachpanda)
'Shoe leather costs' is a really old term. It describes the wear and tear on shoes incurred from having to keep walking to the bank (maybe miles away in the next town) every time prices went up due to inflation. You'd have to keep paying the cost of repairing the leather on your shoes.

Why? Because if you held onto physical cash (or keep money in a current account nowadays) your money would effectively depreciate in value due to the increase in the price of goods. So instead of holding onto your weekly pay in cash you'd earned from your job at the mill, you'd want to go to the bank and keep the money in a savings account with interest. At least in a savings account your money is earning interest and isn't depreciating as much. If interest rates are high, the value of your savings may even gain value relative to inflation. So 'shoe leather costs' explain the likelihood of people holding onto less cash (and ultimately consuming less, decreasing AD in the economy) due to inflation. The higher or less stable inflation is, the more 'shoe leather costs' incurred as you'll keep having to run to the bank (or opening your banking app and transferring more money into your savings).

Hope this helps!
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PurpleHaze69
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Appreciate it Panda
(Original post by beachpanda)
By the way, it can also be used to describe the extra time people end up spend looking for up-to-date pricing information too, due to volatile changes in the general price level. I read that today and thought I ought to mention it!

But I think the term comes from the banking idea I mentioned.
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