How the Automotive Industry Is Affected by the EconomyThesis

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¶ … Automotive Industry Is Affected by the Economy

As the average price of gasoline tops $4.00 a gallon across the country, it is little wonder that an increasing amount of attention has been paid to the automotive industry recently. Today, an increasing number of consumers are demanding that the industry become more responsive to the growing energy crisis facing the country and develop vehicles that are more fuel efficient and less costly to maintain. While the pundits continue to debate the respective efficacies of various alternative fuel approaches and the need for more domestic production, it is clear that these trends are going to continue for the foreseeable future and the cost of oil will just keep rising for the next decade or so - at least. In this environment, identifying how the automotive industry is affected by the economy assumes new relevance and importance and this topic forms the thesis of this study. To this end, a review of the relevant literature to determine the automotive industry price elasticity of supply and demand, the negative and positive externalities produced by the industry, how wage inequality is measured and its current presence in the industry and monetary and/or fiscal policies that serve to affect the automotive industry is followed by a summary of the research and important findings in the conclusion.

Review and Discussion

Automotive Industry's Price Elasticity of Supply and Demand.

The price elasticity of supply and demand relates to how much consumers need and want a given product or service. In this regard, one economist reports that, "When demand is responsive to price changes, demand is said to be elastic, while demand that is unresponsive to price changes is said to be inelastic. We would expect the income elasticity of demand for automobiles to be rather high, while the income elasticity of demand for food to be rather low" (Elasticity of demand, 2008, p. 3).

Generally speaking, then, people will continue to purchase food, clothes and shelter when times are tight, of course, but they may opt to delay the purchase of a new vehicle until the economic conditions improve. Likewise, some consumers may elect to invest in better maintenance of their existing vehicles and have them repaired to keep them operating longer. In this regard, "As an economy goes into a recession and income falls, you would expect demand for automobiles to fall more than demand for food. Even in the recession you can be expected to eat, although you may postpone the purchase of that car" (Elasticity of demand, p. 4). Likewise, in his text, Principles of Economics, Mankiw (2004) points out that, "If your local gas station raised the price it charges for gasoline by 20%, it would see a large drop in the amount of gasoline it sold. By contrast, if your local water company raised the price of water by 20%, it would see only a small decrease in the amount of water it sold" (p. 289). Because the price, quality and function of the different types of vehicles in the automotive industry span the entire continuum of product ranges, though, the income elasticity of demand will vary along this continuum as well. According to Riley (2006), "You would expect income elasticity of demand to vary across the vast range of vehicles for sale in the car industry" (p. 4).

Moreover, the elasticity of demand in the automotive industry would also relate to the geographic region of the country involved, with consumers that live in highly populated states with adequate mass transportation systems experiencing a different level of need than their counterparts in more rural and less densely populated states where access to mass transportation is limited or nonexistent. The elasticity of demand would also relate to the type of vehicle involved, with more fuel-efficient vehicles becoming increasingly popular during sluggish economic periods or during times of high gas prices. For instance, as Karlsson (2008) emphasizes, "If gasoline is $4 per gallon, then a lot of trips that would have been made with gasoline at $1 per gallon will be cancelled. Meanwhile, as car makers are now noticing, the high price of gasoline is causing a sharp decline in car sales in general and the sale of SUVs in particular" (p. 2). While these behaviors are fairly easy to discern and understand, some of the positive and negative externalities associated with the automotive industry in the United States are less apparent, and these issues are discussed further below.

Negative or Positive Externalities the Automotive Industry Produces.

Some of the more obvious negative externalities produced by the automotive industry include the pollution caused by internal combustion vehicles and the concomitant traffic congestion and increased incidence of traffic accidents, injuries and deaths that result in many parts of the country (King & Lyytinen, 2004). The increasing capability of the automotive industry to produce more and more vehicles has been the catalyst for both negative and positive externalities. According to King and Lyytinen, "Such capacity has played a major role in the social process of forcing the automobile industry to internalize negative externalities such as air pollution and hazards to passenger safety arising from automobile use" (p. 1). Furthermore, some researchers suggest that other negative externalities of the automotive industry today include the indirect provision of American dollars to countries in the Middle East that sponsor terrorism and threaten American interests at home and abroad (Hewitt, 2007). By contrast, the creation of new jobs and the addition of new employees to the American workforce are some positive externalities produced by the automotive industry in the United States (Sturgeon, 2000). Because the automotive industry represents such a large component of nation's economic, though, these positive externalities are balanced by wage inequalities within the industry and these issues are discussed further below.

How Wage Inequality is Measured and Its Presence in the Automotive Industry.

The automotive industry is characterized by a significant union presence that affected wage inequalities in the American automotive industry in some significant ways during the 20th century. For example, in his study, "U.S. Wage Inequality, Technological Change, and Decline in Union Power," Mosher (2007) reports that the World War II era and the 1980s represented two important periods in U.S. history where unions first helped automotive workers gain a more equitable share of the industry's profits followed by their declining influence in the penultimate decade of the 20th century when wage inequalities once again became evident. Notwithstanding the importance of the introduction of high-tech applications in the industry that required better skilled and trained workers, it would seem that increases and decreases in wage inequalities in the automotive industry in the U.S. have historically been the result of collective bargaining. For instance, according to Mosher, "Wage inequality has increased substantially in the United States. The upsurge and decline in union power during the [1940s and 1980s' provide a good explanation for these unexplained wage inequality changes" (p. 225). The introduction of innovations in technology and the need for ongoing mediation of labor relations have not been the only influences on the automotive industry, of course, and the monetary and/or fiscal policies established by the U.S. government can likewise have a profound impact and these issues are discussed further below.

Monetary and/or Fiscal Policies that Affect the Automotive Industry.

Because it is so large and its product lines have such a potentially hazardous impact on their users, the automotive industry in the United States has been heavily regulated over the years. According to Baily, Farrell, Greenberg et al. (2005), "The automotive industry in the U.S. is strongly affected by regulation. Concerns about safety, fuel economy, and emissions have resulted in a complex and changing regulatory environment" (p. 3). The automotive industry in the U.S. is also affected by the policies established by the Federal Reserve Board (or the "Fed") in Washington, D.C. These fiscal policies "can have a dramatic (albeit indirect) effect on the nation's economy. Perhaps the Federal Reserve's most powerful tool is its ability to raise or lower the interest rate financial institutions charge one another for overnight borrowing, known as the federal funds rate" (How does the Federal Reserve affect the economy?, 2008, p. 2).

While some observers suggest that the former chairman, Alan Greenspan was just lucky in his largely successful machinations with the national economy, the monetary policies set by the Fed can have an encouraging or dampening effect on the economy depending on what the Fed does with the interest rate. For instance, the Fed.".. can raise rates to discourage additional borrowing and slow the economy. As the economy slows, inflationary pressures ease. Conversely, if the economy is too sluggish, the Fed can lower interest rates to encourage more borrowing and spending. The Fed can also influence the money supply by setting reserve and margin requirements and the purchase or sell of government securities through the Federal Open Market Committee" (How does the Federal Reserve affect the economy?, 2008, p. 3). Therefore, it is reasonable to conclude the… [END OF PREVIEW]

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