Eco_205_Final_Paper

The automobile industry is one of the world’s largest industries, and one of the most influential on the global economy. This is especially true for the United States. Japans automotive industry is the second largest automotive industry in the world, followed by China. The United States’ economy is heavily transportation based, and the automobile industry is affected by several others, most notably the oil industry. Automobiles, along with houses, can be status symbols; everyone always wants the newest model, the most expensive brand. At the same time, almost everyone uses an automobile and over the years it has become a necessary commodity. The automobile industry provides thousands upon thousands of jobs, and in the last century the automobile has revolutionized the world, and become an indispensible aspect of the global culture. Supply and demand refers to the quantity of a given product in relation to how many people want it, and this controls the price of the given item as well as inflation, among other things. The supply curve is the graphical representation of the relationship between the quantity of goods supplied and the current market price. Demand curve is the graphical representation of the relationship between the quantities of goods purchased. Elasticity is the concept involved in understanding this theory of supply and demand. If the number of substitutes for the product is more, the elasticity will be high. In the short run, of course demand seems elastic because the purchase can usually be put off for a while. However, the demise of GM proved that, in the long run, demand is inelastic for automobiles, because few substitutes are available (Xiaoning, 2009). Taxis and buses are not practical for many of the uses consumers need them for, especially if one does not live in an urban area. Depending on the case, an automobile could either be a necessity or a luxury, however most households depend on them as a necessary means of travel. The price elasticity of supply is affected by a few factors. One of them is the desired rate of return on investment of the industry. Another one is the perceived risk of the industry. In the past, investing in the automobile industry was not considered risky, however with the bankruptcy of GM, investors might begin thinking twice about investing in this particular industry (Mitchell, 2009). Unfortunately, because the automobile industry is so large, much of the information about it focuses on the negative aspects. When talking about externalities, sources tend to focus on the negative ones instead of the positive ones. An externality is an impact on a party that was not directly involved in the transaction, also called a “spillover.” According to one article, these negative externalities are as follows: local and global air pollution, contribution to oil dependency, traffic congestion, and traffic accidents, among other, less serious externalities. Because air pollution affects everyone, it could be said that every single transaction between the buyers and sellers of automobiles has a negative effect on multiple third parties. At least in the current social and economic climate, this negative externality has an impact on the economy because people are becoming more aware of the impact they are having on the environment. Aside from environmental reasons, people also want cars that can obtain more miles per gallon due to the rising gas prices (Perry & Walls, 2006). The automobile is considered a private good, rather than a public good and it is nearly impossible for an automobile company to have any kind of monopoly: there are too many popular brands, unlike computer operating systems, for example, where Microsoft has a natural monopoly. Compare owning a car—a private good—with using public transit systems—a public good. Automobiles are rival goods, because two people cannot drive one at the same time, and most people do not own the same car as someone else, thought there are exceptional cases, such as married couples, parent and child, and other where a bond is shared between the owners. The automobile is also an excludable product because a person must pay money to own one (Todd, 2009). No one could ever have an automobile without workers to build them or put them together. There could never be an automobile company without business savvy people to run the business end of matters. Therefore it is inevitable that wage inequality affects the automobile industry. Some feel that the NAFTA or North American Free Trade Agreement is responsible for lowering the wages of workers in the United States, including automobile workers. A particularly vocal source asserts that as long as companies know they can go to Mexico, where the cost of labor is much cheaper, workers will never get the benefit of higher wages in the United States. There are several visual props, including tables and graphs, available on the internet which shows the decline of available US jobs since 1993, when NAFTA was first implemented (Scott, 2003). Wage inequality can be measured by analyzing the collective bargaining and labor management relations existing in the industry. The major factors deciding the level of wage inequality are competition, labor peace, protection of income and employment etc. For measuring the wage inequality existing in the automotive industry the above mentioned factors are to be analyzed thoroughly. Of course, in an industry with such a distance between those in management and administrative positions, and so-called “grunts” or factory workers, a sizable wage discrepancy is expected, if not entirely accepted. Factory workers make significantly less than those higher up the corporate ladder. Not only that, but there is a major gap in job security. If a factory closes, it is not those in the higher positions who pay the price, but the workers and the laborers. Likewise, if job cuts have to be made and people must be laid off, those same workers are the first to go, even though one could argue that they are the most critical component to the factory’s success. When one of Ford’s factories had to make job cuts, the workers became bitterly aware that the sacrifices being made are not exactly “sacrifices” for the people making the actual decision to go ahead with the job cuts. Wage inequality and job inequality affect the automobile industry even in a good economic climate; in today’s it will probably become doubly difficult for workers in automobile factories to keep their jobs (Gongwer News Service, 2006). Obviously, the automobile industry has a huge effect on the economy. If the automobile industry is performing poorly, it has a huge detrimental effect on the economy of the entire world, because besides housing, automobiles are the primary driver of economic activity. As was said before, nearly everyone has a car, and nearly everyone needs a car. Therefore monetary policy affects the automobile industry more than some other industries, though it does not have as much an effect as supply and demand. The automobile industry and monetary policy have a relationship based heavily on mutualism: each relies on the other to a certain extent. Monetary policy tends to favor the automobile industry because it is such a huge money maker for the government, due to the ability to reliably tax automobiles (Ballew, Schnorbus & Hesse, 1994). While the automobile industry is a cornerstone to all of America, it is probably most imperative to the Midwest, due to the very high concentration of factories and headquarters in the region. In 1993, the automobile industry came into some trouble financially, which meant that everything to do with the industry—from parts to employees—also took a severe hit. It become clear in a way it had not been before, that if the automobile industry was in trouble, the whole economy was in trouble. Amendments to fiscal police for the next year reflected that new-found knowledge, and subsequent fiscal amendments have also reflected a view heavily biased toward the automobile industry (Ballew & Schnorbus, 1994). Unless they have been living under a rock, everyone knows that the General Motors (GM) automobile company filed for bankruptcy earlier this summer, causing a huge panic—for good reason. The US previously mentioned economic reliance on the automobile industry is probably the reason much of President Obama’s focus has been on bailing them out financially. If the economy comes out of the recession it is currently in, the demand for new cars will pick up exponentially. If that time comes and most of the automobile companies no longer exist, the economy might suffer even more because, as mentioned earlier, automobiles are a major taxable item. Fewer choices would mean fewer competitors and the prices of automobiles could skyrocket, making fewer people able to purchase them (Perry & Walls, 2006) One of the major factors that have an influence the automobile industry in a negative way is gas prices. The rising price of oil has made many types of vehicles all but obsolete; especially trucks, sports utility vehicles, and RVs because they generally receive relatively poor gas mileage when compared to cars. Certain kinds of cars have fallen victim to this trend as well, especially those with V-8 engines. Oil prices affect most industries, but the automobile more than others, because people tend to buy their vehicles based on the price of gas and how many miles per gallon a given automobile gets. Until another, better source of fuel is proven this will probably not change any time in the near future. Another economic factor negatively affecting the automobile industry is the war, though mostly because war affects many industries negatively. The distribution of labor changes in times of war and terror, and people are more likely to save their money than spend it on frivolous items, such as a new car when their old one runs just fine. The current war is also affecting oil prices and, as already explained; oil prices probably have the single most important influence on automobile sales than any other factor. It could be said that the economy as a whole is very much influential to the industry. There are various issues, both international and national, that are involved in this regard. National economic conditions are decided to a much greater extent by the fiscal and monetary policies followed by the state and country. International economic factors are decided by the global trends of competition and technological advancement. Among such economic factors there will be both positive and negative issues for the automobile industry in particular. It is up to the industry to study the factors systematically and plan accordingly so that the maximum positive economic influences suitable for the automobile industry are utilized to the best of their ability. References Ballew, P., Schnorbus, R. (1994). “The Impact of the Automobile Industry on the Economy.” Chicago Fed Letter. Retrieved July 17, 2009, from the Bnet database. Ballew, P., Schnorbus, R., & Hesse, H. (1994). “The Automobile Industry and Monetary Policy: An International Perspective.” Business Economics. Retrieved July 17, 2009, from the Bnet database. Gongwer News Service. (2006, January 23). “Ford Latest Automotive Industry Employer to Announce Job Cuts in Ohio.” Policy Matters Ohio. Retrieved July 2, 2009, from http://www.policymattersohio.org/media/gongwer_Ford_Job_Cuts_in_Ohio_2006_0123.htm Mitchell, J. (2009, May 31). A GM Bankruptcy Would Reshape Industry’s Role With US Government. CNN Money. Parry, W.H., Walls, M., Harrington, W. (June 2006). “Automobile Externalities and Policies”. Resources for the future. http://econ.yorku.ca/~jametti/4080/Parry_etal_06.pdf Scott, R. E. (2003, November 17). “The High Price of 'Free' Trade.” Economic Policy Institute . Retrieved July 2, 2009, from http://www.epi.org/publications/entry/briefingpapers_bp147/ Todd, A. (2009, March 26). “Public Goods Rather than Private Goods.” History News Network. Xiaoning, M. and Qing, Y. (2009, June 2). U.S. auto industry facing historic change. People’s Daily