Loading...

The impact of economic stimulus on automobile demand

Essay 2010 8 Pages

Business economics - General

Excerpt

Table of Contents

1. Introduction

2. Incentives and impacts on car demand
2.1 Europe and UK
2.2 USA

4. Voice of critics

5. Conclusion

6. References.

1. Introduction

After the beginning of the financial crisis in 2008, nearly every industrial oriented country struggled keeping the current economic level, due to a sharp economic downturn. The countries’ main aim was to stabilize declining sales volume and to hinder economic shrinkage in key industries. Key industries are industries with far-ranging value chains in different branches of a countries’ economy and different geographical parts of a country. Those key industries are the automobile industry in Europe and the USA. Many firms laid off workers or changed their labour condition into temporary work. The result was a lower national total income and less spending capacity which leads to lower demand and finally to a lower total economic surplus. To cope with the danger of a recession many of them introduced an economic stimulus package. These packages included subventions for certain industries or incentives for consumers and companies to plead investments.

The following paper analyses and describes the impact of incentives and stimulus measures, such as scrappage bonus in Germany and UK or sales tax reduction in the US on sales and demand. It relates to basic economic models, theories and actions governments took to cope with these issues. In the last step, the paper outlines and further evaluates the main critics emerged in public press. Moreover it will be discussed whether the decisions, made by governments, contribute to long lasting economic growth and prosperity or not.

2. Incentives and impacts on car demand

2.1 Europe and UK

The Department for Business and Innovation Skills (2010) and the federal ministry of economics and technology in Germany (2009) introduced a policy about the scrappage bonus, also called “wreck rebate”, to stimulate car sales. The owner of a nine-year-old car or more could get an additional 2,500 euro bonus, on top of the normal discount for their old car, if they bought a new car. The only restriction was that the car had to be the current owner’s property more than one year.

On grounds of this concept, every economic individual which planned to make an investment into a new car and met government’s criteria pleaded the decision and got additional 2,500 Euro discount. At that point, the income effect kicks in, because the buyer immediately has a 2,500 euro higher real income. The whole demand curve for cars shifts to the right because consumers are willing to demand a market price that they are normally not willing to pay, while the car manufacturing companies get there expected sales price. On top they got the chance to refinance their investments with unusually low interest. The European central bank cut its interest down to one percentage. This made many car lease offers or loan plans more attractive to the potential customer, because he had to spend less from his money.

But after the scarcity principle, somebody has to pay for the burden of almost five billion euro. The scarcity principle states that in the long run somebody has to pay for the usage of scarce resources. The government made use of Adam Smith’s principle; they spend money, to stimulate the demand of an economy in time of crisis and, to refinance it afterwards with higher taxes in times of economic growth. Furthermore, through higher car sales, the car manufacturer’s stimulated their value chain. This led to stimulation and overall higher demand for the sub-contractors in different industries. All these companies had higher revenues and lower lay-off rates, which resulted in less people unemployed and more resources available to spend in the economy. In conclusion, the government ensured earnings through income and sales tax to refinance the whole system.

To avoid a loss in the total economic surplus the governments did not release a policy with a price ceiling. The total economic surplus is described as the sum of the difference among buyer’s reservation price, actual paid price, seller’s reservation price and actual received price. A price ceiling, in other words a minimum price, would have caused a lower supply by producers, because they would not be willing to supply as much as at a 2,500 euro higher price. The total economic surplus would have been reduced. That would result in less welfare for the whole society. Instead, they gave those people who qualified for the scrappage scheme additional income.

[...]

Details

Pages
8
Year
2010
ISBN (eBook)
9783656403166
File size
360 KB
Language
English
Catalog Number
v212158
Institution / College
Maastricht University
Grade
8,0
Tags
car economic stimulus crisis demand supply economic shock automobile demand

Author

Share

Previous

Title: The impact of economic stimulus on automobile demand