Economics Analysis Paper Three essay

This study aims to identify some Of the macroeconomic variables and analyze the impact of these variables on the demand and supply of Toyota automobile vehicles in the US. The paper includes four to five years historical data of these variables accumulated and samples for this analysis. This analysis will also look at the long term correlation of these variables with Toyota car sales. Results shows that a slowdown in US income growth could short-circuit the surge in consumer spending including the sales of vehicles manufactured by the U.

S automotive manufacturers, such as Toyota Motor Corporation Macroeconomic Analysis Economics use variety of models to explain how the U. S national income is determined, including the aggregate demand-aggregate supply (AD-AS) model. The model is taken from the basic circular flow concept that explains how income flows between household and firms. The aggregate demand curve, labeled AD shown below is a curve that shows the relationship between the price level and the quantity of real GAP demanded by households, firms and the government (Bruce, McConnell, Flynn, 2014).

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It consist of the amount of households plans to spend on goods (C), plus landed spending on capital investment (I), plus government spending (G), plus export (X), minus import (M) from abroad. The standard equation is AD = The short-run aggregate supply curve shows the relationship in the short-run between the price level and the quantity of real GAP supplied by firms. In the short-run, the real GAP and price level are determined by the interaction of the aggregate demand curve and the short-run aggregate supply curve.

As shown below the demand curve is a visual representation of the behavior of buyers in a market while the supply curve is a visual representation of the behavior of sellers in a market. At only the equilibrium price will we have suppliers willing and able to bring to the market exactly what demander want. Table 1 AS -AD Model Determinants of Aggregate Supply and Aggregate Demand The supply and demand of the automotive industry in the U. S, as well as the profit derived from the sector are clearly impacted by the microeconomic variables.

From research, the industry history demonstrates the trends it follows in the business cycle and how these variables have impacted the performance of the industry over the years. Government policies, employment and consumer income, foreign demand, interest rate, credit availability and inflationary expectations are some variables to assess the state of the automobile industry, using Toyota Motor Corporation that engage in the design, manufacture, assembly and sales of passenger cars, minivans, commercial vehicles and related parts in the U.

S. And other countries (Helmut, 1994). Government policies The government uses fiscal and monetary policies to pursue and achieve macroeconomic policy objectives, thus shifting aggregate demand curve. For example, in May 1 981 , with the American auto industry mired in recession, Japanese car makers agreed to limit exports of passenger cars to the Ignited States. This “voluntary export restraint” (EVER) program, initially supported by the Reagan administration, allowed only 1. 8 million Japanese cars into the U. S. Each year. The cap was raised to 1. 85 million cars in 1984 and to 2. 30 million in 1 985, before the program was terminated in 1 994 (Benjamin, 2008) One key long-run consequence of the EVER program stems from the provision that any Japanese cars produced in the U. S. Were excluded from the limits. Beginning With Hand’s Marseille, Ohio, plant in 1982, Japanese makers responded to this provision by investing heavily in U. S. Production facilities.

By 1 990, Toyota and other Japanese makers including Ionians, Mazda, and Immunities had joined Honda in producing substantial numbers of cars in the U. S (Steven, Elevation, Rakes, 1 999) Also following the dramatic drop in automobile sales throughout 2008 because of the global scale recession, General Motors (GM), Ford Motor Company, and Chrysler requested emergency loans from the government in order to address impending cash shortage. So to prevent liquidation – causing massive job losses at these companies and reverberating throughout the industry at the cost of thousands more, the U.

S. And Canadian government provided financial layout ($85 billion) to prevent the disappearance of GM in particular with its roughly 1 00,000 Americans and its central place in the chain of suppliers, part manufactures, and dealers. The bailout have been held up by President Obama and his supporters as a great success story – proof that, by working together, government through its economic policies and business can save jobs and strengthen the economy (Kicky, T. 011) Employment and Consumer Income The car industry is a major employment sector, employing more than 48 million people worldwide, that is about 1 % after subtracting those unable to org. This is also one of the reasons the government of many countries like the U. S, Germany and others are historically heavily dependent on their own car production (COCA, 2009). Current income is the most important variables determining the purchase of consumer product including the sales of new cars.

New cars are normal goods with high income elasticity of demand, so when real incomes are rising there will be an expansion of demand for new vehicles as they become affordable, reverse is the same. In 2008 this factor is likely to cause the dramatic drop in automobile sales because millions of nonusers have either experience a pay freeze, pay cut or being lay off from work causing real disposable income to fall. According to the Bureau of Labor Statistics report, personal income and outlays for December, 2013.

Personal income increased $2. 3 billion, or less than 0. 1 percent, and disposable personal income (DIP) decreased $3. 8 billion, or less than 0. 1 percent, in December. Personal consumption expenditures (PACE) increased $44. 1 billion, or 0. 4 percent. In November, personal income increased $29. 8 billion, or 0. 2 percent, DIP increased $14. 4 billion, or 0. 1 percent, and PACE increased 574. Billion, or 0. 6 percent, based on revised estimates.

So if real household wealth (the difference between the value of a household’s assets and the value of its debts) increases (decreases), then aggregate demand will increase (decrease), which is one of the reasons the aggregate demand curve is sloping downward (Bruce et al, 2014) Expectations When it comes to changes in the expectation of consumers and firms, a big factor is economic confidence. This is an economic indicator that measures the degree of optimism consumers feel about the overall state of the economy and their personal financial situation.

Consumer confidence is formally measured by the consumer confidence index (CLC), a monthly release designed to assess the overall confidence, relative financial health and spending average of the U. S. Average consumer. If consumers become more optimistic about their future income, they are likely to increase their purchasing power. This increased in spending activity will shift the aggregate demand curve to the right. For example, table 2 below shows that the US. Economy inflation and historical interest rates, with growth in the gross domestic product (GAP) of 2. Percent for 2010, compared with a decline for al of 2009. In 201 0 consumer confidence improved from the low levels experienced during the recession, the consumer confidence index exhibit a moderate upward trend in the first quarter of 2011. Likewise manufacturing firms, such as Toyota Motor Corporation can become more optimistic about the future profitability of investment spending shifting the aggregate demand curve to the right. New and improved technologies can enhance expected returns on investment and aggregate demand.

For example, Toyota has a strong focus on research and development (R&D) to expand its product portfolio and improve Table 2 – Expectations for dealership profits Percent of dealers expecting profits to Month/ Year Increase No Change Decline Value Index March 2007 40. 7 42. 6 16. 7 128 March 2008 28. 0 44. 2 27. 8 98 March 2009 18. 0 39. 9 41 . 5 68 March 2010 54. 0 35. 7 10. 3 154 March 2011 57. 4 35. 8 6. 7 166 Source: NADIA Industry Analysis Division, 201 1 the functionality, quality; safety and environmental compatibility of its products. The company conducts its R&D operations at 14 facilities worldwide.

The strong focus on allows Toyota to uphold the technological leadership in most of its product segments, enabling voltmeter innovative products, including the adoption of more fuel- efficient vehicles such as hybrids and electric models hybrid and other fuel- efficient models such as solar powered cars leading to strong sales. The more fuel-efficient a model is, the more likely a consumer will be willing to invest up front in a new car for potential savings on fuel costs down the road (Mono, 2013) Interest rates Interest rates are an important determinant of the performance of automobile industry.

Interest rates for consumers represent the available fund they are willing to borrow to satisfy today’s needs. For businesses, they represent the cost of borrowing money to invest in the growth businesses of a firm (Douche, 2010). From the table 3 above, in 2010 the average new vehicle rates at finance companies increased to 4. 26 percent, up from 3. 8 percent in 2009. Buying a car on credit can increase its effective price remarkably. Let denote the price of a car by P, the credit interest rate by R, and the number of years for which the credit is issued.

Then accounting for credit financing, the effective price of the car can be estimated by the following equation: P +RPR = P* (1 + ran). From the table above, taking 2011 IQ, r = 4. 75% and rounding the average range of the loan to 60 months (5 years). This means that the price of a car bought on a credit at a rate of 4. 45% in the first quarter of 201 1 will be 1. 26 times higher Han if it had not been bought on credit. When the price rises, consumers and firms need to spend more money to finance buying and selling. This makes them relatively ‘short of cash’ than they were at lower prices.

The liquidity of an asset refers to how easily it is converted to cash, with cash itself being ‘perfectly liquid’. So the loss of liquidity associated with the rise in prices forces some consumers and firms try to withdraw funds from banks, borrow from banks, or sell their assets. These actions reduces the liquidity of banks, and in response, banks are likely to raise interest rates as compensation for his lost liquidity. So, because a higher price level increases the interest rate and reduce investment spending, it reduces the quantity of automobile vehicles demanded.