Economics of General Motors

The role of the automotive industry in U. S economy is quite important. Given the multiplier effect, its impacts on other industries such as glass, steel and rubber, so it is considered an industry that shows some level of welfare in the economy one that has a greater share of production in manufacturing. 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.

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. Car manufacturers have adjusted their production and almost all vehicle-producing countries experienced a sharp drop in 2010 of output growth. The decline was particularly marked in Spain and Italy. United States, the decline of automobile consumption of durable goods and investment vehicle production businesses contributed 20 to 30% decline in production complete the second half of 2010.

The current downturn in car sales appears more pronounced than the fundamentals such as revenue growth and real oil prices. Other factors could therefore have played a role. According to estimates more restrictive credit conditions could explain over 80% of the collapse of auto sales occurred in late 2008 in the United States and Canada. In fact, many consumers are unable to obtain a car loan at affordable terms have prompted buyers to delay an purchase they could have done in otherwise. It is also possible that the consumer has held onto their cars longer, the average motor vehicles recently has been better in quality..

Unfortunately, because the automobile industry is so large, much of the information about it focuses on the negative aspects. When talking about externalities, reports tend to focus on the negative instead of the positive. 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 others. At least in the current social and economic climate, this negative externality has an impact on the economy because people believe they have an impact on the environment. Aside from environmental reasons, people also want cars that can get more miles per gallon because of the rising gas prices.

The automobile is considered a private good, rather than a public good and it is nearly impossible for an automobile company to have a monopoly: there are 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 exceptions, such as married couples and parent and child.

The automobile is also an excludable product because a person must pay money to own one. No one could ever have an automobile without workers to build them. There could never be an automobile company without business savvy people to run the companies. 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.

One article mentions 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. Wage inequality can be measured by analyzing the collective bargaining and labor management relations existing in the industry. The major factors affecting wage inequality are competition, labor peace, protection of income and employment etc.

For measuring the wage inequalities existing in the automotive industry these factors need to be analyzed thoroughly. Of course, in an industry with such a gap between management, the administrative positions, and so-called “grunts” or factory workers, a huge wage discrepancy is expected.

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 you 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 felt that the sacrifices being made are not exactly “sacrifices” for the people making the actual decision to go ahead with job cuts. Wage inequality and job inequality affect the automobile industry even in a good economic climate; in today’s markets it will probably become doubly difficult for workers in automobile factories to keep their jobs. 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 world’s economy. because besides housing, automobiles are one of the primary drives 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.

Monetary policy tends to favor the automobile industry because it is such a huge money maker for the government, because of their ability to reliably tax automobiles. While the automobile industry is a cornerstone for America, it is probably most important 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 is very clear, that if the automobile industry is in trouble, the whole economy is in trouble.

Amendments to fiscal policy reflect that new-found knowledge, and other new regulation have also reflected a view heavily biased toward the automobile industry. Unless they have been living under a rock, everyone knows that the General Motors filed for bankruptcy earlier this summer, causing a huge panic.. 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. 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 have poor gas mileage..

Oil prices affect most industries, but the automobile more than others; people tend to buy their vehicles based on the price of gas and the MPG. Until another better source of fuel is discovered this probably will not change. Another economic factor negatively affecting the automobile industry is war, though mostly because war affects many industries. 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 works just fine.

The current conflict is affecting oil prices and, as already explained; oil prices have the single most important influence on automobile sales than anything else. In 2010, the weight of the automotive industry as a whole (considering also the production of auto parts) represented about 1% of GDP, one of the most important of all economic activity. In addition, the Industrial contribution to GDP is even higher: last year came to 6. 6%. On the other hand, was the sector that has contributed to the growth of manufacturing since the end of convertibility, in late 2001.

From that time until 2008, said nearly a third of the rise of industry in general. Then, the international financial crisis that hit later that year and in 2009, led to a drop in the level of production throughout the economy. But the following year, when activity increased again, was when automotive sector led the recovery, explaining about 50% of the growth of the industry. During this year, the automotive industry has returned to bring about a third of measured growth, regaining much of its vital importance. End Notes 1. Ballew, P. , Schnorbus, R. (1994).

“The Impact of the Automobile Industry on the Economy. ” Chicago Fed Letter. Retrieved from, the Bnet database. 2. Ballew, P. , Schnorbus, R. , & Hesse, H. (1994). “The Automobile Industry and Monetary Policy: An International Perspective. ” Business Economics. Retrieved from, the Bnet database. 3. Gongwer News Service. (2006, January 23). “Ford Latest Automotive Industry Employer to Announce Job Cuts in Ohio. ” Policy Matters Ohio. Retrieved from, http://www. policymattersohio. org/media/gongwer_Ford_Job_Cuts_in_Ohio_2006_0123. htm 4. Mitchell, J. (2009, May 31).

A GM Bankruptcy Would Reshape Industry’s Role With US Government. CNN Money. 5. 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 6. Scott, R. E. (2003, November 17). “The High Price of 'Free' Trade. ” Economic Policy Institute . Retrieved from, http://www. epi. org/publications/entry/briefingpapers_bp147/ 7. Todd, A. (2009, March 26). “Public Goods Rather than Private Goods. ” History News Network. 8. Xiaoning, M. and Qing, Y. (2009, June 2). U. S.

auto industry facing historic change. People’s Daily ——————————————– [ 1 ]. Mitchell, J. (2009, May 31). A GM Bankruptcy Would Reshape Industry’s Role With US Government. CNN Money. [ 2 ]. 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 [ 3 ]. Todd, A. (2009, March 26). “Public Goods Rather than Private Goods. ” History News Network. [ 4 ]. Scott, R. E. (2003, November 17). “The High Price of 'Free' Trade. ” Economic Policy Institute .

Retrieved from, http://www. epi. org/publications/entry/briefingpapers_bp147/ [ 5 ]. Gongwer News Service. (2006, January 23). “Ford Latest Automotive Industry Employer to Announce Job Cuts in Ohio. ” Policy Matters Ohio. Retrieved from, http://www [ 6 ]. Ballew, P. , Schnorbus, R. (1994). “The Impact of the Automobile Industry on the Economy. ” Chicago Fed Letter. Retrieved from, the Bnet database. [ 7 ]. 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