Last Updated 07 May 2020

Monetary and/or Fiscal Policies that have affected the Automotive Industry

Category Automotive Industry 
Essay type Research
Words 839 (3 pages)
Views 419

The financial and economic policies that are put in place by the government like the monetary policy, has significantly affected the job opportunity rates, growth rates and pricing of the automotive products. The monetary policy directly affects the employment cost for the reason that, as the money supply goes up, the value and the interest rate goes down.

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. Contrastingly, a reduction in the money supply leads to increased interest rates and value of money and therefore the demand for automotives decreases and as a result reduces employment rates.

The monetary policy has also impacted on the industry growth, for instance, the increased interest rates have lead to reduced expenditure by customers. Accordingly, this situation restricts the growth and expansion of the automotive industry. On the other hand, low interest rates will increase customer expenditure on automotives and hence increased sales and in the long run the business will grow. Furthermore monetary policies are central players in the determination of product prices, for instance, increased monetary supply leads to low rates and for that reason, the demand for automotives will increase.

These changes will be effected until equilibrium is established for the price and the demand for the products. Fiscal policy is another player affecting the growth and expansion of the automotive industry, the pricing of the products as well as the employment rates. This policy involves the taxation and regulation of the business by the government. The main concerns come to play when the taxation rates are so high that the expenditure budget is restricted, this means that the employment rate will have to be reduced as a measure to adjust and fit into the available resources.

Otherwise when the taxation is fairly low, then the employment rates are likely to go up as more resources are available for use. The increase in taxation rates and reduced government expenditure may also restrict the growth of the automobile industry, on the contrary, a reduction in the taxation rates and increased government expenditure will lead to growth of the industry. It is also true that low taxation increases the customer power of purchasing and therefore the buying price of the products is also going to rise.

Conclusions The trends in economic development and other changes greatly affect the automotive industry. The cost of production, Consumer purchasing decisions, government interference, the foreign competitors among other factors are the main factors affecting the growth and expansion of the auto industry. The purchasing habits, decisions, preferences and needs of customers have a major impact on the automobile industry because the success of any business depends on the profits which are obtained when the company makes sales.

This is a reflection of the first principles of economics, which suggest that people come to terms with tradeoffs. The increased cost of acquiring vehicles will lead the customers into seeking the next best alternative like the public transport. Government interference (Taxation and salary regulation) on the other hand affects business expenses and hence will also determine success rates of the industry because higher taxation cuts into the business’ profits and also decreases the sales since the increase in reflected by and large in the final cost price of the automotive products thus the selling price is raised.

When the government spends a lot, inflation ensues and the value of money is reduced and increases the prices of automotives. The cost of raw material is another major factor affecting expansion of the industry because its prices in directly proportional to the selling prices. When there is an increase in the cost of raw material, selling price goes up and sales are reduced so do the company’s profits and vice versa.

The availability of cheap labor in other competitor countries has heightened competition in the US market causing some companies to relocate to developing countries where there is cheap labor hence increasing unemployment population in the mother country US. The influences are both negative and positive; the negative impact include; competition from abroad, high taxation, and high cost of production (raw materials and labor). High labor cost in US and low labor cost in foreign countries put automotive in an unfair competition greatly reducing sales.

Higher taxation eats into the profits and decreases the sales as well. The cost of raw materials translates to increased cost of production which in turn leads to higher selling prices. With all these negative impacts many companies still survive while others have fallen out.


Economics and Business Group Centre for Automotive Research. (2003). Economic contribution of the automotive industry to the U. S. economy - an update. Retrieved on 3rd February 2009 from http://www. cargroup.

org/pdfs/Alliance-Final. pdf Environmed Research Inc. (1995). Cars, air pollution and health. Retrieved on 3rd February 2009 from http://www. nutramed. com/environment/cars. htm Environmental Defense. (2003). Automobile industry largest source of lead pollution today. Retrieved on 3rd February 2009 from http://www. environmentaldefense. org/pressrelease. cfm? ContentID=2889 Jones, R. (2006). American auto industry seen at a crossroads. Retrieved on 3rd February 2009 from http://www. msnbc. msn

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