American Public University
I am planning to purchase a Volkswagen SUV car which is imported from a German company. The car I am willing to buy is a full car with many other features better than the other imported cars and the domestically produced vehicles. Due to the technological advantages in the car, I believe my family will be safer and more comfortable compared to the other car brands. However, as an imported product, the price of the car is closely related to the changes in the inflation rates, the interest rates, and the exchange rate between the Euro and the USD.
Considering that the car is imported from another country, the price of the car is a function of the cost of the production, and the cost of trade. The inflation rate in Germany is the primary indicator of the production costs in Germany. In Europe, the global financial crisis has increased the number of the lost jobs, and the personal income has gone down. Therefore, the demand for the products has gone down in the last five years. Consequently, the decreasing demand of the products has caused a slow-down in the inflation rate, and the inflation rate in the European countries including Germany is "0."
Even though the inflation rate is “0” in the European countries, it does not mean that the production of the car by Volkswagen has not increased over the last two years. The reason behind this is the structure of the production cost includes a composition of the production factors such highly qualified workers and steel (Ohanian, 2010). The automotive sector requires hiring highly skilled workers, and during the last global financial crisis, the wages of the skilled workers have not decreased. Also, the steel is something imported into Germany, and the developing countries have used the advantage of being little, and they raised the price of the steel. As a result of these facts, while the prices of many other products and services were decreasing, the price of the automobiles did not go down in Germany.
Also, the inflation differences between the countries play a significant role in the determination of the imported products because the inflation rate differences are one of the primary determinants of the exchange rate. Considering that the US economy has started recovering from the crisis before the European economies, the inflation rate is higher in the US than the inflation rate in the European countries. The recession in the developed countries have caused a strange situation in the national economies, and the inflation has been something desirable in the developed countries (Blanchard, 2006).
Before 2008, the only state which has been suffering from the lack of increase was Japan. The Japanese economy, thanks to the very high productivity and very high saving rate, the domestic demand has not been enough to stimulate the economy in Japan. The Japanese government has tried many economic policies to increase the inflation in the country; however, the Japanese people still prefer living traditionally, and it is tough to change their attitudes for spending (Ohanian, 2010).
The developed countries, other than Japan, have faced the small level of inflation problem after 2008 because the people in these countries have lost the varying opportunities to generate income, and, more importantly, they have lost their belief in their economies, and the recovery policies. Many of the people in the developed countries are not willing to spend their money, and they do not want to make significant investments because they believe that the recovery of the losses during the most recent global financial crisis has not been completed. Therefore, the people prefer keeping their savings somewhere safe, and they believe making an investment or starting a business now is not the safe place for their savings. Therefore, the loss of trust in the European countries is an essential barrier in front of the recovery policies, and the low inflation rate is the main indicator for this (Oh, 2014).
In the economy theory, the crises are classified into two main classes: 1-Supply-sided crises, and 2-Demand-sided crises. The last global financial crisis is mainly demand-sided crisis because the conditions on the supply-side have not changed much over the last five years. The central feature of the supply-side is the production costs. Considering that the production costs have not changed much over last five years, we can claim that the supply-side is not the main reason in the back of the economic recession in the developed countries (Blanchard, 2006).
The demand-side has been the relatively more influencing side in the last global financial crisis. The loss of the trust in the markets in the developed countries has created a big difficulty for the recovery, and the demand in the developed countries is not enough to create stimulation for the recovery.
The characteristics of the last crisis have raised the suspicion of the free markets. The free markets have caused a big mess in the US, and the mess has easily spread to the other countries’ economies. Some economists believe that the free markets might create more problems in the future; therefore, the governments should establish a control and support mechanism to the free markets. This situation is entirely different from the Keynesian suggestions because the Keynesian idea was to use the fiscal policies once to stimulate the effective demand. After 2008, some economists believe that the governments should use the market control tools and monitor the markets all the time, not only once (Ohanian, 2010).
Coming back to my decision of purchasing a Volkswagen car, under the conditions in the markets at present, I need to spend almost 40,000 USD for the car. I expect that because the US have a higher inflation rate than the Germany, and the Euro have gained value against the USD lately, I believe the price will be higher for the car I am willing to buy.
Another important issue for my decision is the interest rates. The interest rate influences the exchange rates and my rate of return on my savings. As known, the FED has started increasing the interest rate gradually in the US while the interest rate is at a very small level in Europe although the European Central Bank has begun increasing the interest rate in Europe. Therefore, the capital will be more valuable in the US, and that means the US will attract more capital to the US. When a lot amount of USD enters to the US markets, the USD will lose more value against the Euro, and the car will be more expensive in the US. Also, the interest rate will increase the return on my savings if I deposit them into the financial institutions. In another word, when I buy the car, I will lose the high-interest gain thanks to the increasing interest rate.
Considering all the factors I have discussed above, purchasing the imported car in the US is relatively more expensive for the Americans. Therefore, many of the Americans will not prefer buying an imported brand new car. Instead, they might prefer buying used cars in the US. Consequently, the demand for the imported cars will decrease in the US. Also, the recession in the European countries will reduce the domestic request of the German cars. Consequently, the need for the German cars will drop domestically, and at the international level (Oh, 2014).
On the other side, the recession might cause a decrease in the supply of the German cars due to the increasing production costs. The production costs might increase because the unstable macroeconomic conditions increase the risk for the investors. I can use the information I learn in the macro classes to make decisions upon the macroeconomic analysis (Blanchard, 2006). The macroeconomic analysis in the newspapers makes sense for me.
References
Blanchard, O. (2006). Macroeconomics. Upper Saddle River, N.J.: Pearson Prentice Hall.
Oh, S. (2014). Shifting gears: industrial policy and automotive industry after the 2008 financial crisis. Business And Politics, 16(4). http://dx.doi.org/10.1515/bap-2014-0015
Ohanian, L. (2010). Understanding Economic Crises: The Great Depression and the 2008 Recession. Economic Record, 86, 2-6. http://dx.doi.org/10.1111/j.1475-4932.2010.00667.x
