Article Review
Article Review
The motor vehicles industry in Mexico is facing a jolt due to the fall in demand from Europe, Latin America and Asia. The economic slow-down in these areas have reduced demand for cars and light trucks whose production has fallen by 4.1% in February this year from the previous year. But there is the brighter side as well. Though the world outside North America is under recession the USA is experiencing robust growth with the job market faring quite well. This is reflected in the 75 per cent of export of the auto industry of Mexico finding place in the US. This has somewhat compensated the loss in demand from the rest of the world. A total of 539,000 vehicles have been produced in the auto-assembly plants in Mexico in January and February 2016. This is a 2per cent drop from the production level in January and February, 2015. USA and Canada are the major markets of Mexican vehicles. The US, Canada and Mexico share a 23 year old partnership under the North American Free Trade Agreement (NAFTA).
The auto industry in Mexico is dominated by eight foreign companies. Among these the Toyota Motor Corp as well as the Nissan Motor Co., the Ford Motor CO. and General motors are carrying on expansion activities . Audi, Kia, Daimler and BMW are the other big foreign companies that are about to enter the auto industry in Mexico. With all these expansion and new entries into the industry Mexico is slated for a growth in auto production to a rate of 5 million vehicles a year by the time it reaches 2020 .
The major portion of the cars produced in the country is for the purpose of export. For example, of the 3.4 million vehicles produced in Mexico in 2015, 83% was exported. But the domestic demand for vehicles is growing in the recent years. The domestic demand for vehicles has experienced a 14 per cent growth this year from the previous year while the growth in the previous year was around 19 per cent. Once reason for this growth in domestic sales is the fall in the imports of used cars from the US . The policy makers have decided to keep the domestic demand high so that the car production industry does not face a downfall at the face of global slow-down. Restrictions on import along with the provision of easy loans to the consumers will further boost the domestic demand for new cars in Mexico.
Car sales have increased stupendously in the areas bordering the US. The Mexico city however has shown slackness in the car market. The fall in the oil process have affected the job market around the areas near the gulf of Mexico. The demand for vehicles has actually fallen in these areas.
Economic Terms Associated with the Issue
There are two microeconomic concepts that we can use to interpret the issue at the initial stage of analysis. They are demand and supply. The discussion in the article is centered round the issue of demand for and supply of motor vehicles in Mexico. The concept of export and import as determinants of demand and supply are also some other economic concepts that we can associate with this article.
The article is not only concerned with microeconomic concepts. We find macroeconomic concepts like recession and growth to be quite relevant in the context of the issue raised in the article. The effect of price level on the job market has also been touched upon in the article while it discusses the fall in demand in some parts of Mexico where job market is slowing down.
Let us now analyze the article in terms of the economic concepts we enumerated in this section.
Economic Analysis and Interpretation of the Issue
The primary concern expressed in the article is the fall in production in the auto industry in Mexico. The production fell as demand has slowed down. The recessionary trend in many countries around the world has reduced world market demand for vehicles. Thus export demand for Mexican vehicles has also fallen. We have shown this as a leftward shift in the demand curve for vehicles in figure 1 from D0 to D1. The leftward shift has led to a fall in price which has resulted in a fall in supply of vehicles along the supply curve. Thus the production and sales of vehicle has come down to Q1 from Q0.
Figure 1 S
P
D0
D1
Q1 Q0 Q
Since the US has been unaffected by the recession in Europe it has shown steady growth last year and till now it has maintained a consistent rate. Thus the demand for Mexican cars has increased in the US. This has increased exports of motor vehicles from Mexico to the USA.
The domestic demand for motor vehicles in Mexico has increased due to the fall in the import of cars from the US. The fall in the imports can be traced to the rise in the dollar prices. The US dollar has gained in strength in recent times. With the rise in price of US dollar the prices of US cars have increased in the world market leading to the fall in demand for US used cars. Thus the import of US cars has declined in Mexico. The demand for cars in Mexico has also increased due to the easy credit facility provided to the consumers. We can see how availability of credit is an important determinant of demand for durable goods. Thus the stronger dollar as well as the financial easing in Mexico has together lead to the higher domestic demand for automobiles in Mexico.
But there are some dampeners to domestic demand as well. The fall in employment in the oil refining and exploration sector has affected demand in the coastal areas of Mexico . The global slide in the oil prices has affected the domestic economy in Mexico. The income and employment around the Gulf of Mexico has fallen.
References
Althaus, D. (2016, March 7). Mexican Auto Production Down as SOme Export Markets Falter. THe Wall Street Journal. Retrieved from http://www.wsj.com/articles/mexican-auto-production-down-as-some-export-markets-falter-1457389101
