Ford Case Study
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New UK car sales in September hit their highest monthly total for five and a half years as the latest 63-plate attracted buyers. The Society for Motor Manufacturers and Traders (SMMT) said 403,136 new cars were registered in the UK, a rise of 12.1% on the same month in .
The SMMT said the growth also reflected the fact buyers were returning to the market after a period of holding off. Buyers typically tend to replace new cars after three years, but because of economic conditions in recent years may have left that longer. It is three years since the ending of the vehicle scrappage scheme, which gave people incentives to trade in their old cars. Cars bought under that scheme would now be around three years old.
Another factor boosting sales was the type of financing deals available, which can lump together payments with servicing and even vehicle excise duty. Richard Lowe, an analyst at Barclays, said: “Attractive finance packages are offering consumers more clarity on running costs, which even with a more promising economic outlook is an important factor for those on a budget.”
Ford’s Fiesta remains the UK’s top selling car, with 20,600 sold in September. Vauxhall’s Corsa was in second place with 14,500 vehicles sold. Car sales have now risen for 19 months in a row. The SMMT’s chief executive, Mike Hawes, said: “The UK market is reflecting growing economic confidence. Robust private demand has played a major role in this growth, with customers attracted by exciting, increasingly fuel-efficient new models which offer savings in the cost of ownership.” But he added
that the UK car market was likely to remain strong.
“As we head into the quieter months, I suspect we’ll see sales hold firm, keeping the UK market zooming ahead of our European counterparts,”. The UK car market is the second biggest in Europe after Germany. So far this year, UK buyers have bought 1.79 million new cars, compared with Germany’s 2.22 million. The gap between the two has shrunk 6% since this time last year.
Meanwhile, a package of measures aimed at bringing down motoring costs, including insurance premiums, has been announced by the government. It was reported that there are plans to pilot fuel price comparison signs on major roads and freeze the cost of the MoT test. The statutory maximum price of the MoT test for a car will be pegged at £54.85 until 2015.
The inflated cost of fuel on major roads is among the most common complaints among drivers. In some areas petrol and diesel can cost 10p per litre more at motorway service stations. The government wants to install a series of price comparison signs which will show the cost of fuel at all petrol stations along any given route.
Ministers are also promising to save motorists money by tackling what they call the compensation culture.
Section A Questions
In total there are 50 marks available for this question. The marks for each question are given at the end. It is important to answer as fully as possible. Marks will
also be awarded for clarity and for the use of correctly labelled diagrams where appropriate.
1. Using appropriate diagrams, explain why car sales in Britain have increased in recent times. (8 marks)
2. Describe how the vehicle scrappage scheme influenced the market equilibrium for older cars. Justify and explain your answer using appropriate diagrams where necessary. (10 marks)
3. What factors are likely to influence the price elasticity of Ford’s Fiesta car? (12 marks)
4. Outline the package of measures mentioned in the article designed to bring down costs and stimulate demand. (8 marks)
5. Explain the likely effect upon price competition of installing fuel price comparison signs on major roads. Make reference to the market structure of petrol stations within your answer. (12 marks)
Section B
According to a policymaker at the Bank of England, interest rates are on course to rise next spring and could be raised sooner if there are signs that falling
unemployment is causing inflationary pressure. Martin Weale, an external member of the Monetary Policy Committee (MPC) said the Bank could raise rates before next May’s General Election.
Mark Carney, Governor of the Bank of England, has however stressed that the MPC is in no rush to raise interest rates and that any increases would be gradual. The Bank ended the direct link between the rate of unemployment and interest rates when it targeted other measures such as wage growth and business investment instead.
The Bank is betting on an increase in productivity as involuntary part-time workers take on more hours, keeping inflation close to the Bank’s 2% target. It predicts spare capacity in the economy will be absorbed gradually, paving the way for stronger wage growth.
Some surveys suggest that firms are already running close to capacity. This means increased demand will put pressure on input costs, including wages. Workers will then use higher incomes to buy more goods and services, further pushing up prices and wages.
MrWeale said average earnings could rise more quickly than expected in the coming months. ‘We certainly expect wage growth to pick up during the course of this year.
If it picks up by more than we expect and there isn’t an offsetting improvement in productivity then the case for an earlier rate rise will certainly be there,’ he
said.
Fathom Consulting, an economic consultancy firm run by former Bank of England economists, has warned of the risk of a “wage price spiral” in Britain although this view is not shared by all. Some economists such as Dame DeAnne Julius, have said that Britain’s competitive, flexible and open economy mean this risk is low.
The Bank of England believes that the UK is running between 1% and 1.5% below its potential and any increase in employment would have little effect on inflation.
David Miles, another external MPC member, also reminded borrowers this week that they should start thinking about the impact of a rate rise on their personal finances.
“It is important that there is a clear recognition by borrowers and lenders that interest rates will not remain at this level for many years to come,” he said. “They need to think very carefully about what’s going to happen when the cost of that mortgage moves up.”
Mr Weale, who has been described as a monetary policy “hawk”, joined Spencer Dale and former MPC member Andrew Sentance in voting for a small rate rise in 2011 to tackle high inflation.
Section B Questions
In total there are 50 marks available for this question. The marks for each question are given at the end. It is important to answer as fully as possible. Marks will
also be awarded for clarity and for the use of correctly labelled diagrams where appropriate.
1. According to the article, the Bank of England is expecting the UK rate of interest to increase next year. Explain why this is likely to happen. (8 marks)
2. Using appropriate diagrams, outline the likely impact of an increase in interest rates upon the economy. (10 marks)
3. Explain what is meant by the term ‘wage-price spiral?(8 marks)
4. Why would inflation be low in a ‘competitive, flexible and open economy’? (12 marks)
5. Suppose that you are working as an economist at the Bank of England. Outline the policies you would recommend to the UK government to overcome the economic problems outlined in the article?(12 marks)
(I just need short answers for each question and do diagrams if required) PLEASE
SAMPLE ANSWER
Introduction
- The increase of 12.5% in average monthly motor vehicle sales in the last five years UK is largely attributed to the hard economic times that kept the UK consumers from the car market. The good financing deals available and also the optimistic economic prospects in the UK looked promising. The economy of a country improves only when the disposable income of its citizens also improves. The average household in an economy accounts for almost thirty per cent of the total aggregate demand for all goods and services in an economy. The relationship between disposable income and consumer spending is positive. The consumption function gradient in these cases is positive and it’s known as the marginal propensity to consume. As the citizen’s income increases so does their consumer demand which results in more purchases of vehicles in these case. In these case the marginal propensity to consume has increased has resulted in more consumption of vehicles at each level. This is in accordance to Keynesian theory. The other factors like the stoppage of the scrappage scheme and the good finance deals are just but incentives to boost spending in order to increase the circulation of funds in the economy.
The Consumption and Saving Function
Consumer spending/saving Income/saving C= a+ cYd
S = -a +s Yd
a
-a Disposable income (Yd)
- In the short run, there will be an outward shift in aggregate demand for older vehicles as the demand for older vehicles will increase due to the scrappage scheme incentive but in the long run the aggregate demand for older vehicles will shift inwards as people begin to feel the effects of the promising economy and the good finance deals and discard the old vehicles while their prices will also drop to P2
Price P AS1
P1
P2 AD1
Y2 Y1 AD2 Real National Income
- The price elasticity of ford will be influenced by the removal of the scrappage scheme, the UK citizen’s preference for exported products and the price of the vehicle. Its fuel efficiencies and durability will also affect its elasticities.
- The subsidy granted by the UK government under the scrappage scheme is intended to stimulate the demand for new vehicles together with the affordable financial deals that have been provided by the government. The insurance premiums, freezing the costs of Mot tests and the affordable fuel sign projects are the measures taken by the government to bring down motoring costs and stimulate demand.
- The eventual results of reduced fuel price signs would be that the Petrol stations that charge higher prices will lose their clients and in the long-run the prices of fuel will come down due to the natural laws of demand and supply. The demand for the affordable fuel will increase and the rest of the fuel stations will also reduce their prices.
Part B
- In the long run, due to the increase spending by the UK citizens, the aggregate demand increases and the economy grows towards full employment of all the factors of production. Most firms will increase their prices in order to increase profits margins while the shortages of input factors will increase the firm’s costs of production. Inflationary gap will occur and the UK government will increase the interest rates to control the inflationary gap. (Blanchard, 2011)
- P2
P1 AD2
AD1
National Output
The Interest rates would make goods and services more expensive and curb consumer demand from AD2 to AD1 hence the suppliers would also because of reduced price from P2 to P1 and they will supply less goods leading to reduced expenditure. (Sullivan, 2003)
- Wage price spiral occurs whenever the price raises leads to even higher wage demands by workers as they try to live and maintain their real and normal standards of living. The higher wages that are above the gains in the productivity of labor results in an increase in per unit cost of labor. In order for firms to maintain their normal profits they also increase their prices. The processes end in a cycle over again and the inflation ends up being out of control.
- The inflation would be low in the UK as a result of government interventions to maintain it that way. For example, between the years 1997 and 1998, the Bank of England increased the interest rates from an average of 6% to 7.5% these reduced the smaller inflationary gap’s trend that had started getting out of control.
- The policies that I would recommend would be the ones to control inflation as the excess demand for motor vehicles and other services increase due to improved economy, inflation would certainly occur in the long run. I would recommend the use of monetary policies such as the use of interest rates to reduce the level of the actual aggregate demand. Higher interest rates would reduce the aggregate demand in the following ways; a). They will discourage borrowing in house-holds and also by companies. b) Increase the general rate of saving as the opportunity cost to save has also increased and finally the general increment in mortgage interest rates of payments will also reduce the disposable effective real income of the homeowners which will reduce their ability to incur extra expenses or spend. Fiscal policies such as higher taxes and other policies like wage control and supply side policies will assist the government to control the economic problems in the UK.
References
Sullivan, S. S. (2003). Economics: Principles in action. Upper Saddle River, New Jersey
Pearson, Prentice Hall.
Blanchard, O. (2011). Macroeconomics Updated (5th Ed.) Englewood Cliffs: Prentice Hall.
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