The Macroeconomic Paper tests your ability to apply economic principles to a business decision considering the impact of macroeconomic variables. Select one situation from the items outlined below: A

Business Macroeconomic Analysis

Name:

Institutional Affiliation:

Business Macroeconomic Analysis Outline

Introduction

The US automotive market is the largest manufacturing sector in the country one of the largest in the world. Though the market experienced a dip in the aftermath of the 2007-2008 economic recession, production has since doubled and it stood at twelve million passenger vehicles in 2015 (Williams, Peterson, Couch, & Paris, 2016). The automotive parts market has also expanded at the same rate with the rest of the automotive industry.

The American automotive industry has an immense impact on the American economy just as the American economy has an effect on the auto industry. This makes it imperative for Rick to take into consideration the macroeconomic variables as they have an impact on the economy. The economic recession of 2008-2009 for instance led to a precipitous decline in new car sales due to the overall decrease in consumer spending. Before making a decision on whether to expand or not, it is vital that Rick takes into account macroeconomic variables that can have an impact on the fortunes of his business.

Relevant Economic Principles

The automotive industry is a cyclical industry that has historically cycled through different phases of the business cycles. During boom times, the automotive industry’s production rates are at record peak. This is because this phases are characterized by stability in inflation rates and high employment (Liu & Hussain, 2014). This increases the demand in the automotive market. Solid consumer confidence and strong, steady decline of the unemployment rate since the 2008-2009 recession put the North American automotive market at a near cyclical. Consequently, demand has also doubled since 2009 when it was at the lowest due to high unemployment rates, loss of consumer confidence and a constrained money supply. Thus, the business cycle is important as it affects the GDP growth rates, consumer confidence and the availability of demand for consumer durables such as automotive parts.

Monetary policy and interest rates are an important determinant of the performance of the automotive industry. This is because they have an impact on the cost of credit and consequently the availability of funds to power consumer spending. Economic theory holds that the durable goods market is one of the key channels affected by monetary policy. An increase in interest rates therefore results to a decline in production rates by limiting the availability of funds for purchase of vehicles and subsequently the demand for auto parts.

Exchange rates and international trade also have an impact on the US auto parts market. This is because the automotive industry is a global market where automotive parts are manufactured for consumers all over the world. Hence, it is vital that there is an understanding of exchange rates and international trade as automotive parts are involved in the export of their manufactures (Carbaugh, 2013).

Recommendations and Economic Justification

One needs to carefully weigh the risks and rewards of expansion before making the decision to expand. The American automotive industry has an immense impact on the American economy just as the American economy has an effect on the auto industry. The current low interest rates and rising employment mean that car buyers will continue visiting dealerships. The strong US economy and increased confidence also mean that the prospects for auto manufacturers remain positive. Rick should consider expanding his business to meet future demand.

Carbaugh, R. J. (2013). International Economics. Cincinnati: South-western.

Liu, L., & Hussain, S. M. (2014). Essays in macroeconomics. New York: University of Rochester.

Pindyck, R. S., & Rubinfeld, D. L. (2013). Microeconomics. Boston: Pearson Education.

Williams, J., Peterson, T., Couch, L., & Paris, A. (2016). 2016 Automotive Parts Top Markets Report. International Trade Administration.