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Automotive Industry/ Economic Theory

Automotive Industry
ECONOMIC THEORY

Automotive Industry
In the automotive industry there are many factors and policies that affect the automotive industry and its performance. The following topics and their impacts on the automotive industry are as follows:
• Supply and Demand (Sales)
• North American Free Trade Agreement (NAFTA)
• External Affects
• Labor Supply and Demand
• Federal Policies
• Economic Influence
Supply And Demand
High competition from foreign car imports causing US manufactures to seek deals with lower cost overseas companies. This movement is in effort to reduce manufacturing costs of domestic vehicles in order to stay competitive with foreign manufactures. By reducing manufacturing costs, domestic manufactures are seeking ways to reduce the cost of their vehicles in order to improve sales. (National Environmental Trust [NET], n.d., pg. 5) One of the main strategies to reduce costs of the domestic automobiles, manufacturers of component parts are relocating their manufacturing sites to countries such as Canada, Mexico, India, China and the Philippines to reduce the costs of these components. The affect of these moves is obviously a loss of domestic jobs and a reduction of cash flow into the US economy.
Another factor that is very influential to the automotive industry is that of rising fuel costs. Higher oil prices have forced automotive manufactures to slash prices on their larger less gas efficient vehicles while at the same time raising the prices of highly efficient vehicles. Due to higher gas prices the demand for less efficient vehicles is low forcing the manufactures to slash prices in order for them to move the vehicles off their lots. The opposite is occurring to higher efficient vehicles. With the gas prices increasing the demand for higher efficient vehicles is increasing which means the manufactures can raise prices due to the higher demand. (Reuters [R], 2007, pg. 1) While fuel prices and cost cutting practices are a...