Australian Car Industry - Assignment Example

ustrаliаn саr industry (Insert Name) (Institution Affiliation) Q1. Subsidies in the Australian car industry normally take the form of payments by the Australian federal government to car producers or manufacturers. The payments are done in cash directly to the manufactures. They can be considered as negative taxes and the effect of a subsidy is to reduce the costs of supplying a given commodity (Dodgson, Hughes, Foster & Metcalfe, 2011). In terms of demand and supply analysis, this signifies that the supply curve will shift downwards by the amount of the subsidy whereby more is supplied at any given market price. This will lead to a fall in price and an increase in quantity demanded. For instance, if the prices of cars in Australia fall below the expected market price the quantity demanded increases (Arnold, 2010). A new equilibrium will be established at price P1. This can be illustrated in the figure below. The equilibrium price of cars in Australia is represented by price Pe and when there is a subsidy from the government the price of the car will drop from Pe to a new price p1 and subsequently leading to an increase in quantity demanded from Qe to Q1 (Arnold, 2010). Australian PM Julia Gillard on behalf of the federal government recently said that car manufacturing needs to be part of the Australian future because it does have, at its forefront, design and innovation skills which are very important not only to car manufacturing, but to the rest of manufacturing. This is very true as many jobs in the manufacturing industry will not be lost and more and more people will continue to work in the industry (Sexton, 2010). Comparative advantage refers to a situation whereby an individual or an organization has ability to produce a good or services at a lower cost compared to the others in the market. Comparative advantage enables an organization to sell its goods or services at a lower price than the competitors therefore realizing more sales. Australia has no comparative advantage in manufacturing cars; this is clearly evident on how the industry is performing. Although the car industry in Australia is producing cars for the domestic market but consumers are not buying those cars due to the cars high prices compared to cheaper cars imported from Japan. The cost of producing a unit of car in Australia is much more compared to the cost of producing the same car in Japan. This makes Japan to have a comparative advantage over Australia in manufacturing cars (Sexton, 2010). Q2. Subsidies are normally meant to reduce the costs of supplying a given commodity. This is very much applicable in the Australian car manufacturing industry where the Australian government subsidises the industry (McEachern, 2006). When the Australian government decides to decrease its subsidies say from $1.6 billion to $1.1 billion it will have a negative impact on the prices of the car, the prices will increase because the cost of production will as well go up. This can be demonstrated in the figure below. In the figure above, if the Australian government reduces subsidies to car manufacturers the prices of cars increase from Pe to P1 leading to a drop in cars purchased from Qe to Q1. This will force the Australian government, to use the money that it could have used to subsidise the car manufacturing industry in another industry that it has a comparative advantage such as the coal industry. If the Australian government concentrates more on the coal industry that it has comparative advantage over other countries, then the industry will flourish creating more employment opportunities thus leading to economic growth and development (McEachern, 2006). Q3. Subsidies usually involve a situation whereby the government, in this case the Australian federal government pays part of the car manufacturing cost to the firm that is in the business of manufacturing those cars (Webster, 2003). When the Australian federal government does that, it leads to a reduction in the price of the car and it should therefore encourage consumption or purchase of more cars. The Australian government economy will overall develop and this is very important to continuous expansion of the economy over time. Due to the low prices of cars in Australia many citizens can afford to buy cars and therefore many citizens would be comfortable and will be able to carry on with their day to day activities. Those citizens with cab business can as well afford to buy more cars and expand their businesses therefore creating employment to other people. In a situation where more cars are in the country other jobs that are related to the cars industry like the mechanic, panel beating and car washing are also readily made available. This will also create employment opportunities to other people (McEachern, 2006). Q4. The winners from continued subsidies to the Australian Car industry are the car manufacturers and the Australian federal government. The car manufacturers are winners simply because when the Australian government gives subsidies to them, they are forced to reduce the prices of the cars that they manufacture. This normally leads to an increase in the car sales by the firms that manufacture them and in the long-run enabling those companies to break even or in most cases to high profits. The firms normally feel encouraged to continue doing business in Australia because of the increase in sales and profitability therefore still create employment opportunities to Australians. The other winner from continued subsidies to the Australian car industry is the Australian federal government itself. This is because car manufacturing industry forms a crucial sector of the Australian economy; the sector employs hundreds if not thousands of people in Australia. It should be noted that the Australian government secured almost 900 jobs at Holden’s plant at Fishermen’s Bend in Victoria as well as more than other 3000 plus jobs in other manufacturing sector in Victoria and South Australia. The Australian federal government led by the Prime Minister Julia Gillard stated that the government would continue to financially aid the car industry by claiming that the industry was very essential to Australia remaining a sophisticated manufacturing nation. She further stated that that the car manufacturing industry was very important and it needed to be part of the Australian future because it encouraged creativity, design and innovation skills which are very necessary in the rest of manufacturing (Sexton, 2010). The losers from continued subsidies to the Australian Car industry are the Australian citizens. This is because, for the Australian government to raise money to be used to subsidise the car manufacturing industry it must get the money from taxes. Individuals the ordinary citizens in Australia are the major tax payer in Australia and it nearly impossible for Australian federal government to give subsidies without increasing taxes. The Australian government can do so by either increasing the tax rate or by imposing taxes to other commodities that did not attract any form of taxation, this automatically affect the local citizen in a very greater way. Secondly, Australian citizen will suffer health wise due to pollution caused by many cars in the country (Sexton, 2010). When the Australian government gives subsidies to car manufacturer, the manufacturers are forced to lower the prices of those cars due to lower cost of production. If the prices of cars goes down then many people in the country can afford more than one car and instead of using public transport from moving from one point to the other the owners of the vehicle use their own. This in most cases leads to traffic jams in major highways and eventually leading to air pollution from emission of carbon from those cars. Q5. Australia should not increase protection for its car industry. Firstly, the car industry has no comparative advantage over others countries the likes of Japan and United States America. For instance, Australia has only three major car manufacturers-Ford, Toyota and Holden compared to Japan and the United States of America which over fifteen car manufacturers each. The cost of manufacturing cars in Australia is much higher compared to Japan and the United States of America especially due to a high dollar. According to the Australian business review of 11 April 2013, BHP Billiton Chairman said that the car manufacturing industry was deteriorating and Holden was axing about 500 jobs in Adelaide and Melbourne and was cutting production from 400 cars a day to 350 cars because of the strong dollar that was trading that time at $US1.05 (Dodgson, Hughes, Foster & Metcalfe, 2011). Secondly, it is most likely to be true that subsidies on cars are likely to be economic poison and very poor public policy, This case usually result in hurting taxpayers, consumers and lowering productivity. As much as it is claimed that the Australian government must protect and preserve the car manufacturing industry in order to keep thousands of jobs is false. Protection of the car manufacturing industry does not result in saving jobs overall. At most, they are usually kept temporarily at the expense of other jobs in other sector of the economy leading to a situation whereby the jobs become more costly to consumers as well as to taxpayers. It should be noted that other jobs associated with car manufacturing industry like buying, selling, mechanics, car washing and panel beating will still exist even if cars are imported and cars are no longer manufactured in Australia (Alesina, Rodrik, 2010). Thirdly, when people try to argue that car manufacturing industry is also important in aiding on technological advancement in other manufacturing sector is not realistic. Technology transfer and spill overs especially from the computer manufacturing industry are equally important in driving the manufacturing industry in Australia. The Australian government should mostly concentrate on funding R&D department to enable it work more efficiently and effectively so that it can come up with more innovations therefore creating more employment opportunities in the manufacturing industry (Dodgson, Hughes, Foster & Metcalfe, 2011). References Alesina A., Rodrik D. (2010). Distributive Politics and Economic Growth, Quarterly Journal of Economics , 109, 1994: 465-490. Arnold, R.A. (2010). Microeconomics, 10th edn. New York: Cengage Learning. Dodgson, M., Hughes, A., Foster, J., & Metcalfe, S. (2011). Systems thinking, market failure, and the development of innovation policy: The case of Australia. Research Policy, 40(9), 1145-1156. McEachern, W.A. (2006). Contemporary Economics, 2nd edn. New York: Cengage Learning. Sexton, R.L. (2010). Exploring Economics, 5th edn. New York: Cengage Learning. Webster, T.J. (2003). Managerial Economics: Theory and Practice. Bradford: Emerald Group Publishing. Read More