Eco 372 - Product Purchase and the Economy

Product Purchase and the Economy

Hugo Velasquez

ECO/372

April 27, 2016

Professor Hank Lewis

Product Purchase and the Economy

Before considering making a new purchase, there are always many factors that need to be taken into account, in particular with a purchase as significant as a new automobile. Buying a new car requires a huge amount of deliberation and researching in addition to budgeting. Two important economic indicators to take into account when investing in an automobile are interest rates along with rates of unemployment. These indicators will help out an individual in determining whether or not to go through with a major purchase.

Due to the automotive industry being a recurring business, variations in earnings as well as revenues are more probable due to the strength of the consumer in conjunction with the status of the economy. Sales in the automotive industry tend to be greater when consumers possess a self-confident view regarding their future economic situation along with substantial activity in the economy. In such settings, individuals are more likely to go with purchasing a vehicle.

On the other hand, unemployment undeniably plays an enormous role in this setting. When unemployment rates are on the rise, there is a reduction of individuals making a major purchase; primarily this is due to the uncertainty of their job security in the near future or worst case scenario being unemployed. With uncertainties as such, additional bills like a car payment, automobile insurance, as well as day-to-day travel expenses; most individuals will monitor their finances more closely and are more inclined to navigate away from any unnecessary purchases.

In March 2014, the unemployment rate was 6.7% (National Conference of State Legislatures, 2016) and automobile sales were 1.53 million (The Wall Street Journal, 2016). As of March 2016, the unemployment rate has been steady between 4.9% and 5% (National Conference of State Legislatures, 2016), and automobile sales are at 1.59 million (The Wall Street Journal, 2016) on an annualized basis. This data shows that when there is a decrease in the unemployment rate, the sales of automobiles increase; this is due to consumers feeling secure with the status of the economy and job security.

Another factor that plays a role in purchasing a vehicle is interest rates. They influence the financial aspect of buying a car. In other words, the lower the rate is, the less interest will build up over time, and in the end the car will be cheaper, same goes for the opposite scenario. (DO I ADD SOMETHING HERE???LIKE START WITH: “ LETS TAKE A HONDA CIVIC FOR EXAMPLE, (AND ADD PRICE DETAILS) There can be two consumers purchasing the same vehicle, at the same price; however, if one of them has a lower interest rate than the other, the individual with the higher interest rate will end up paying a larger total amount for the same vehicle. Although this alone is not sufficient to define an undesirable economic environment, it can make a huge difference for those individuals who are sitting on the fence. (KEEP THIS?)