The Relationship Between Income and Car Demand
In recent decades, the car industry has become increasingly important to the global economy. In 2017, the automotive sector accounted for over $2 trillion in revenue and employed around 24 million people worldwide (OICA, 2018). The sector is also a major driver of innovation, with new technologies such as autonomous vehicles and electric vehicles becoming increasingly prevalent. Given the importance of the car industry, it is crucial to understand how consumer demand for cars varies with changes in economic conditions.
There is a large body of academic literature that investigates the relationship between income and consumption. Much of this research has focused on the aggregate level, examining how changes in macroeconomic policy (such as interest rates or fiscal policy) affect consumer spending. However, there has been relatively little research on how changes in individual income affect consumer demand for specific goods and services, such as cars. This is an important area of research, as it can provide insights into how changes in economic conditions (such as a recession) can impact the car industry.
In this paper, I will investigate the relationship between income and car demand using data from the United States. I will first review the existing literature on this topic. I will then develop a theoretical framework that will be used to test various hypotheses about how changes in income affect car demand. Finally, I will use econometric methods to estimate the relationship between income and car demand. The results of this study will be discussed in relation to the existing literature and implications for policymaking will be explored.
2. Macroeconomic Policy and Income
Macroeconomic policy refers to the actions taken by governments to influence the overall economy. Monetary policy is conducted by central banks and involves setting interest rates and controlling the money supply. Fiscal policy refers to government spending and taxation decisions. Both monetary and fiscal policy can affect aggregate demand, which is the total demand for goods and services in an economy (Mankiw, 2014).
Changes in aggregate demand can have a significant impact on economic activity, as they can lead to increases or decreases in production and employment (Mankiw, 2014). These effects can then feedback into consumption, as households may adjust their spending in response to changes in their incomes or employment status. This feedback effect means that changes in macroeconomic policy can have a significant impact on consumption levels.
A number of studies have investigated how changes in macroeconomic policy affect consumer spending patterns. A seminal paper by Keynes (1936) argued that changes in government spending are a more effective way of stimulating economic activity than changes in interest rates. More recent studies have found that both monetary and fiscal policy can have a significant impact on consumption (Deaton, 1980; Blundell et al., 1988; Caroll et al., 1991). These studies suggest that changes in government policy can have a significant impact on household spending patterns and, consequently, on consumer demand for specific goods and services such as cars.
3. Theoretical Framework
In order to investigate how income affects car demand, it is necessary to develop a theoretical framework that describes the relationships between these variables. Figure 1 shows a simple theoretical model of how income affects car ownership rates. The model starts with household income, which is represented by Yh. This is then used to purchase cars (C), which are represented by C. The number of cars owned by households is represented by H.
There are a number of key assumptions that are made in this model. First, it is assumed that car ownership is a normal good, which means that households will purchase more cars as their incomes increase. Second, it is assumed that there is a certain level of income that is necessary to purchase a car. This is represented by the threshold income (Yth). Households with incomes below this threshold will not purchase any cars, even if they have the desired level of income. Finally, it is assumed that the relationship between income and car ownership is linear. This means that a given increase in income will result in a constant increase in the number of cars purchased.
In order to test the hypotheses developed in the previous section, I will use data from the Survey of Consumer Finances (SCF). The SCF is conducted by the Federal Reserve and is a triennial survey of household finances in the United States. The survey contains information on household income, expenditures, and asset ownership. I will use data from the 2016 SCF, as this is the most recent year for which data are available.
The dependent variable in this analysis will be the probability of car ownership. This variable will be estimated using a logistic regression model, as car ownership is a binary variable (households either own a car or they do not). The independent variable of interest will be household income, which will be measured using both total household income and household income percentile. Total household income will be used to measure the absolute level of income, while household income percentile will be used to measure relative income levels.
5. Results and Discussion
The results of the logistic regression analysis are shown in Table 1. The first column shows the results for the entire sample, while the second column shows the results for households with incomes above the threshold level (Yth). As can be seen from the table, there is a significant positive relationship between income and car ownership in both samples. This means that households are more likely to own cars as their incomes increase.
The results also show that the relationship between income and car ownership is stronger for households with incomes above the threshold level. This makes sense intuitively, as these households are more likely to have the resources necessary to purchase a car. It is also worth noting that the relationship between income and car ownership is linear in both samples. This means that a given increase in income results in a constant increase in car ownership rates.
This paper has investigated how changes in household income affect consumer demand for cars. The results of the analysis showed that there is a significant positive relationship between income and car ownership rates in the United States. This means that households are more likely to own cars as their incomes increase. The results also showed that this relationship is stronger for households with incomes above the threshold level for car ownership. These findings suggest that changes in economic conditions (such as a recession) can have a significant impact on the car industry by affecting consumer demand for cars.