Understanding how a business is affected by external forces is crucial when looking at business through the lens of economics. For Ford and the automobile industry as a whole, the COVID-19 pandemic is a prime example of how something outside of the control of the business can affect it. The automobile industry has been drastically changed due to this, with the demand for vehicles being at an all-time high. There are other external forces that can affect the economic growth of a business, with the Federal Reserve bank being one of these forces. The Federal Reserve has the ability to print and issue money, serving as the bank for the government and other banks (Tabarrok, 2021, p. 734). The Federal Reserve can also electronically transfer money, serving as an alternative for physically printing and distributing currency.
The Federal Reserve Bank
Ford’s key market is the United States with the US holding the highest number of units sold, at about 1.7 million units sold (“Ford Motor Company’s Vehicle Wholesales”, 2021, Table 1). When looking at how the Federal Reserve bank affects Ford’s key market, understanding aggregate demand is important. The Federal Reserve bank has tools that attempt to affect aggregate demand for economic growth. The Federal Reserve bank buys and sells bonds to lower interest rates, lowers the interest on reserves and lends to banks in times of financial crisis. These powers all play a part in achieving the goals of regulating aggregate demand, regulating economic growth, and minimizing risk for investors.
The Federal Reserve Bank’s Effect on Ford Motor’s Economic Growth
The federal funds rate tells us the rate in which commercial banks are lending funds to other banks, which is a component of the Federal Reserve bank’s policies. For the past three years the federal reserve rate has been as follows: 2020 with a rate of 0.10%, 2021 with a rate of 0.09%, and 2022 with a federal reserve rate of 2.33% (“Federal Funds Effective Rate”, 2022, Table 1). Looking at the interest rate paid on reserves and making changes to the interest rate is one of the Federal Reserve bank’s policies that affects aggregate demand. Before 2021, the Federal Reserve bank used IORR and IOER rates, replacing these two with the now used IORB rate. The interest rate on reserve balances for the last two years is as following: 2021 with a rate of 0.15% and 2022 with a rate of 3.15% (“Interest on Reserve Balances”, 2022, Table 1). When looking at this information and seeing as how the Federal Reserve bank aims to achieve maximum employment and steady economic growth, we can better see how Ford Motor is affected by the Federal Reserve bank. The GDP growth rate helps analyze the aggregate demand and economic growth of the key market, which for Ford is the United States. The GDP growth rate for the past 3 years are as follows: 2020 with a rate of -29.9%, 2021 with a rate of 7%, and 2022 with a rate of -0.6% (“United States GDP Growth Rate”, 2022, Table 1). When looking at this we can see that Ford has drastically grown economically from 2020 in which the COVID-19 pandemic hit.
The Effects of Fiscal Policy
“Fiscal policy is federal government policy on taxes, spending, and borrowing that is designed to influence business fluctuations (Tabarrok, 2021, p. 805).” Consumer and government spending are the two main components regarding fiscal policy, with an increase in either of the two causing a boost in economic growth and aggregate demand. Fiscal policy helps reduce unemployment, government spending helps to make more jobs available causing the economy to grow and continue to flow. Full employment from government spending can cause crowding out, where it is overall less efficient for the economy as private spending from consumers will decrease. The two key markets for Ford are the United States and China, with China being the number two country in which Ford has the most units sold. By looking at the GDP for these two countries we can see how Ford is affected. In 2021 China’s reported GDP was $17.73 trillion dollars, with the United State’s reported GDP being $22.96 trillion dollars (“GDP”, 2021, Table 1). The Chinese government is look to spur consumer spending by means of tax cuts an rebates to improve their economy. Ford is in a good place with their key markets’ home countries’ economies continuing to grow from the state it was in 2020. This will allow more workers to find jobs with Ford Motor and increase company profitability as a whole.
Works Cited
Board of governors of the Federal Reserve System. (n.d.). Retrieved October 1, 2022, from https://www.federalreserve.gov/monetarypolicy/reserve-balances.htm
Carlier, M. (2022, February 10). Ford: Car sales by country 2021. Statista. Retrieved from https://www.statista.com/statistics/475637/vehicle-sales-of-ford-in-leading-countries/
Cowen, T., & Tabarrok, A. (2021). Modern principles of economics. Worth Publishers.
Federal funds effective rate. FRED. (2022, September 1). Retrieved October 1, 2022, from https://fred.stlouisfed.org/series/FEDFUNDS
GDP (current US$) - China. Data. (n.d.). Retrieved October 1, 2022, from https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=CN
United States GDP growth RATE2022 data - 2023 forecast - 1947-2021 historical. United States GDP Growth Rate - 2022 Data - 2023 Forecast - 1947-2021 Historical. (n.d.). Retrieved October 1, 2022, from https://tradingeconomics.com/united-states/gdp-growth
Thank you Josh for your post, I finally read someone’s topic that isn’t Coca- cola lol well someone had Samsung but i love how you were able to break down how COVID 19 had An impact on the sales of cars, I know no one is wanting to purchase cars now because everything is so high but you mentioned that the federal reserve can lower Interest rates so this could be a good thing moving forward with purchasing Ford cars
Josh,
I appreciate the information you brought forth concerning The Federal Reserve Bank and the automobile industry. I recently bought a new car myself and am shocked at the state of the market. Of course, the shortage of vehicle parts happened in 2020 but the whole industry is not yet recovered. That mean that used vehicles are selling for more than their usual worth and new/used cars are retailing for much higher than they were before. The market is extremely tough and your post gave me even more insight. Great topic for your project and I look forward to learning even more about it.
Haley Sumner
Thank you for your thoughts this week. The automobile market has certainly been interesting to follow in recent years. I found the information you provided on economic trends as relates to the federal reserve and fiscal policy to be interesting. The pandemic had significant impact on the US economy that was mostly negative. This being said, I think that we have attributed to growth what is really just the economy being in a better state then it was in the depths of a global pandemic. I am curious your thoughts on this. Do you believe the market is truly thriving, or does it just appear to be because it is doing better than it was in 2020?