Download the influence of the economic growth slowdown on the demand of

THE INFLUENCE OF THE ECONOMIC GROWTH SLOWDOWN ON THE
DEMAND OF NEW VEHICLES IN LITHUANIA
M o n i k a Piniauskaitė
Šiaulių Didždvario gimnazija
Abstract
The research question of this essay is "What is the influence of the economic growth slowdown on the
demand of new vehicles in Lithuania?" This question is analysed by investigating the economic behaviours
indicating the significance of economic growth slowdown on the demand of new vehicles and by analysing
non-price determinants of new vehicles' demand.
New vehicles' sales market in Lithuania was on the upsurge together with the economy, however, in
the end of 2008 economy started to shrink thus leading to the reduced demand for new vehicles, as they are
considered as luxury goods and lower consumer income results in decreasing purchases of new vehicles. Pri­
mary and secondary research revealed that decreasing GDP led into decreasing consumer income and reduced
consumers' purchasing power. Increasing inflation and unemployment were the key factors that affected prices
of new vehicles, however, not only did rising prices affected purchases of new vehicles, but also non-price
determinants, such as change in consumer income, availability of credit and availability of substitutes (used
vehicles), played the most important role in the decline of new vehicles' purchases.
After the analysis was accomplished the conclusion was drawn showing that during the period of 2007¬
2009 purchases of new vehicles decreased by 67% leading to the confirmed hypothesis "Economic growth
slowdown made a major impact on the economic objectives related to the market of new vehicles and signifi­
cantly reduced the demand of new vehicles." Due to the changes in price and non-price determinants of the
demand, new vehicles' purchases and sales were dramatically reduced showing that economic theory can be
practically applied.
Keywords: economic growth slowdown, demand, price and non-price determinants of demand, PED:
Price elasticity of demand, LTL: Lithuania's currency Litas.
Introduction
Since the first quarter of 2007 Lithuanian "GDP (gross domestic product) - the currency value of all fi­
nal goods and services produced within a country's borders in a given year" (O'sullivan, Sheffrin, 2007) started
to increase significantly. In the third quarter of 2007 Lithuanian economy experienced the boom, GDP growth
rate reached the highest level - 10,5% resulting in the increase of the demand for new vehicles (including per­
sonal and commercial vehicles) in Lithuania. However, the economy has its cycles, and after the boom follows
the recession - a period of time "when the economy experiences two consecutive quarters (six months) of
falling GDP" (McGee, 2004); this can be proved by the statistics from Lithuanian statistics department, which
show that from the fourth quarter of 2007 GDP rates started to decrease, thus making an impact on the demand
of new vehicles and other economic objectives related to the market of new vehicle sales in Lithuania.
Research object: changes in the demand for new vehicles in the period of economic growth slowdown
in Lithuania.
Research aim: The aim of this essay is to fully respond to the question: "What is the influence of the
economic growth slowdown on the demand of new vehicles in Lithuania?"
Research methodology. An interview with a certain part of managers of the companies selling new ve¬
hicles in Lithuania, the analysis and comparison of the data provided by the companies, analysis of the data
provided by the government in Lithuanian statistics department, and the analysis of theory from the textbooks,
the Internet sources and newspaper articles
1
Theory
Economic growth which can be defined as "an increase in a country's Real GDP per capita", changes
in the rates of inflation - "a persistent increase in the average price level in the economy, usually measured
through the calculation of consumer price index" (Blink, Dortan, 2007) and in the rates of unemployment - "pe­
ople of working age who are without work, available for work and actively seeking employment" (Blink,
Dortan, 2007), affect the rates of economic growth thus making the impact on market structures existing in the
country.
1
Price and non-price determinants of demand, real GDP per capita, unemployment, and inflation.
72
E K O N O M I N Ė
A N A L I Z Ė
IR
P
L A N A V I M A S
Demand is the consumers' willingness and ability to buy particular good or service at a particular time
and place. "The law of demand states that as long as all other variables (income, price of other goods, preferen­
ces) remain unchanged, then a fall in the price will lead to an increase in the quantity demanded and vice versa.
This means that the demand curve for new vehicles is downward sloping and thus that quantity demanded for
new vehicles is negatively correlated with the price of new vehicles." (Ziogas, 2008). It can be shown in the
diagram. See figure 1 below.
P r i c e of u e r w
vehicles
Ql
QO
Quaurirv of Lev.
vehicles
Fig. 1. Demand curve for new vehicles
This diagram shows that when the price of new vehicles is lower the quantity demanded for new vehic­
les is higher P -Q and vice versa at P -Q . There are numbers of factors that determine the demand for new
vehicles thus leading it to the shift either to the right or the left. Determinants of demand can be price or nonprice. According to the topic of the extended essay the determinants of demand for the new vehicles are stated
below:
Price determinants of demand:
1. Change in the price of new vehicles (Ziogas, 2008).
Non-price determinants of demand:
1. Change in consumers' income (Ziogas, 2008);
2. Changes in preferences (Ziogas, 2008);
3. Advertising of new vehicles;
4. Price of fuel and insurance;
5. Changes in the price of substitute (used vehicles) and complementary (fuel, insurance, etc.) goods/
services (Nugent-Smith, 2005);
6. Size of the new vehicles sales market (Ziogas, 2008);
7. Availability of credit for buying a vehicle (Ziogas, 2008).
Non-price determinants results in the shift of the demand curve. Before the change in any above mentio­
ned non-price determinant demand curve for new vehicles is D . See figure 2 below.
1
1
2
2
0
Price of lien
rehicLes
Q JsL.ri —•. of neTV
rehicles
Fig. 2. Effects of non-price determinants on the demand of new vehicle
73
E K O N O M I K O S
IR
V A D Y B O S
A K T U A L I J O S '
2 0 1 0
I S S N
2 0 2 9 - 1 0 1 9
The change in non-price determinants can lead the demand for new vehicles to increase - shift to the
right (from D to D ) or to decrease - shift to the left (from D to D ).
Another important factor affecting the quantity demanded of good refers to income elasticity of de¬
mand - YED. Income elasticity of demand measures the relative sensitivity of the change in the quantity of a
good with respect to the change in people's income (Mcgee, 2004). Income elasticity of demand depends on
the kind of the good.
If YED>1 it means that percentage change in quantity demanded is bigger than the percentage change
in consumers' income; therefore, we say that demand is income elastic as the increase in income results in the
faster rise in demand, and on the contrary if 0<YED<1 demand is income inelastic; a rise in income leads to
a lower increase in the demand. The case when YED=0 means the change in income does not affect the de­
mand of the good and when YED=1 - the change in income is equal to the change in the demand of the good.
Determinants affecting income elasticity of demand are "the degree of necessity of the good" and "the living
standards of the economy" (Ziogas, 2008). As a new vehicle is one of the luxury goods it means that it is not
a necessity, thus when consumer income decreases demand for new vehicles also decreases. Therefore, consu¬
mers tend to acquire used vehicles because of lack of encouragement to acquire new vehicles. Speaking about
the standards of living, it highly depend on the rate of economy growth, therefore, when there is a slowdown
in the country's economy the demand for new vehicles becomes more income elastic than during the period of
growing economy, so it is expected that demand for new vehicles will be affected by the economic slowdown
and changes in determinants of demand leading to the decline in the sales and purchases of new vehicles.
0
1
0
2
Analysis
In 2007 when the economic boom began there were 2456 companies which sell new motor vehicles, pro­
vide their maintenance and repair services, also this number includes retail sale of automotive fuel in Lithuania
(Statisticalyearbook of Lithuania, 2008). During this year 25713 of new personal and commercial vehicles we­
re sold, the most popular makes were "Volkswagen" - 3437 units, "Toyota" - 2327 units and "Skoda" - 2218
units sold (http://www.autotyrimai.lt/naujienos/, 2009). Despite the high rates of growing economy after the
period of two years not only did the whole Lithuanian economy fall back into the level of 2006, but also the
market for new vehicles has also experienced huge slowdown in its purchases. The diagram below shows the
number of new vehicles registered in 2007, 2008 and 2009. See figure 3 below.
•1 i Ej J
2
III!
WT1
n
I
I
6
8
4
2650
-
2
5
3
7
I I . 11111 - •
n
I
m l
I
IIP?
I
MM
I
MM
Fig. 3. The number of new vehicles registered during 2007-2009
Created by the author of work with reference to the website: <http://www.autotyrimai.lt/naujienos/>.
74
E K O N O M I N Ė
A N A L I Z Ė
IR
P L A N A V I M A S
Yea rimo nth
Figure 4. The number of new vehicles registered during 2009 (without January data)
Created by the author of work with reference to the website: <http://www.autotyrimai.lt/naujienos/>.
As it can be seen in the diagrams the number of new vehicles registered mostly increased during the
third and fourth quarter of 2007. The assumption that the increase in sales and registrations of new vehicles
may have resulted from the increase in people's income can be made as the rate of real GDP per capita in the
third quarter was LTL 7 887,654 while in the fourth quarter it reached its peak in 2007 - LTL 8 068,531 - the
rise in real GDP per capita results in the rise in people's income as real GDP per capita means "average income
per person" (Mcgee, 2004). As the cause of the rising real GDP per capita, the number of new vehicles sold
also increased. In 2008 economy was still in the period of growing economy, real GDP per capita increased
to LTL 8 778,317 in the third quarter. However, in the end of 2008 the economic crisis begun and the rates of
real GDP per capita started falling, 2009 begun with the sharp falling of the Lithuanian economy as the level
of real GDP was the same as in 2006. Those who felt the effects of the economic crisis, mostly were the pri¬
vate business sector as the purchases were decreasing as a result of high rates of unemployment and inflation.
The companies which were selling new vehicles experienced huge declines in their purchases as new vehicles
are not a necessity and people tend to postpone the acquisition of new vehicles. The decrease in the quantity
demanded for new vehicles can be also explained by the non-price determinants.
2
Changing consumer income in the period of 2007-2009 can be taken as the first determinant of demand
which affected the rates of new vehicles' sales. Higher consumer income in 2007 and 2008 resulted from ri¬
sing real GDP per capita thus leading to more income elastic demand. Average household disposable income
in 2007 was LTL 859 average per capita per month while average consumption expenditure in cash was LTL
685,1 per capita per month. Compared to the previous year expenditure rose by 16,%. As new vehicles are one
of the luxury goods it is "positively related to income" (Mcgee, 2004), thus an increase in the consumer income
results in the decrease of income elasticity of demand and the bigger amount of new vehicles were sold. During
2007, 11,1% the part of all expenditure was allocated for transport while in 2008 the percentage decreased till
10,42% showing the decline compared to 2007 (Statisticalyearbook of Lithuania, 2008).
In the end of 2007 the supply of money was quite high, the rate of interest fixed by Europe central
bank was about 5,0% this number shows that ability to take a loan was great. Banks did not put high margins
- "the portion of the interest rate on an adjustable-rate mortgage that is over and above the adjustment-index
rate. This portion is retained as profit by the lender"[link to the list of sources,thus consumers could borrow
money without strict leasing conditions. Therefore, more than half of new vehicles registered in 2007 were le­
ased - LTL 2.152 million were borrowed for buying new vehicles because of minimal conditions required for
leasing. In the beginning of 2008 the availability of leasing for vehicles was still quite high as almost a half of
new vehicles were leased, however in the second half of the same year Lithuanian economy begun to slow as a
result of the economic crisis, availability of credit was strongly reduced, banks were not willing to lend money
as the number of insolvent customers increased. The year 2009 begun with a fall into the level of 2004, the
market of new vehicles in Lithuania experienced the biggest decline in its purchases. According to the manager
of the Private Limited Company (PLC) "Inchcape Motors" "Purchases of new vehicles had decreased by 70¬
80%" (www.autotyrimai.lt/naujienos/, 2009), also he mentioned that the decline in the purchases could have
been affected by the value added tax, which had increased by 2 percentage points from 19 to 2 1 % . Decline in
3
2
3
All statstical data was taken from Lithuanian Statistics Department.
This measure includes expenses on train, bus tickets and etc.
75
E K O N O M I K O S
IR
V A D Y B O S
A K T U A L I J O S '
2 0 1 0
I S S N
2 0 2 9 - 1 0 1 9
the purchases and availability of credit led into decreasing quantity demanded for new vehicles resulting in the
reduced prices for new vehicles as the market of new vehicles belongs to the monopolistic competition market
and consumers have quite high level of sovereignty and can influence the prices of new vehicles.
Fluctuation in the prices of fuel could have also affected the rates of new vehicles' sales as the price of
unleaded octane 95 was 0,953 Euro per liter and diesel price was 0,86 Euro per liter in December 2007. Ho¬
wever, in the year 2008 situation changed dramatically, the prices of fuel went up till 88,1 Euro cent per liter
for unleaded octane 95 and 95,2 Euro cent per liter for diesel in December, while in December 2009 the price
of unleaded octane 95 was 1,05 Euro per liter and the price of diesel was 0,89 (http://www.aaireland.ie/petrolprices/, 2009). According to the international magazine for decision makers "The Baltic Course": „Over the
year 2009, the retail price for 95-octane fuel in European Union (EU) grew by an average 17.9%, according to
the European Commission's data on fuel prices in EU. One of the highest annual fuel price increases in 2009
were observed in Lithuania - up by 41.1%."Price of fuel, as well as the overall position of Lithuanian econo­
my, in this case was mostly affected because of the beginning of the recession period. Recession resulted from
the highly rising inflation - 8,1% in December 2007 while in December 2006 inflation was only 4,5% and
unemployment rates - 4,3%. New vehicles' sales and registrations decreased sharply as not only did the price
of fuel increased, but also the rates of inflation and unemployment begun to rise - inflation till 8,5% unem­
ployment - 5,8% while in 2007 it was only 4,3%. However, while speaking about the impact of prices of fuel
representatives of the companies were inclined to say that "prices of fuel have an impact on the attributes of
new vehicles consumer wants to acquire, but not on new vehicles buying on the whole." Therefore this state­
ment proves that price of fuel had only a very little impact on new vehicles' sales.
4
Moreover, all companies selling new vehicles paid much attention for promotional activities thus highly
affecting consumers' tastes and preferences as the aim of all commercials is to show the quality and superiority
of the promoted vehicles in order to stimulate the purchases. It can be presumed that in the period of economic
crisis companies were aiming to present more commercials in order to affect consumers' tastes and preferen¬
ces.
The acquisition of new vehicles depends upon the prices of insurance. In 2007 the prices of insurance dif­
fered from LTL 200 to LTL 350-400 depending on the driver's experience, engine capacity and driver's level
of discipline , while in 2008 and 2009 the prices of insurance were up to LTL 500. According to the prices of
insurance in 2007 and 2009 it can be said that it could have made an impact on the quantity demanded for new
vehicles. However, despite the above analysed determinants of demand for new vehicles in Lithuania, deter¬
minant, which made a major impact on decreasing demand for new vehicles, is high availability of substitutes
locally (used vehicles) and constantly rising prices of fuel globally. According to the accomplished survey of
the managers of companies selling new vehicles in Lithuania about the position of new vehicles market during
the recession period it was said that "availability of buying used vehicles has a greater impact on the quantity
demanded. To be more precise - lack of encouragement to acquire new vehicles instead of used one." Moreo­
ver, the manager of PLC "Inchcape Motors" said that another problem in the market of new vehicles is the lack
of competitiveness as: "Competition is medium and the decision of a person on buying either one, or another
vehicle is predetermined not only by such factors as marketing actions and price, but also by emotions and
prevailing opinions. Moreover, in one town it is not possible to find many companies selling cars of the same
make (except for Opel), therefore, if a person intends to acquire, for instance, Ford car in Vilnius, he could only
do this in one point of sale." This statement proves that new vehicles' market in Lithuania belongs mostly to
the monopolistic competition in which consumer sovereignty is high and the change in consumers' income and
quality of life makes a major impact on the demand of new vehicles during the period of 2007-2009.
5
Conclusion and evaluation
In responding to the question "what is the influence of the economic growth slowdown on the demand
of new vehicles in Lithuania" it can be said that economic growth slowdown and a slowdown in the sales of
new vehicles in Lithuania are closely related as the change in economic indicators such as decreasing GDP,
rising inflation and unemployment had reduced the demand for new vehicles drastically therefore the hypot­
hesis "economic growth slowdown made a major impact on the economic objectives related to the market of
new vehicles and significantly reduced the demand of new vehicles" is confirmed. According to the analysis of
new vehicles' market position in the period of two years in Lithuania the conclusion that the economic growth
slowdown made a strong impact on the levels of new vehicles' purchases can be made, as the rate of new ve4
5
As a result of higher inflation rates price of new vehicles were also rising.
Size of the engine and driver's level of discipline are taken into consideration while calculating the price of insurance.
76
E K O N O M I N Ė
A N A L I Z Ė
IR
P L A N A V I M A S
hicles registered dropped by 2 3 % comparing 2007 and 2008, while in 2009 the percentage of the decline was
67% comparing to 2008. The overall decline during the analysed period is about 67%. The major reason for
the decline was the slowdown in Lithuanian economy which affected all economic sectors and the market for
new vehicles was the sector which suffered mostly because of the fact that new vehicles are luxury goods and
demand for them is highly influenced by the change in consumer income which means that decreasing rates of
GDP, increasing inflation, and unemployment increases the prices of new vehicles thus decreasing the demand
for new vehicles. Despite the fact that change in prices makes the biggest impact on demand itself, the chan¬
ge in non-price determinants for new vehicles such as change in consumer income, availability of substitutes
(used vehicles) and availability of credit to acquire new vehicles affected quantity demanded for new vehicles,
it means that the quantity of new vehicles purchased and registered was reduced because of the change in these
determinants.
While evaluating the whole analysis of new vehicles' market situation in Lithuania it can be noted that
despite the complicated economic situation the Government had to consider the example of encouraging citi¬
zens to buy new vehicles by paying appropriate allowances for the old vehicles as Germany did. Moreover,
if the Government would not have had increased the value added tax thus discouraging the acquisition of any
kind of good, especially the acquisition of luxury goods such as new vehicles, the purchases would not had
decreased considerably.
The main aim of this essay was to find out whether applied economic theory worked in practice and the
conclusion can be drawn that it did, as theory of the firm and analysis of price and non-price determinants sho¬
wed that changes in the new vehicles' sales market, which resulted from shrinking economy can be explained
from the economic point of view using economic theory and laws. The table below represents a summary of
determinants of demand and its impact on demand for new vehicles.
Table 1
Impact of determinants of demand on demand for new vehicle
Determinants of demand
Starting from 2007 consumers' income was rising resulting from growing
economy (increasing rates of real GDP per capita) and thus increasing de­
Change in consumers' income
mand for new vehicles, however, when economy started to shrink, consu­
mers' income decreased and together with them purchases of new vehicles.
In the period of economic boom consumers preferred buying new vehicles
with a variety of supplements, while in the economic slowdown demand for
Changes in preferences
new and expensive vehicles decreased as consumers tended to buy vehicles
that have less and cheaper supplements.
It can be said that companies selling new vehicles were paying more atten¬
tion for the advertisement of new vehicles during economic crisis, thus try­
Advertising of new vehicles
ing to increase the sales.
During the economic slowdown prices of used vehicles decreased, thus en­
Changes in the price of substitute (used
couraging consumers to acquire them, leading to the decreased demand for
vehicles) and complementary (fuel, insu­
new vehicles. Decrease in demand for new vehicles might be partially affec¬
rance, etc.) goods/services
ted by rising prices of fuel and insurance.
Size of the new vehicles' sales market did not change much as some showro­
Size of the new vehicles' sales market
oms bankrupted, however new and modernized one opened, offering a varie­
ty of new vehicles, but this have not affected demand very much.
Availability of credit for buying a vehic­ Availability of credit for buying new vehicle in 2009 was very low compa­
le
red to 2007; therefore this also reduced demand for new vehicles.
This table clearly represents the relation between economic theory and its application into practice.
However, while writing extended essay about the new vehicles' market in Lithuania some difficulties we­
re faced which could have made essay inaccurate in some cases. First and the most important difficulty was the
lack of appropriate statistical data as there was not that much information about this market, as it had seemed
to be when the research was made. Another problem was the reluctance of representatives of companies sel­
ling new vehicles to answer the questions in a detailed way. As a result, it was not possible to get as sufficient
information as possible from the questionnaire.
77
E K O N O M I K O S
IR
V A D Y B O S
A K T U A L I J O S '
2 0 1 0
I S S N
2 0 2 9 - 1 0 1 9
References
1. Blink, J.; Dortan, I. (2007). Economics Course Companion, Oxford University Press.
2. Colander, D. C. (2004). Microeconomics, Fifth edition, The McGraw-Hill/Irwin.
3. Matt Mcgee, (2004). Economics for use with the International Baccalaureate Diploma Programme. Economics - in
terms of The Good, The Bad and The Economist, Victoria: ©IBID Press.
4. Nugent-Smith, J. (2005). Economics from an International Perspective. Tallarook: Montreux Management Pty Ltd.
5. O'sullivan, A.; Sheffrin, S. M. (2007). Economics Principles in Action, Pearson Prentice Hall.
6. Statistical yearbook of Lithuania (2008).Vilnius.
7. Ziogas, C. (2008). IB Study Guides Economics Standard and Higher Level, Oxford University Press.
8. [viewed on: 18-09-2009] Access on internet: <http://www.investopedia.com>.
9. AV Automotive Research. [viewed on: 26-11-2009] Access on internet: <http://www.autotyrimai.lt>.
10. Lithuanian Statistics Department. [viewed on: 09-07-2009] Access on internet: <http://www.stat.gov.lt/lt/>.
11. Association of Lithuanian Banks. [viewed on: 19-10-2009] Access on internet: <http://lba.lt/>.
12. International Petrol Prices. [viewed on: 14-12-2009] Access on internet: <http://www.aaireland.ie/petrolprices/
EKONOMIKOS AUGIMO SULĖTĖJIMO ĮTAKA NAUJŲ AUTOMOBILIŲ PAKLAUSAI LIETUVOJE
Monika Piniauskaitė
Santrauka
Pagrindinis šios esė klausimas: „Kokią įtaką ekonomikos augimo sulėtėjimas Lietuvoje daro naujų automobilių
paklausai?" Šis klausimas yra analizuojamas tiriant su kaina susijusių ir nesusijusių paklausos faktorių pasikeitimus, kurie
rodo, kokią reikšmę ekonomikos augimo sulėtėjimas turi naujų automobilių paklausai Lietuvoje.
Naujų automobilių pardavimo rinka Lietuvoje augo kartu su ekonomika, tačiau 2008 metų pabaigoje ekonomika
ėmė smukti, taip sukeldami paklausos naujiems automobiliams mažėjimą, kadangi automobiliai yra laikomi prabangos
preke ir žemesnės vartotojų pajamos veda link mažėjančių naujų transporto priemonių pirkimų. Pirminis ir antrinis tyri­
mas atskleidė faktą, jog mažėjantis BVP ženkliai sumažino vartotojų pajamas ir vartotojų perkamąją galią. Didėjantis
infliacijos ir nedarbo lygis buvo pagrindiniai ekonominiai veiksniai, kurie turėjo įtakos naujų automobilių kainoms, nepai­
sant to, kylančios kainos nebuvo vienintelis veiksnys, lėmęs mažėjančius naujų automobilių įsigijimą. Su kaina nesusiję
faktoriai, turėję didžiausią įtaką mažėjantiems pardavimams, buvo pasikeitimas vartotojų pajamose, galimybė gauti kredi­
tą bei substitutų egzistavimas (panaudoti automobiliai).
Atlikus tyrimą buvo padaryta išvada, rodanti, kad per 2007-2009 metus naujų automobilių pardavimai sumažėjo
67 %, gauti rezultatai patvirtino tyrimo pradžioje išsikeltą hipotezę, kad ekonomikos augimo sulėtėjimas Lietuvoje pa¬
darė didelę įtaką ekonominiams objektams, susijusiems su naujų transporto priemonių rinka ir stipriai sumažino naujų
automobilių paklausą. Dėl pasikeitimų su kaina susijusiuose ir nesusijusiuose paklausos faktoriuose naujų transporto prie­
monių įsigijimai ir pardavimai ženkliai sumažėjo, tai ne tik patvirtina tyrimo pradžioje išsikeltą hipotezę, bet ir įrodo, kad
ekonomikos teorija gali būti praktiškai taikoma realiose gyvenimo situacijose.
78