Wednesday, September 2, 2009

Minimal GDP Effect Of Cash For Clunkers

The Los Angeles Times is reporting a yearly high in auto sales:
Overall, auto sales in August were the highest in more than a year, according to industry figures released Tuesday. Car makers sold more than 1.2 million cars and trucks, up 1% from the same month last year and the first year-over-year sales gain since August 2007.

Much of that was a result of the clunkers program, which ran July 24 to Aug. 24 and provided hefty government rebates to consumers who traded in gas guzzlers for more fuel-efficient new vehicles.
That is the good news. The 'not aware news' is that the increase sales will do much less for GDP growth than one would naively think.

The Bureau of Economic Analysis released information on how cash for clunkers will affect GDP and its effect will be less than the total sales transactions of the automobiles purchased.

The government will use the sales price less the rebate. So a $20,000 car purchase with a $3,500 rebate will be treated as a $16,500 car sale.

Additionally, to the extent sales are from inventory or imports, the decrease in inventory or the additional imports, will offset the dollar sales amount used to compute GDP. So, if a car was sold from inventory, only the amount of the difference between inventory and sales value will increase GDP.

There are also situations where it might decrease GDP. For example, If the $20,000 car mentioned above is in inventory for $17,000 and the buyer buys it at $20,000 with a $3,500 rebate. The effect on GDP is a sales price of $16,500 less inventory value of $17,000 for a decrease of GDP by $500.

GDP will grow by the difference between new car sales and the change in inventory and additional imports. It is the net difference that will add to GDP and not the dollar amount of new car sales under the cash for clunkers program.

Since many of the auto plants were idle and the goal of the cash for clunkers program was to reduce inventory, there will be a much smaller effect than the public anticipates.

Moreover, used car sales are not included in GDP calculations. The decrease in used auto sales as a result of the program will not affect GDP. Neither will the destruction of the usable used cars traded in negatively or positively affect GDP.

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