Influence of Economics on Household Decision Making

Influence of Economics on Household Decision Making

University of Phoenix, School of Business

Economics

ECO/561

Introduction

The base level understanding of general economics can have a profound effect on how an individual rationalizes big purchases such a car, appliances, home repairs, home purchase, computer equipment, college tuition, or another “big-ticket” item, which are often purchased using loans/financing. In this analysis I am reflecting on my decision-making process that led me to choose the purchase of my personal vehicle, a Honda Accord. I will dive deeper into my decision-making process and uncover the latest ten year trends in Gross Domestic Product (GDP) and trends in Personal Consumption Expenditures (PCE). I will also retrieve and analyze data on the Effective Federal Funds Rate and the Consumer Price Index for the same period of time. Finally, I will pivot my analysis to discuss the influences the Federal Government had on my car purchase. The compiled messages below are examples provided from the course textbook along with other outside sources.

Latest 10 Year Trends

Trends in GDP

Retrieving the data from on the Real Gross Domestic Product over the last 30 years demonstrated a consistent increase year over year since 1987. There was a two-year period where there was a decrease in the GDP. In the year 2008 the GDP came in -0.3% than the year prior, with 2009 following with an even worse year at a -2.8% decrease in GDP. The goings on of the times we know now as the housing crisis and the banking scandals that rocked the nation clearly showed up in the US’s Real GDP. There was also a slight dip, almost no growth in the US GDP in 1991. In the graph provided below on the 30 year Real GDP, it demonstrates the consistent growth of the US Real GDP (U.S. Bureau of Economic, 2019).

The impact of the financial crisis had on the US GDP was subject of an analysis that demonstrated not only did it impact the United States, but it also had impact on the GDP of India and the GDP of BRICS nations. The results obtained found a positive relationship among the economic growth and final consumption expenditure, gross capital formation and exports of an economy. However, the influence of these explanatory variables changed significantly when they were examined for their impact on the economy of India and India included in BRICS (Arora & Kalsie, 2019).

Trends in PCE

Next, evaluating the trends in the Personal Consumption Expenditures which measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends (McConnel, Brue, & Flynn, 2015). The 30-year trend also demonstrates a consistent year over year growth with the only negative growth in the years 2008-2009.

GDP / PCE Comparison

Similarly, the 30-year trend in Real Personal Consumption Expenditures also rose consistently year over year. The PCE also shared similar changes in decline during the 2008-2009 periods. Unlike what the data represents in 1991, there was no plateau in Real Personal Consumption Expenditures. In the comparison, there appears to be an almost one to one correlation in GDP to PCE, which does appear to hold consistent over the last 30 years. The strength and growth of the US GDP is tightly aligned with the Personal Consumption Expenditures (see graph below).

Trends in the Effective Federal Funds Rate

The federal funds rate is the interest rate at which depository institutions trade federal funds with each other overnight, on an uncollateralized basis (FEDFUNDS, 2019). The review of the Effective Federal Funds Rate demonstrated how volatile the markets have been through the years. In contrast, over the most recent eight years, the inflation rate has been at extreme lows and has recently seen increases since 2016. This stands to reason, as consumers were apprehensive about the financial crisis back in 2008-2009 the Feds continued to decrease the interest rates to slowly regain their footing on stabilizing the economy.

I purchased my Honda Accord in 2007 with a $5,000 deposit from my Federal Income Tax Returns. When I took out my loan for the vehicle, it appears I did so at the HEIGHT of the Federal Fund Rate. Interest levels had been climbing since 2003 and showed no signs of stopping. I had no crystal ball, only the tax refund and the knowledge interest rates were continuing to climb. If I could have waited two years to purchase my Accord, I would have locked in one of the lowest interest rates in the last 10 years. The lowest rate was in 2014, which I know I could not have waited that long to purchase a vehicle.

Trend Comparison to Inflation

The Consumer Price Index for all items less food and energy is a measure of changes in the purchasing-power of a currency and the rate of inflation. While there has been a steady increase in the rate of inflation for the past 30 years, there has been an average of 1.9% year over year increase for the most recent 10 years.

Influences of the Federal Government

The Federal Government, while I don’t like to believe they influenced my purchase, actually did play a part. This comes in the form of my Personal Income Taxes. This tax is levied on taxable income, and deductions (business expenses, charitable contributions, home mortgage interest payments, certain state and local taxes) are taken into account (McConnel, Brue, & Flynn, 2015). Every year we file our Federal and State taxes in the hopes of receiving a refund. It was that refund seven years ago that made my decision to purchase the vehicle because it allowed me to make the down payment on the car without impacting any of the savings account.

Conclusion

In summary, reflecting on my decision-making process that led me to choose a Honda Accord was more about having the down payment readily available than it was about finding the right time for interest rates. I touched on my decision-making process and shared the latest ten year trends in Gross Domestic Product (GDP) and trends in Personal Consumption Expenditures (PCE). I analyzed the data on the Effective Federal Funds Rate and the Consumer Price Index for the same period of time. Finally, I shared how the influences from the Federal Government had on my car purchase.

References

Arora, A., & Kalsie, A. (2019). Impact of US financial crisis on GDP of BRICS economies: An analysis using panel data approach. Global Business Review, 19(2), 439-454. doi:10.1177/0972150917713509

Board of Governors of the Federal Reserve System (US), Effective Federal Funds Rate [FEDFUNDS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FEDFUNDS, April 1, 2019.

McConnel, C., Brue, S., & Flynn, S. (2015). Economics: Principles, Problems, and Policies 20th Ed. New York: McGraw-Hill https://phoenix.vitalsource.com/#/books/1259822400/cfi/6/18!/4/2@0:0.

U.S. Bureau of Economic Analysis, Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Price Index) [PCEPILFE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PCEPILFE, J, April 1, 2019.

U.S. Bureau of Economic Analysis, Real Gross Domestic Product [GDPC1], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDPC1, April 1, 2019.

U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items Less Food and Energy [CPILFESL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CPILFESL, April 1, 2019.