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The Case:

Pakistan’s Automobile industry is the thriving industrial sector and has significant contribution in country’s GDP and tax collection. Three major auto-manufacturers; Toyota, General Motors Honda and Suzuki are enjoying monopoly power in the local/domestic market. These companies setup their assembly plant in Pakistan. Domestic manufacturers are covering significant portion of consumers demand for cars. Despite of large volume of local production, the industry is still dependent on imports of various auto parts and components used for manufacturing. The country is also allowing the imports of used cars to meet large demand of consumers. In financial year 2015, government has raised tariff by 20 percent on imports of auto parts and all types of used imported cars. In the same period, domestic fuel prices fall drastically due to overall decrease of fuel prices in international market. Consider the data on only two categories of domestic and imported cars to analyze the situation. The prices of cars after and before tariff are given below.

 

Price before tariff 

Price after tariff

Toyota corolla (Domestic car 1300 cc)

19,00,000

20,00000

Suzuki Mehran (Domestic car 800cc)

6,00,000

6,10,000

Imported car (1300 cc)

1700,000

20,40,000

Imported car (800 cc)

5,50,000

6,60,000

 

Requirement:

Keeping in mind the given situation, logically discuss any two reasons for rise in prices of domestic cars.

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Solution idea GDB

 

 

We know well that a domestic price level represents the current price for a specific good or service in an economy. Government agencies or national economists tend to look at various price levels in order to assess rising or falling prices, called inflation and deflation in economic terms, respectively. The most common domestic price level is the consumer price index. This index is common in a host of countries; it measures the prices for a basket of goods that most economists deem necessary to individuals in the economy. Price levels can also represent a snapshot in time of prices, allowing for benchmarks among various periods. Free market economies use price as the determining factor between supply and demand In this theory, the domestic price levels for goods and services all hinge upon these two basic factors. The problem in most free market economies, however, is that some level of government interaction exists that makes the market less free. Therefore, price levels change due to unnatural causes or factors. Economists look to determine which of these extemporaneous factors are causing the most change in terms of inflation or deflation. Now we discuss what is tariff you know that tariff is like restriction charges of importer by governments in the name of taxes  Tariff a tax imposed on imports , which are goods coming into a country .That’s why consumers end up paying more if the domestically produced goods are priced higher than imports . it’s called taxes Tariff can discourage foreign countries or business from trying to sell products in a foreign country . through this concepts we can say that yes due to tariff our domestic prices will be changes because importers want to gain profit  form own business .

SOLUTION:

1- The increasing rate of population demanded everything affect the need of life and automobile is one of them.
2- The banks provide facilities to buy a new automobile on easy demand, a person who have not too much capital to buy a car he can easily take a car through bank. This process increases the demand of cars.
3- Domestic fuel price decreases from 117 to 71 approximately this will also a reason.
The decrease in the inflation in our country is another point in this scenario. Automobile companies are very important for the country’s taxes collection, if the demands of cars are increasing then defiantly due to demanded of people, the taxes
Will get larger benefit for the government. More then ever when the industry is still depending on the imports of various auto parts and components used for manufacturing, government will gain by rising import and export taxes for the country’s profit. In addition to know that the country is also allowing the imports of used cars to meet large demand of consumers but it can raise the praise of fuel so as tariff are used to restrict trade the government is using that strategy. World demand for fuel is exceeding exploration and refinery capacity. This is what has traditionally caused prices to rise, especially when supply is tight disruption.

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