The German automotive industry is one of the oldest in the world with over a century of operation. The industry is renowned for the invention of the four-stroke engine (Germany Trade & Invest 2013). The earliest vehicle to be powered by gas was developed by Karl Benz.
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Thereafter, the copyrighting of the vehicle gave rise to the famous Benz line of automobiles. The automotive industry around the world has borrowed a lot from the German automotive industry in terms of engineering and architecture of automobiles. Being the forerunners in the automotive industry gives the country a unique and considerable position in the international automotive market.
The German vehicle industry is propelled by ten main automobile brands namely Audi, BMW, Daimler, Iveco, Opel, MAN, Neoplan, Porsche, and Volkswagen (Germany Trade & Invest 2013). The automotive business is the largest sector in the German economy that contributes to about 20 percent of Germany’s industry revenue (Germany Trade & Invest 2013).
The industry is thus a major employer in the country’s economy. Consequently, the industry employed approximately 712,500 workers as per the 2011 statistics (Ernst &Young 2011). The industry’s contribution to the economy is clear as evidenced by the German government’s commitment to fund research in the sector. In the year 2011, 19.6 billion Euros were committed to the industry’s research and development (Ernst &Young 2011).
Consequently, the numerous innovations and inventions that take place regularly in the industry elucidate the magnitude and intensity of the research. The research focuses mainly on the creation of environmentally friendly expertise for old and new technologies in the automotive industry. More than ten new patents on the same are made daily, which has made the country be the most innovative automotive industry worldwide (Germany Trade & Invest 2013).
According to Ernst and Young’s European Automotive Survey of senior automobile manufacturer and supplier decision makers, the company led to the ranking of Germany as the most competitive automobile production location globally (2011).
The Application of Heckscher and Ohlin Theory to the German Economy
The Heckscher and Ohlin theory provides an explanation of international trading patterns, which take into account three factors of production namely land, labour and capital (Gerber 2010). The model thus treats the commodities produced in an economy as products of the three factors. The model assumes that trade often takes part between two countries with different resource endowments (Melitz 2012).
As a result, a country imports items that use up too much of its resources and exports those items that it can produce comfortably without using up too many resources. According to the Heckscher and Ohlin theory, Germany has adequate skilled labour especially in the automotive industry.
Consequently, the German automotive industry is the most competitive in the world due to the accessibility to factors of production thereby enabling the country to compete favourably with other countries in the international market (Stiftung 2012). Therefore, the country intensifies in the manufacture and export of vehicles to other countries.
In addition, there is adequate labour and expertise in the German research industry. As a result, the American automotive industry has established research centres in Germany due to the excellence of the research in the industry. On the other hand, Germany imports labour-intensive items such as crops and other raw materials from countries such as China and Estonia (Leamer 1996).
How Germany has Reacted to the Economic Crisis
The 2008/2009 global economic crisis left several countries such as Greece economically unstable. During that time of economic downturn, Germany was severely affected by the recession though it recovered rapidly due to an increase in current account surpluses (Carr 2011). The policy styles adopted by Germany are not in line with the European Union policies hence creating complications.
These policies are not sustainable in the European Union, which has to review them. Germany’s ownership of a surplus ballooned current account under the Euro is one of the policies that contradict the European Union (World Trade Report 2008). By international standards, the surplus is very high at seven percent of its gross domestic product, which is the highest ever since Germans post-war reconstruction phase (German Council of Economic Experts 2012).
Effects of the Crisis on German Economic Policies and Welfare
Economic policies are constantly changing to suit dynamic challenges in different countries. After the 2008/2009, crisis German economic policies were altered to ensure the country remained stable. The labour market had to go through changes because a huge population was unemployed. Additionally, the country experienced a decrease in aggregate demand during that period due to unemployment (Burda & Hunt 2011).
The federal government at that time had to introduce economic stimulus programs to stabilize the economy (Bibow 2013). The stimulus programs offered employment opportunities as they were mainly related to infrastructure projects, new investments and car-scrap bonus programs (Moravcsik 2012).
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The policy helped in easing the effects of the recession on the economy as well as protecting the welfare of the citizens. The resulting stability of the labour market assisted in the recovery from the financial crisis. Germany pursued a supply-side biased measure in trading to increase its surplus on current account in order to avoid debts (German Council of Economic Experts 2012).
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Ernst & Young 2011, European automotive survey. Web.
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German Council of Economic Experts 2012, Euro area in crisis. Web.
Germany Trade & Invest 2013, The automotive industry in Germany. Web.
Leamer, E. E. 1996, The Heckscher-Ohlin model in theory and practice. Web.
Melitz, K. O. 2012, International economics, 9th edn, Pearson, New Jersey.
Moravcsik, A. 2012, “Europe after the crisis: how to sustain a common currency,” Foreign Affairs vol.9 no.3, pp. 54-69.
Stiftung, K. A. 2012, The German economy during financial and economic crisis since 2008/2009. Web.
World Trade Report 2008, The causes of trade. Web.