Frequently Asked Questions

Guidelines for Citing BEA Information | ID: 522 | Created: Aug-26-2009
Answer

How is the federal Consumer Assistance to Recycle and Save Act of 2009 (i.e., the CARS program) reflected in the National Income and Product Accounts (NIPAs)?

The federal CARS program (popularly called "cash for clunkers"), which began in July 2009 and ended on August 24, 2009, provides a credit of $3,500 or $4,500 for customers who purchase a qualifying new, more fuel efficient auto or light truck from a participating dealer when they trade in a qualifying less fuel efficient auto or light truck. The credit is applied by the dealer to the customer's purchase, after which the dealer is reimbursed by the federal government. The impact of this program is reflected in several components of the NIPAs.

For sales to households, the discounted value of the sale is reflected in current-dollar personal consumption expenditures (PCE). The effects of the discount and other price changes are removed in the calculation of real (that is, price-adjusted) PCE. The payment to sellers is recorded as a subsidy (which is like a negative sales tax). For sales to businesses, the value is reflected in private fixed investment (PFI).

The sales of new motor vehicles under the CARS program are reflected in the source data underlying BEA's motor vehicles estimates; specifically, calculations of unit sales of new autos and new light trucks by model from Ward's Automotive Reports and of the average vehicle price (after rebates and concessions) by model for new autos and for new light trucks from J.D. Power and Associates.

The PCE and PFI motor vehicles estimates are deflated by detailed consumer price indexes (CPIs) for new motor vehicles from the Bureau of Labor Statistics (BLS). The detailed CPIs for new vehicles reflect "the average rebate, concession, and/or markup during the preceding 30 days." (See Chapter 17 of the BLS Handbook of Methods (http://www.bls.gov/opub/hom/pdf/homch17.pdf), page 29.) Because most of the CARS rebates for July occurred during the last week of the month, the July rebates are reflected in the CPIs for both July and August-that is, the information on rebates enters the indexes with a lag. BEA has made a small adjustment to the July price indexes for new autos and for new light trucks to better align them with the timing of the CARS program rebates/subsidies.

On the income side of the accounts, BEA treats this federal credit as a subsidy in the NIPAs. The increase in federal subsidies is reflected in the source data underlying these estimates from the Monthly Treasury Statement.

The following is a simplified example of how a transaction under the CARS program is reflected in the NIPAs: Suppose a household purchases a new auto under the CARS program and pays a negotiated price of $20,000 less a rebate of $3,500, for a transaction price of $16,500. The purchase of the new auto will be included in PCE. The valuation for current-dollar PCE is the net price paid by the household after the rebate-which is $16,500, the value of the transaction for current-dollar PCE.

On the income side of the accounts, assume the dealer receives $20,000-that is $16,500 from the consumer and $3,500 from the federal government. Suppose that the $20,000 is distributed to the factors of production as follows: $15,000 to compensation of employees, $1,000 to taxes on production and imports (for sales taxes), and the remaining $4,000 to operating surplus. Then the transaction will be reflected in gross domestic income as follows: Compensation of employees ($15,000), plus taxes on production and imports ($1,000), less subsidies (-$3,500), plus operating surplus ($4,000), which equals $16,500, the same as on the expenditure side of the accounts.

For the calculation of real PCE, BEA deflates the current-dollar value by the relevant price deflator, which in principle should reflect the decrease in the transaction price. Thus, all else equal, the effects of the CARS program would be reflected in increases in quantity and decreases in prices for PCE.

Note that if the purchase were made by a business instead of by a household, it would be included in PFI. If the vehicles that are sold under the program represent a drawdown of inventories or additional imports, the increases in PCE and PFI would be partly offset by a decrease in inventories or an increase in imports. To the extent that the purchases represent additional domestic production, they would add to real GDP. Current-dollar GDP would increase if the increase in quantity produced is larger than the decrease in price.

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