Indonesia's Middle Class and Autonomous Vehicles (Pre-prelims CSQ Push)
Case
Table 1: Gross Domestic Product per capita (at 2018 US$ constant prices) for Indonesia and South Korea, selected years
| 2000 | 2005 | 2010 | 2015 | 2018 | |
|---|---|---|---|---|---|
| Indonesia | 781 | 1263 | 3122 | 3331 | 3893 |
| South Korea | 11948 | 18640 | 22087 | 27105 | 21363 |
Source: World Bank
Table 2: Indonesia’s Selected Economic Indicators, 2015–2018
| 2015 | 2016 | 2017 | 2018 | |
|---|---|---|---|---|
| Real Economic Growth (%) | 4.9 | 5.0 | 5.1 | 5.2 |
| Unemployment (%) | 4.5 | 4.3 | 4.2 | 4.5 |
| Change in General Price Levels (%) | 6.4 | 3.5 | 3.8 | 3.3 |
| Net Exports in goods and services (current US$billion) | 7.7 | 9.5 | 11.8 | -8.7 |
Source: World Bank
Extract 1: Opportunities and challenges for Indonesia’s burgeoning middle class
Indonesia is the world’s fourth largest consumer market, trailing only China, India and the United States. The economy is now worth US$900 billion per annum, fuelling a large consumer base and a burgeoning middle class and retail sector, drawing in significant capital investment from domestic and international sources.
Key factors driving Indonesia’s explosive growth include its strikingly young population, with 60% of its people below 30 years of age, expanding at 2.9 million a year. It is undergoing rapid urbanisation, expected to reach 71% of the population by 2030, fuelled by rising incomes and a consumerist lifestyle.
Equally critical are the considerable challenges for companies seeking a share of this market, including its fragmented geography across 6,000 inhabited islands and the heterogeneous nature of its people. Indonesians have a strong preference for trusted local brands and take particular, even nationalistic, pride in supporting local businesses. Compounding the regional disparities are the logistical challenges of extending supply chains across a country poorly served by insufficient transport infrastructure, which is usually dominated by domestic firms with long-established connections.
Figure 1: Number of urban vehicles worldwide, billions — private car population is projected to fall sharply from 2025 to 2035, before rising thereafter.
Extract 2: Selling rides, not cars
An autonomous vehicle (AV) is capable of sensing its environment and operating without human involvement. AVs will initially be offered for sale not to private owners but to robotaxi-fleet operators, partly because an AV’s light sensors are still so expensive that they would cost more than the rest of the vehicle put together — less of a problem for robotaxis, which generate revenue throughout the day. Large-scale deployments are most likely to start with geofenced robotaxi services in cities such as Singapore or Dubai, then expand.
The roll-out of cheap robotaxis in urban areas is encouraging many young urbanites to abandon private car ownership altogether. Since most cars sit unused 95% of the time, switching to shared robotaxis that operate around the clock could greatly reduce the number of vehicles on the road. But if robotaxis are in use 50% rather than 5% of the time, they will need to be replaced far more often; unless vehicle lifespans can be greatly extended, the number of new vehicles needed each year will rise.
Pricing models for users will change, too: Uber is already testing telecoms-like monthly price plans in some cities, which charge a fixed fee for a certain number of rides or miles travelled for subscribers. This implies that non-subscribers will end up paying a higher rate per ride.
Source: The Economist (Special Report), 1 March 2018
Extract 3: Potential economic and social effects of driverless cars
The penetration of autonomous vehicles would reduce unproductive hours Americans spend driving to work by 2.7 billion hours, enabling them to use the freed-up time working or doing other activities, thereby boosting overall driver productivity by 1.2 trillion.
Source: VOX, CEPR Policy Portal, 1 December 2017
Questions
(a) With reference to Table 1, explain why real GDP per capita in US$ might not be a good indicator to compare material wellbeing of an average person living in South Korea to another living in Indonesia, and suggest a more appropriate indicator. [3]
(b) Explain whether data on net exports could help you to conclude that Indonesia is an open economy. [2]
(c) Using information from Extract 1, explain why a rational foreign retailer may decide not to invest in Indonesia. [3]
(d) With reference to Figure 1, suggest why the worldwide private car population may fall sharply from 2025 to 2035, before rising thereafter. [4]
(e) Using a Production Possibility Curve, explain how a “penetration of autonomous vehicles” (Extract 3) could impact future economic growth. [3]
(f) Explain how the introduction of telecoms-like pricing plans (Extract 2) would increase Uber’s revenue. [4]
(g) Explain one way that a robotaxi firm could benefit by expanding its customer base. [2]
Answers
(a) Explain and suggest — [3]
The relevant theory is the limitations of national income in comparing standards of living.
In Table 1, South Korea’s real GDP per capita (US) is inaccurate because exchange rates fluctuate constantly. [1m] Exchange rates also fail to account for differences in the cost of living: South Koreans earn more, but goods and services cost more there too, so the indicator overstates South Korea’s true mSOL. [1m] A more appropriate indicator is real GDP per capita at purchasing power parity (PPP). [1m]
Note: 1 mark deducted if there is no reference to the table.
(b) Explain — [2]
No — the data cannot support that conclusion. [1m stand] Net exports give the absolute difference between export revenue (X) and import expenditure (M), not a proportion of GDP. To judge whether an economy is open one must know the size of trade flows relative to GDP, which net exports alone do not reveal. [1m theory]
Note: an unsubstantiated stand earns no mark.
(c) Explain — [3]
A foreign retailer is a rational economic agent seeking to maximise profit, so it will not invest where the expected benefit (revenue) of investing falls short of the expected cost. [1m goal + marginalist principle]
Per Extract 1, Indonesians have a “strong preference for local brands”, so consumer tastes are not aligned with foreign brands and demand for foreign goods may be low — expected revenue and profit are low. [1m benefit] “Insufficient transport infrastructure” raises distribution and transport costs, increasing the expected cost of investing. [1m cost] With low expected revenue and high expected cost, the retailer may not invest.
(d) Suggest — [4]
2025–2035, sharp fall. Robotaxis and private cars are close substitutes (both means of transport), so the cross elasticity of demand is high and positive. [1m] Introducing cheaper robotaxi services therefore causes a more than proportionate fall in demand for private cars, sharply reducing the quantity of private cars. [1m]
Beyond 2035, gradual rise. After the initial disruption, demand for private cars stabilises — some consumers still prefer the autonomy of ownership. [1m] Demand then rises gradually as world population grows and incomes rise with economic growth. [1m appropriate demand factor]
(e) Explain, using a PPC — [3]
The production possibility curve shows the maximum combinations of two goods the economy can produce when resources are fully and efficiently employed at a given state of technology. [1m definition]
A rising number of autonomous vehicles raises productivity by reducing “unproductive hours” for drivers (Extract 3), increasing the economy’s productive capacity. [1m] This potential growth is shown by an outward shift of the frontier from to . [1m accurate PPC]
(f) Explain — [4]
Uber is practising price discrimination, charging different effective unit prices to consumer groups with different price elasticities of demand.
For frequent users, ride-hailing takes a high proportion of income, so their demand is more price elastic; they opt into telecoms-like plans with lower per-ride rates. A lower unit price yields a more than proportionate rise in quantity exchanged, raising revenue. [1m elastic market + 1m impact]
For occasional users, ride-hailing takes a low proportion of income, so their demand is more price inelastic; they pay per ride. A higher unit price yields a less than proportionate fall in quantity exchanged, again raising revenue. [1m inelastic market + 1m impact]
(g) Explain one way — [2]
(Either a cost or a revenue advantage earns full credit.)
A larger customer base lets a robotaxi firm reap technical internal economies of scale: the heavy fixed costs of geofencing routes (extensive R&D) are spread over more rides, lowering average cost. [2m]
Alternatively: marketing economies of scale (advertising costs spread over a larger base), or a revenue advantage — greater market share confers greater market power and price-setting ability, so demand rises and becomes more price inelastic, raising revenue and profit. [2m]