Country Report: An In-Depth Look inside the Mexican Economy
BY: Aly Gouda 4063562
Intermediate Macroeconomics: International Financial Relations (ECB2IMAE) Professor: Mark Schramm
Tutorial Group 2
Country Report: Mexico
A country of huge importance in Latin America, massive industrial prevalence on a world scale and a currency that is one of the worst behaving yet vital to investors both foreign and domestic in the region. Sharing borders with its biggest trading partner, the USA, Mexican products are exported around the world particularly north to the US itself. This paper provides an in depth analysis of the Mexican economy from a macroeconomic perspective.
The Mexican economy is dynamic and very interesting to indulge in, regarding how much it is integrated on a global level. The Mexican economy interacts with a substantial amount of trading partners, both in the financial and goods services market. It is one of the largest economies in the South American region and has a number of very interesting characteristics. Although it is one of the largest producing economies in the region and has a relatively cheap currency, it has been in debt for most of the past decade. The Mexican economy is extremely reliant on its exports in order to perform well with the US being its biggest customer, buying up almost 80% of its exports. This issue is due to many macroeconomic related events that we will discuss over the course of this paper.
We begin our in depth analysis of the Mexican economy by discussing the balance of payments and all of its components. We start off by discussing the current and capital account and then move on to discuss the component that financing the activities made by those account, which is the financial account. We then go further with our analysis by discussing the exchange rate and its fluctuations using different macroeconomic mechanisms such the interest parity condition and the purchasing power parity, which are to be explained and discussed in their corresponding sections throughout the paper. We end our analysis by giving a short and long run forecast of the exchange rate based on our analysis and the mechanisms used throughout the paper.
The Mexican Currency, El Peso is famous for its extremely volatile fluctuations and sharp depreciations in the past. We will attempt to understand the origins of these sharp changes and what the government did to deal with them.
The Mexican currency is particularly interesting because of its use as a proxy currency by foreign investors as it is the only currency traded around the clock. This has in turn helped amplify the volatility and exposure of the currency to different speculations and events to the point where some drastic changes literally took effect over night. This along with all other related aspects would be further discussed during the paper.
1. The Balance of Payments:
Figure 1: The Balance of Payments, Source: OECD statistics.
Figure one exemplifies the current and financial account balances for the past 15 years. Ultimately, this shows the country’s transactions between its residents and non-residents concerning goods, services, financial claims and liabilities to the rest of the world in a certain time period. It entails the current, capital, and financial account. The net financial account shows net acquisition and disposal of financial assets and liabilities. It portrays how net lending to or borrowing from non-residents is financed. Mexico’s current account has been fluctuating during the past fifteen years. Many economists who have studied the balance of payments believe these fluctuations occurred in three different waves. During these three periods of time the current account reacted dramatically to macroeconomic events particularly from the period...
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United States Inflation Rate
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Fomento Economico Mexicano S.A.B
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