100% satisfaction guarantee Immediately available after payment Both online and in PDF No strings attached
logo-home
Summary Mexican Peso depreciation £2.99
Add to cart

Summary

Summary Mexican Peso depreciation

 0 view  0 purchase

Mexican Peso depreciation

Preview 1 out of 1  pages

  • July 9, 2021
  • 1
  • 2020/2021
  • Summary
All documents for this subject (7)
avatar-seller
rachellamsc333
To what extent might the depreciation in Mexico’s currency improve its economic
performance? (25)

Due to falling oil prices which lead to decrease in demand for Mexican peso and loss of
productivity in Mexico relative to the US, the Mexican peso has depreciated by more than
50 % against the dollar in the last 5 years, 70% in the last 10, 100% in the last 15, 150% in
the last 20, and 500% in the last 25 years.

Fall in exchange rate causes price of imports to rise and exports to fall, making exports more
price competitive, thus improving the current account of balance of payment as demand for
exports is likely to be higher than demand for imports. However, a large share of Mexico’s
manufacturing uses imported goods as production inputs, this means that as price of
imports rises, cost of production rises as well, thus price of exports may rise too, therefore
the current account may not be improved. Furthermore, according to the Marshall-Lerner
condition, the sum of the elasticities of demand for exports and imports must exceed one
for balance of payments to improve following a devaluation in currency. However, the top
exports from Mexico are crude petroleum, cars and vehicle parts, and its top imports are
refined petroleum, vehicle parts and integrated circuits. These are commodities and
essentials that have relatively low price elasticities of demand, therefore fall in exchange
rate of Mexican peso may not have a significant effect on improvement of its current
account. This can be supported by the fact that Mexico has a trade deficit of USD 1.236
billion in January 2021.

Due to lower exchange rate which makes it cheaper for multinational to purchase assets
locally, and more expensive for domestic investors to purchase assets overseas,
depreciation of Mexican peso has led to more inward FDI and less outward FDI which
improves its financial account position, helping it to become the world’s fifteenth largest FDI
recipient. However, there are also other factors that attract inward FDI, such as Mexico's
macroeconomic stability, large domestic market, growing consumer base, rising skilled labor
pool, welcoming business climate, and proximity to the US. However, although increase
inward FDI may help improve Mexico’s financial account position, it will cause exchange rate
to eventually rise due to higher demand for Mexican peso, and will worsen trade deficit due
to loss of its price competitiveness and thus causing demand of exports to fall and imports
to rise. Also, the fact that peso has devaluated after previous promises not to do so led
investors to lose confidence in policymakers and thus may cause inward and local
investments to fall.

In conclusion, the extent to which depreciation in Mexico’s currency can improve its
economic performance depends on many factors, such as whether the increase in demand
for exports cause by falling exchange rate is enough to recover the fall in prices of exports. It
also depends on the extent of the depreciation and whether it is short or long term.

The benefits of buying summaries with Stuvia:

Guaranteed quality through customer reviews

Guaranteed quality through customer reviews

Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.

Quick and easy check-out

Quick and easy check-out

You can quickly pay through credit card for the summaries. There is no membership needed.

Focus on what matters

Focus on what matters

Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!

Frequently asked questions

What do I get when I buy this document?

You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.

Satisfaction guarantee: how does it work?

Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.

Who am I buying these notes from?

Stuvia is a marketplace, so you are not buying this document from us, but from seller rachellamsc333. Stuvia facilitates payment to the seller.

Will I be stuck with a subscription?

No, you only buy these notes for £2.99. You're not tied to anything after your purchase.

Can Stuvia be trusted?

4.6 stars on Google & Trustpilot (+1000 reviews)

53068 documents were sold in the last 30 days

Founded in 2010, the go-to place to buy revision notes and other study material for 14 years now

Start selling
£2.99
  • (0)
Add to cart
Added