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Economy of Mexico Essay Sample

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Introduction of TOPIC

Introduction

Mexico is one of the largest growing economies ranking the twelfth position on the world list as measured by the GDP in nominal terms.  Its GDP crossed the trillion dollar mark that made it one of the advanced economies in the middles income country category. Its membership to the North America Free Trade Agreement has greatly facilitated the growth of its exports sector.  This study analyzes Mexico’s economy, with the most current information included and makes a conclusion based on these findings (Stanley, 2009)

Coordinating mechanism used for price setting

Mexico has a free market economy where price is determined by the forces of demand and supply. Over 90% of the Mexican trade economy is under the FTAs (Free Trade Agreements) with not less that 40 countries among them being Israel, the European Union, South and Central America, and Japan. The free trade agreement was initiated in 1992 and came into force inn 1994 (Travel Document Systems, 2009)

Government involvement in the market system

The government has been actively involved the market system as opposed to a purely consumer behavior to bring about the success of the Mexican economy. The government has been instrumental in ensuring a macro and micro-economic environment that is conducive for business through concessions, injection of competition, instituting the property rights, regulations, policies and reforms. Recent administrations have increased competition in telecommunications, distribution of natural gas, rail roads expansion, and expanded competition in airports and ports through infrastructure upgrades. Mexican primary fiscal goals are poverty elimination and increased infrastructure spending which is expected to be financed by the high oil prices besides instituting fiscal policy reforms (Stanley, 2009)

Primary exports from and imports into Mexico

Mexico is one of the world highest ranking economies that is very open to international infiltration but highly depended on the United States which accounted for 82% of Mexican exports in 2007. Mexico exports to the United States include electrical equipment, cars and petroleum. The overall Mexican exports stood at $ 294 billion (f.o.b) according to the 2008 estimates. The primary export commodities are oil and its products which represent 15.8%, manufactured goods 80.8%, agriculture/fish/forestry 2.7%, mining 0.6%. The main export partners as the United States which accounts for 82.2% of exports, Canada at 2.4% and Germany 1.5%. Exported electricity amounted to 1.278 million kWh, oil exports at 2.204 million bbl per day and 2.973 billion of natural gas was exported. Total imports according to the 2008 estimate stood at $ 305.9 billion f.o.b. The main import commodities are still mill products, electrical equipment, networking machines, car parts, aircraft and its associated parts and agricultural machinery. Import partner are the United States which accounts for 49.6% of imports, China at 10.5%, 5.8% of imports from Japan while South Korea accounted for 4.5% of imports (Consensus Economics, 2009)

Inflation Rate

Mexican current inflation levels stand at 6.18 %. The inflation rate has remained relatively controlled over the past few years with inflation rates for 2004, 2005, 2006, 2007 and 2008 standing at 5.2, 3.3, 4.1, 3.8 and 4.5 respectively. Therefore the current 6.18% inflation rate has not been representative of the historical levels. This made the Bank of Mexico to raise its forecast by 0.25 points. The inflation is expected to fall to 4.5 by the end of the fourth quarter of 2009 (China View, 2009)

Table: Mexico-Annual Inflation Rates  

Source: Adapted May 06th, 2009 from http://www.consensuseconomics.com/files/samples/lacf.pdf

Administration of M

exico’s monetary policy Monetary policy is maintained

and executed by the Banco de Mexico or the Bank of Mexico which is its central bank. Mexico currently maintains a floating exchange rate system. The Bank of Mexico does not set the exchange rate but it effect the rate through the accumulation of foreign exchange reserves through the Exchange Rate Commission which is governed by the Bank of Mexico. The 1996 accumulation of foreign exchange reserves were carried out when the peso was so strong something that has helped improve Mexico’s debt repayment conditions. The oil income brought a lot of international reserves totaling to US $ 75.8 billion by 2007 causing the Bank of Mexico to launch a monthly auction program to achieve stable level of reserves. The Bank of Mexico has also influenced interest rates through altering money supply using a technique called corto. It’s a way of restricting money supply carried out by the Bank of England (Crandall, 2004)

Level of unemployment in Mexico

Mexico’s current unemployment rate stands at 4.1% according to the 2009 estimates. Comparably it’s the highest it you take into account the historical rates such as 3.00% for 2003 and 3.70 % for the end of 2008. 85% of the national cake is concentrated into the hands of a few individuals with the rest 15% shared by the poor majority.

Year Unemployment Rate Rank % Change
2003 3.00% 168  
2004 3.30% 167 10.00%
2005 3.20% 27 -3.03%
2006 3.60% 30 12.50%
2007 3.20% 32 -11.11%
2008 3.70% 42 15.63%

Source: Data Retrieved May 6, 2009 from http://www.indexmundi.com/mexico/unemployment_rate.html

This unemployment level adversely affected the Mexican production rate which grew by 5.2 % compared to 6.8% for Chile, 6.3% for Argentina, and 6.8% for Brazil. This has led to proliferation of the underground economy which has basically retarded economic development in Mexico (Stanley, 2009)

Standard of living

The Gross Domestic Product per capita (Purchasing Power Parity) is at $ 14, 200 which is average compared to other economies but below par with regard to the United States which was $47,000 according to the 2008 estimates. This per capita income makes it the second on the continent with Venezuela leading with $ 11,388 (Tong Siak, 2009)

The amount of tax paid by an individual in Mexico is dependent on the tax bracket as indicated below.

Source: Retrieved May 6, 2009 from http://www.bnai.com/images/special_reports/nath09_mexico.pdf

Country’s GDP

Mexican country’s GDP according to the latest 2008 estimate was $1.143 trillion. The 2008 GDP growth was 2% and in the five years from 1996 to 2000, GDP grew annually by a steady 5.1%. In 2003 the rate of GDP growth was 1.4% while in 2002 it grew by 0.8%. In 2001, the GDP had declined by 0.2% while in 2000 it went up by 6.6%. In 2006, 2007, and 2008 GDP grew by 4.9%, 3.2 % and 1.4% respectively. These statistics reveal that the rate of GDP growth over the years has not been very stable especially in the last 9 years (Stanley, 2009)

Mexican Currency

Mexico uses the Peso or MXN which exchanged at 11.016 according to the 2008 estimates. The current exchange rate is $1=13.2473 MXN. The US dollar has appreciated over the Mexican Peso while the MXN has depreciated over the US dollar (X-rates.com, 2009)

Trade Organization Affiliations

In 1986, Mexico became a member of the General Agreement on Tariffs and Trade (GATT) and it’s also an active participant of World Trade Organization. Mexico has entered into 12 free trade agreements with a total of 44 countries. Among them is the North American Free Trade Agreement (NAFTA) with Canada and United States. At the moment the NAFTA agreement is the most comprehensive in terms of its scope and the reciprocal trade that takes place. NAFTA has positively impacted Mexico that has resulted into poverty rates dropping to 17.6 % in 2004 from 24.2 % in 2000 and real incomes increased (Hufbauer & Scott, 2005)

Conclusion

Despite the rising unemployment rates, inflation and poverty rates, Mexico has emerged as one of the fastest growing countries in the Latin America. Not only has the country has benefited immensely from a rich oil reserves that makes the 8th world exporter but the decentralization and privatization policy undertaken by the government in the recent years has paid off remarkably. Despite the record breaking growth, Mexico is still bedeviled wide disparities in incomes inequalities, social and political risks. Mexico needs to modernize her tax system, reform labor laws, and build her infrastructure.

References

China View, (2009). Bank of Mexico raises 2009 inflation forecast. Retrieved May 6, 2009 from http://news.xinhuanet.com/english/2009-04/30/content_11286025.htm

Consensus Economics, (2009). Latin America Consensus Forecasts: A digest of Economic Forecasts. Retrieved May 6th, 2009 from www.consensuseconomics.com

Crandall, R (2004). Mexico’s Domestic Economy. Political and Economic Dynamics. Lynne Reiner Publishers; London, pp 34-56

Hufbauer, G. & Scott, J. (2005). NAFTA Revisited: Achievements and Challenges. Washington, DC: Institute for International Economics, pp 2-13

Stanley, S. (2009). México Económica Pro filé. Economy Watch. Retrieved May 7th 2009 from http://www.economywatch.com/world_economy/mexico/

Tong Siak, H (2009). Mexico Per Capita Income. Retrieved May 7, 2009 from http://siakhenn.tripod.com/capita.html

Travel Document Systems, (2009). Mexico Economy. Retrieved May 7, 2009 from http://www.traveldocs.com/mx/economy.htm

X-rates.com, (2009). Mexican Peso. Retrieved May 6, 2009 from http://www.x-rates.com/d/MXN/table.html

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