Essay about Mexican Peso Case Study

993 Words Apr 1st, 2014 4 Pages
1. Take a look at Mexico’s balance of payments over the past few years. Use the schedule I have attached to the case – it is in the same format as we used to examine the U.S. balance of payments. What do the trade and current account balances suggest about the likelihood of a potential devaluation of the peso? Why?
a. It suggests that because Mexico is importing twice as much as they are exporting that there is a strong chance that the peso will lose value to counter the constant increase in imports. It is also important to point out that the exports in 1974 and 1975 are practically the same. The current account balance is negative 4 billion U.S. dollars which is 4 times larger than it was in 1972. All this leads me to believe that the
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Briefly explain why.
a. The PPP for the Mexican peso/U.S. dollar exchange rate should be MP13.29/$ and I believe that the new exchange rate is too high, especially when compared to the 13.29 PPP. Another reason to believe that it is not reasonable is that looking at exhibits 5 and 7 indicates that the peso may not have needed to be devaluated much at all considering the increase in Mexico’s reserves and the decrease in the forward discount from June to August.
8. Suppose the Mexican government had decided not to devalue the peso. What would have been some of the economic and financial policies it could have implemented to defend the currency? How would these policies affect employment and income levels in Mexico?
a. Financial policies that could have been implemented would be to limit the number of imports and/or raise import taxes and loosen up their taxes on corporations to encourage new business in Mexico. It would raise employment while having a positive effect on income levels compared to if the peso was devaluated.
9. Please evaluate the future of the peso based on your answers to the above questions as well as the following information: (1) Oil production is likely to come on stream shortly and oil is priced in the world markets in dollars. (2) Foreign oil companies will be making substantial investments in Mexican oil fields. (3) The Mexican government will

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