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5 pages/β‰ˆ1375 words
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Style:
APA
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Accounting, Finance, SPSS
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Research Paper
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English (U.S.)
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Case Assignment (Mexico) Global Finance Finance Research Paper

Research Paper Instructions:

CASE ASSIGNMENT
Mexico experienced large-scale trade deficits, depletion of foreign
reserve holdings and a major currency devaluation in December 1994,
followed by the decision to freely float the peso. These events also
brought about a severe recession and higher unemployment in
Mexico. Since the devaluation, however, the trade balance has
improved.
1. Investigate the Mexican experiences in detail and write an APA style
5 - 8 page report on the subject. In the report, you may:
(a) document the trend in Mexico’s key economic indicators, such as
the balance of payments, the exchange rate, and foreign reserve
holdings, during the period 1994.1 through 1995.12.;
(b) investigate the causes of Mexico’s balance of payments difficulties
prior to the peso devaluation;
(c) discuss what policy actions might have prevented or mitigated the
balance of payments problem and the subsequent collapse of the
peso; and
(d) derive lessons from the Mexican experience that may be useful for
other developing countries.
In your report, you may identify and address any other relevant issues
concerning Mexico’s balance of payment problem.
2. Define the balance of payments.
3. Why would it be useful to examine a country’s balance of
payments data?
4. The United States has experienced continuous current account
deficits since the early 1980s. What do you think are the main causes
for the deficits? What would be the consequences of continuous U.S.
current account deficits?
5. In contrast to the U.S., Japan has realized continuous current
account surpluses. What could be the main causes for these
surpluses? Is it desirable to have continuous current account
surpluses?
6. Comment on the following statement: “Since the U.S. imports more
than it exports, it is necessary for the U.S. to import capital from
foreign countries to finance its current account deficits.”

Research Paper Sample Content Preview:

CASE ASSIGNMENT (MEXICO) GLOBAL FINANCE
[Name of the Writer]
[Name of the Institution]
[Subject]
[Date]
CASE ASSIGNMENT (MEXICO) GLOBAL FINANCE
Question 1
a) Key economic indicators
Figure 1: Mexico Balance of Payments
b) Mexico in order to combat stagnation as well as rising inflation had made several changes in its economic policy which have led to the crises in 1994. The chief aim of this particular strategy was to foster the foreign direct investments as well as to restructure the external debt and escalate the growth of the private sector of the country. Along these lines, the peso the Mexican currency was pegged to the United States dollar with the intent to encourage price and trade stability (Hermosillo & Billings., 1996). This trade liberalization has resulted in the rise of imports and exports of the country and at the same time increment in the capital inflow. Furthermore, the opening of the borders to United States facilitated the economic growth of Mexico and diminish the inflation. Nevertheless, the country became exceptionally vulnerable to the changes in the external forces. At the instance, when Peso was pegged against the United States Dollar, the value was set at an extremely high rate due to which the purchasing power of the Mexican consumers significantly increased. As a result, trade deficit of Mexico continued since the government was compelled to pay for the rise in consumption.
Another factor leading to the Balance of Payment issue in Mexico was the decline of the confidence of the investors. The confidence of the investors lessened mainly because of the overvalued money as well as deficit of the current account (Springer & Molina., 1995). The political condition in the country further worsened the condition. The political crises prevailed due to uprising of the Chiapas in the start of the years and ending with the assassination of the presidential candidate in March. These aspects to a great extent damaged the trust of the investors.
c) Policy Actions
The balance of payment issues as well as collapse of Peso could have been preventing by restricting the devaluation of Peso against the Dollar. In the year 1993, the current account deficit was 6.5% of the Gross Domestic Profit. It was extremely large when compared to majority of the standards and at the same time was financed by the short-term capital inflows. To avoid such situation, the policy should have been derived that emphasized on the direct investments by the means of license arrangements, joint ventures as well as completely owned facilities of the foreigners and other different sources of the hands-on capital. A policy should have been derived that not only made the host country attractive but also ensure the engagement in different trade actions (Kamin., 1999). Such form of capital exchange leads to long-standing stability and at the same time significantly contribute to the transformation of the host nation.
Further analysis of the financial crises in Mexico revealed the following shortcomings. For instance, the country was suffering from fragile and restricted links with foreign markets and at the same time was primarily dependent on the external conditions. Other aspects include financial underdevelop...
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