Penn Foster Economics Final Project Mexico

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The foreign currency chosen in the comparison against the U.S. Dollar is Mexican Peso (MXN). Introduction Mexico maintained a fixed exchange system of Peso to Dollar, since 1954. Mexico continued the use of such system even after collapse of Bretton Woods system in 1971 and world price shock in 1973. But due to escalating accumulated foreign debt, high inflation, large capital flight, and consequences of import substitution policy, the Peso has lost its value in 1976. After exploring with two rates – preferential rate and free market rate, Mexico established a floating rate policy in 1994. (Source: cuhk.edu.hk, 2013) In this new system, exchange rate is dictated by forces of demand and supply. The New system allows for little or no government involvement in fixing exchange rate. The exchange rate is impacted by macroeconomic aspects such as inflation, interest rate, GDP growth rate, budget deficit, general business environment, political stability etc. Mexico is one of the rapidly developing economies who has been able to keep inflation rates low. In 2012, average rate of inflation was just 3.6%, which is low as compared to other emerging markets. Real GDP growth in 2012 was 4%. Towards the end of 2012, Mexico had foreign currency and hold reserve of $163.6 billion, which was 18th highest in world. (CIA World Factbook, 2013). Foreign investment has played an important part on Mexico’s growing economy. The study of MXN against USD for a period of 5 years (year 2006 to year 2010) reveals that foreign investors are ready to back out from their investment in international markets as soon as they sense obstacles emerging. The foreign investors still do not trust fully in the stability of emerging markets. Mexico is 12th biggest economic power in the world in purchase parity terms. (CIA World Factbook , 2013) The GDP growth rate of Mexico was 5.15%, in 2006. But

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