Macroeconomic Variables in Mexico
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Macroeconomics is the study of the trends and cycles of variables such as the budget deficit, unemployment, inflation, exchange rates, economic growth, e.tc. Evaluating these variables will help the monetary authority of a country assess the performance as well as come up with necessary measures required to increase aggregate output through the use of both fiscal and monetary policies. Fiscal policy involves the use of taxes and government expenditure, while monetary policy consists of the use of interest rates, discount rates, open market operations, etc. to stimulate aggregate demand (Andersen et al., 2015). This study will analyze the trends of economic growth, inflation, and unemployment in Mexico from 2009-2018 and compare them with world averages with a view of providing recommendations on important fiscal and monetary policy.
Economic growth is the quantitative increase in a country’s output generally over one year. Economic growth can be measured using; Urbanization, GDP per capita, Gross National Product, social welfare, e.tc. Increasing the overall demand for goods and services, improving the technology and expanding a country’s workforce are ways in which a state could use to ensure the economy grows ((Rodriguez, 2016)
The figure below explains Mexico’s trend in economic growth from 2009-2018.
Over the years, Mexico has intensified its trade with the United States of America majorly because of the close geographical location in the two economies. Critical contributors to Mexico’s Gross Domestic Product are the services sector, for example, tourism and manufactured goods. After the 2008-2009 global economic recession, Mexico’s trade balance worsened because of its overreliance on the USA as an export destination. This period recorded a negative economic growth rate of 5. 29percent.In 2010, the economy was on a recovery path, and this rate increased to 5.12 percent.
A further deterioration in terms of trade increased the trade deficit by 9 percent, causing a significant decrease from 3.66 percent in 2011 to 1.93 percent in 2013 (Rodriguez, 2016). The period 2013-2018 experienced an increase in public investment, and the country’s workforce expanded. It led to the rise in the Gross Domestic output, and hence the country’s economic growth increased steadily from 1.35 in 2013 to 2 percent in 2018.
Unemployment in a country is said to exist when individuals willing and able to work at the current wage rate are unable to secure job opportunities. There exist various types of unemployment, which include structural, frictional, cyclical, voluntary unemployment, e.tc. Mexico has experienced a steady decrease in the unemployment rate since 2009, as shown in the graph below.
Mexico’s economy comprises of both the formal and informal sector. The informal sector takes the most significant share in terms of the labor force, as most individuals prefer self-employment. During the global financial recession that ended in 2009, many firms were unable to produce the expected output lowering their profits, and hence most could not sustain their labor force. It led to a reduction of workers in the formal sector, and this resulted in a rise in unemployment levels to 5.36 percent.
Subsequent years witnessed a significant decrease in unemployment levels, mainly due to the contraction of the labor force (Rodriguez, 2016). Current statistics show that the level of unemployment is at 3.32 percent, and it is expected to decrease further, leaving employers to fight over the limited number of qualified employees in the formal sector. Consequently, the wages will increase as a response to the few employees available.
Inflation is the prolonged rise in the general price level of goods and services as a result of currency devaluation. It is measure by the Consumer Price Index. Inflation can either is caused by a general increase in the cost of production or an increase in demand for goods and services in an economy (Andersen et al., 2015). The figure below shows the trend of inflation and deflation in the past ten years in Mexico.
The Consumer price index in 2009 was 5.3 percent, which declined to 3.40 percent in 2011. From 2011 to 2016, the CPI further fell to 2.7 percent in 2016. it was a result of a persistent decrease in fuel prices, which reduced the transportation cost, thus leading to a decline in prices of agricultural products.2017 experienced a 3.22 percent increase in the CPI due to the rise in the energy prices, which increased the cost of production as well as transport cost hence increasing the prices of essential commodities(Andersen et al., 2015).
The annual behavior of the Mexican government of adjusting tariffs and regulating taxes could also explain the cause of the rapid in CPI as firms are forced to alter prices in response to an increased production cost.2019 however, recorded a low CPI of 3.8 percent up from 4.90 in 2018 due to a decrease in fuel prices by 0.5 percent.
It’s impossible to suggest final recommendations without an in-depth comparison of Mexico’s performance to that of the world. The trend of unemployment in Mexico versus that of the world average is explained by the figure below.
Mexico’s unemployment rate is below the world’s average. Despite the rate decreasing over the decade, scholars argue that this could be different as we move to the near future. They expect unemployment to rise partially due to the geographical composition of the population, which comprises of many young and jobless individuals currently (Rodriguez, 2016). If this number increases over the years, it could push the unemployment rate further up.
Over the years, Mexico has used interest rates as a monetary policy tool for dealing with inflation. It has adopted inflation targeting, which involves the setting of a numerical target of inflation with a flexible margin.
The graph below shows the comparison of the world’s inflation average to Mexico’s.
Compared to the current world’s average inflation rate of 2.4 percent, the Mexican rate
exceeds it by 2.46 percent. Experts predict that this rate could continually decrease to approach the world’s average (Bölükbaş, 2018). Through the use of interest rates to achieve their numerical target of 3 percent, Mexico could be prosperous in keeping the rate of inflation close to the world’s average. It would, in turn, improve the economy by increasing savings and investments as well as keeping the prices of essential commodities low.
Another crucial variable to be analyzed against the world’s average in this paper is economic growth. The following figure shows the trend in economic growth between Mexico and the world for the past ten years.
Mexico, which is a budget deficit country, has continued to grow at a slower rate as compared to the global average, which currently stands at 3.1 percent (Bölükbaş, 2018). Through the use of government expenditure as a fiscal policy tool, Mexico could have achieved a higher aggregate demand for its goods and services and, consequently, higher economic growth. To achieve this objective, the Mexican government could channel funds to various sectors and develop the necessary infrastructure. Secondly, it could reconstruct universal chains by negotiating for better terms of trade to ensure an increase in exports. In the long run, the country’s trade balance would improve and lead to a decrease in the budget deficit.
References
Andersen, T. B., Malchow-Møller, N., & Nordvig, J. (2015). Inflation targeting and macroeconomic performance since the Great Recession. Oxford Economic Papers, 67(3), 598-613.
BÖLÜKBAŞ, M. (2018). Do Inflation and Economic Growth Substantially Affect Youth Unemployment? Evidence from 20 Emerging Economies. Uluslararası İktisadi ve İdari İncelemeler Dergisi, 55-66.
Garza-Rodriguez, J., Andrade-Velasco, C., Martinez-Silva, K., Renteria-Rodriguez, F., & Vallejo-Castillo, P. (2016). The relationship between population growth and economic growth in Mexico. Jorge Garza-Rodriguez and Cecilia I. Andrade-Velasco and Karen D. Martinez-Silva and Francisco D. Renteria-Rodriguez and Pedro A. Vallejo-Castillo, (2016)” The relationship between population growth and economic growth in Mexico”, Economics Bulletin, 36(1), 97-107.