Unemployment, Economic Growth, and Inflation in Mexico
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Macroeconomics is a branch of economics that deals with the study of the aggregate economic variables and phenomena by analyzing their trends and cyclical movements. Such variables include unemployment, economic growth, budget deficit, inflation, e.tc. Studying such variables is crucial to an economy that wants to assess its overall economic performance (Ros, 2015). This paper will evaluate the trend of three economic variables, namely; unemployment, inflation, and economic growth in Mexico for ten years (2009-2018) by use of excel graphs and compare them with world averages. Policy recommendations will be made based on the appropriate monetary or fiscal policy relevant to each variable.
Unemployment refers to a situation where individuals willing to work at the prevailing wage rate in an economy are unable to find jobs. From 2010, the rate of unemployment in Mexico has been declining significantly. The following graph shows the trend of unemployment in Mexico from 2009-2018.
Following the world economic recession in (2008-2009), unemployment levels spiked up due to a lack of job opportunities in the formal sector. As a result, the formal sector contracted while the informal sector expanded, resulting in the creation of self-owned enterprises. The unemployment rate during this period reached its peak, which is 5.36 percent. In the next two years, ‘ unemployment rates decreased gradually until 2013, when the economy stagnated at 4.91 percent (Kacemi & Hassan,2018). Subsequent years, however, experienced a steady decline in the unemployment rate partially due to the shriveling of the labor force. Current statistics show that the unemployment rate in Mexico stands at 3.42 percent. At this rate, the economist argues that wages for the current workforce will rise as employers try to compete over the decreasing number of candidates in the formal sector.
Inflation can be defined as the general rise in prices of goods and services over time and measured by a Consumer price index. There are two types of inflation, namely, demand-pull inflation caused by an increase in aggregate demand and cost-push inflation caused by the rise in the cost of production (Ros, 2015). In the past decade, Mexico has continued experiencing various instances of inflation and deflation, as shown in the figure below.
The year 2009 was associated with a high CPI of 5.30 percent, which later decreased from 2011 to 2016. The period (2011-2016) was associated with a continued decrease in energy prices, making the prices of agricultural goods to drop due to low transportation cost. During this period, CPI reduced from 3.42 percent to 2.72 percent. However, from 2016 to 2017, CPI increased from 2.02 to 6.04 percent.
It was as a result of a 12 percent increase in the energy cost, causing a rise in the price of food and beverage by 2.52 percent (Kacemi & Hassan,2018). Another reason that could explain the behavior of CPI is the fact that every year the Mexican government regulates taxes and alters the tariffs and forces business persons to adjust prices of goods and services. In 2019, a 0.5 percent decrease in energy cost resulted in lower inflation of 3.77 percent.
Economic growth is the rate at which output in an economy increases over time, usually one year. A country can increase its economic growth through; increasing its labor force, technological advancement, and an increase in the aggregate demand of goods and services. There are various ways of measuring economic growth in a country precisely, Gross National Product per capita, Gross Domestic product, Urbanization, occupation structure of the labor force, e.tc. Mexico however, regularly uses Gross Domestic Product at Purchasing Power Parity. That is, it converts the Gross Domestic Product into purchasing power parity rates using the United States dollar to eradicate the price differences between countries (Sánchez & Almada,2016).
The figure below shows the trend of Economic growth in Mexico over the last decade.
The major trading partner for Mexico is the United States accounting for half of its imports and exports. Mexico’s economy was greatly affected by the global financial crisis (2008-2009). Its overreliance on manufactured goods export to the United States made their overall economic performance to decline in 2009 to a negative value of 5.29 percent. However, the economy recovered in 2010 and grew at a rate of 5.12 percent. In 2011, the economy started to experience a downward trend in its growth to reach 1.35 percent in 2013. An increase in the trade deficit over this period by 9 percent contributed to this 3.77 decrease in the growth rate of Mexico (Sánchez &Almada,2016). Onwards from 2013, Mexico experienced an increase in economic growth from 1.35 percent to 2 percent in 2018 due to an increase in public investment and an increase in the labor force.
So as to recommend viable fiscal and monetary policy, it’s essential to compare Mexico’s performance with the World averages for the three macroeconomic variables. The figure below shows the trend in Economic growth versus the world average.
Compared with the world average, Mexico’s is growing at a lower rate, mostly because, over the years, it has operated with a budget deficit. As per 2018 statistics, the country witnessed a 2 percent deficit of its GDP. To ensure its economy approaches the average world rate, Mexico should increase its aggregate demand through the use of fiscal policy, such as an increase in government expenditure. The government should invest in strategic sectors and infrastructure, increase public investment, and reconfiguring global chains to ensure exports increase (Ros, 2015). When applied, this could help reduce the budget deficit in the country and improve its balance of trade position in the long run.
Mexico’s unemployment rate is below the world’s average, which currently stands at 4.95 percent, as shown in the graph below.
Though aggregate unemployment has continued decreasing over time, experts in economics expect an increase in this rate in the future due to the demographic characteristic of the population. Mexico’s population comprises of highly educated young fellows of the age (15-29) years who are currently unemployed (Kacemi & Hassan,2018). It could further worsen the situation in the labor market if more of such individuals pass out in institutions of higher learning. Through the use of fiscal policy, the government should ensure it attracts investment that enables it to create opportunities that absorb such individuals.
Mexico, over the years, has used inflation targeting in an attempt to keep inflation low by the use of interest rates. The comparison between the world average and its inflation rate is explained by the line graph below.
Though Mexico has continued to use inflation targeting over the years, the rate of inflation has continued to increase and exceed the world’s average. It’s projected that this rate will decrease over the years to approach the world’s average. Inflation targeting through the use of interest rates has been working over the years. Non-Activist approach is convenient for such an economy. The strategy will ensure prices of consumables are kept low hence boosting economic growth through savings and investments.
References
Ros, J. (2015). Development Macroeconomics in Latin America and Mexico: Essays on Monetary, Exchange Rate, and Fiscal Policies. Springer.
Kacemi, T., & Hassan, S. (2018). Inflation dynamics analysis in selected MENA countries. Pakistan Journal of Humanities and Social Sciences, 6(2), 160-168.
Sánchez-Juárez, I., & García-Almada, R. (2016). Public debt, public investment and economic growth in Mexico. International Journal of Financial Studies, 4(2), 6.