Exchange Rate Risk in Mexico - Research Paper Example

s 5 August 2009 Exchange Rate Risk in Mexico The OECD (organization for economic cooperation and development) countries have been experiencing a very hard time especially when it comes to the exchange rates. The current account deficit has also been another factor that has affected the OECD countries, Mexico is one of the countries that is heading towards a free market economy and when a country moves towards free market economy it mainly depends on free trade to boost its economic growth. This paper will throw light upon exchange rate risk in Mexico and it will also focus on important factors like the current exchange rate system followed in Mexico.

Bretton Woods agreement collapsed in the early 1970s and this caused the exchange rate movements to be inconsistent. "This apparent conflict between theory and empirical evidence poses a problem in determining the optimal role of exchange rates in the formation of appropriate economic policies. The proposition that flexible exchange rates lead to balance of payment equilibrium position primarily rests on the purchasing power parity theory." (Effects of Exchange Rate) Mexico is one of the most important members when it comes to trading with the US and it is also one of the fastest developing economy.

The Gross Domestic Product of the Mexican Economy was $574.5 billion in the year 2001 and the net value of the exports was approximately $178 billion. Mexico is one of the most important trading partners of the US and hence it is very important economically to the US. There has been many instances of Mexican-American dialogues recently and majority of these dialogues have been regarding strengthening the economic relationship between the two countries. "Mexico's main exports are manufactured goods.

These tend to be normal goods. An increase in demand will result in an increase in their consumption. Similar arguments are also applicable for the relation between Mexican Import and Mexican real GDP. This relation is measured by a3 The sign is positive and it is statistically significant." (Effects of Exchange Rate) Mexico is trying very hard to woo manufacturers to establish companies in Mexico, these manufacturers will be assured a tariff-free role in Mexico, and Mexico is doing the same in order to export the products to the US.

The exchange rate uncertainty will not heavily affect the volume of foreign trade; the exchange rate in Mexico will indirectly affect the interest rate in the country. Mexico has to exploit its exports with the US in order to maximize the gains out of export. More than 70% of what Mexico exports directly go to the US and this can further be increased in order to maximize the returns. It is fair to say that the exchange rate is not a big risk in any way, the Mexican economy looks to be quite strong and it is strong and prospering because of the trade relationship it shares with the US.

Works CitedEffects of Exchange Rates (2003). B Net http://findarticles.com/p/articles/mi_qa3674/is_200310/ai_n9302100/ (Accessed on 5 August 2009)Effects of Exchange Rates (2003). B Net http://findarticles.com/p/articles/mi_qa3674/is_200310/ai_n9302100/pg_5/tag=content;col1(Accessed on 5 August 2009)