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Derive lesson from the Mexican experience that may be useful for other developing countries

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Chika Ilonah
Chika IlonahLv10
28 Sep 2019

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Critically evaluate the following statement:

In light of the experience of the last two decades, free trade is the best trade policy for most developing countries.

7. How common is it for people to migrate from one developing country to another

a. More common than the migration from developing countries to developed countries.

b. Less common than the migration from developing countries to developed countries, but more common than migration between developed countries.

c. Less common than migration between developed countries, but more common than the migration from developed countries to developing countries.

d. It doesn’t happen at all.

Mexican interest rates are normally substantially higher than U.S. interest rates. a. What does this imply about the inflation differential (Mexico inflation minus U.S. inflation), assuming that the peso interest rate is the same in both countries? Does this imply that the Mexican peso will appreciate or depreciate? Explain. b. It may be argued that the high Mexican interest rate should entice U.S. investors to invest in Mexican money market securities, which could cause the peso to appreciate. Reconcile this theory with your answer (a). If you believe that the high Mexican interest rate does not entice U.S. investors, explain why. c. Assume that the difference between Mexican and U.S. interest rates is typically attributed to a difference in expected inflation in the two countries. Also, assume that purchasing power parity holds. Do you think that your business cash flows would be adversely affected? In reality, purchasing power parity does not hold consistently. Assume that the inflation differential (Mexico inflation minus U.S. inflation) is not fully offset by the exchange rate movement of the peso. Would this benefit or hurt your business? Now assume that the inflation differential is more than offset by the exchange rate movement of the peso. Would this benefit or hurt your business?

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