INTRODUCTION

OVERVIEW

Mexico is a country in the southern portion of North America. It is bordered to the north by
the United States; to the south and west by the Pacific Ocean; to the southeast by
Guatemala, Belize, and the Caribbean Sea; and to the east by the Gulf of Mexico.

Some prominent statistics are

 Population: More than 13 million

 Land area: 1,972,550 km sqr
 Life Expectancy: 77.3 years.
 15th largest economy in the world in nominal terms
 11th largest economy by purchasing power parity, according to the IMF
 Official currency of Mexico is called Peso. Currently, 1 Peso equals 0.052 US Dollars.
 Enormous disparity between the rich and poor in Mexico.

Mexico leads production on items like cars, refrigerators, computers, flat screen televisions,
and mobile phones.

Growth in 2019 should be aided by higher oil prices, but the economy is still constrained by
low productivity, a still-large informal sector that employs over half of the workforce, weak
rule of law, and corruption. Current Growth rate is around 1.8%.

ECONOMY

The World Bank reported in 2009 that the country's Gross National Income in market
exchange rates was the second highest in Latin America, after Brazil at US$1,830.392 billion.

Among the OECD countries, Mexico has the second-highest degree of economic disparity
between the extremely poor and extremely rich. The bottom ten percent in the income
hierarchy disposes of 1.36% of the country's resources, whereas the upper ten percent
dispose of almost 36%.

Mexico is the second-largest exporter of electronics to the United States where it exported
$71.4 billion worth of electronics in 2011. The Mexican electronics industry is dominated by
the manufacture and OEM design of televisions, displays, computers, mobile phones, circuit
boards, semiconductors, electronic appliances, communications equipment and LCD
modules.

Mexico produces the most automobiles of any North American nation. The industry
produces technologically complex components and engages in some research and
development activities.
NATIONAL INCOME
OVERVIEW

The quantitative information associated with national income can be used to determine the
effect of various economic policies. Considered an aggregate of the economic activity within
a nation, national income accounting provides economists and statisticians with detailed
information that can be used to track the health of an economy and to forecast future
growth and development.

National income can be used to assess the current standard of living or the distribution of
income within a population. Additionally, national income provides a method for comparing
activities within different sectors in an economy, as well as changes within those sectors
over time. A thorough analysis can assist in determining overall economic stability within a
nation.

GDP is the most popular measurement technique for National Income.

GROSS DOMESTIC PRODUCT (GDP)

GDP at purchaser's prices is the sum of gross value added by all resident producers in the
economy plus any product taxes and minus any subsidies not included in the value of the
products. It is calculated without making deductions for depreciation of fabricated assets or
for depletion and degradation of natural resources.

It has two types: Nominal and Real. Real GDP is the nominal GDP reduced with inflation.

The trend for both can be shown as:

Whereas the rate of change of GDP or economic growth can be shown as:

GDP = C + I + G + NX

Where, C = Consumption

I = Investment

G = Government Spending

NX = Net Exports

Mexico’s data from year 2000 to year 2018 has been taken to calculate the GDP.

1. CONSUMPTION

This component is the money value of all the goods and services bought by households
and non-profit institutions. These are classified into consumer durables, semi-durables,
non-durables and services.

By performing regression of the data available for consumption and real GDP it is found
that:

C = 0.606411645*Y + 87.52426418

Or Marginal Propensity to consume is 0.606

The general trend can be shown as:

Household consumption billion USD

1000
900
800
700
600
500
400
300
200
100
0

2. INVESTEMENTS

Investment is the amount of capital added to physical stock over a period of time.

Investment includes building of machinery, housing construction, construction of

factories and offices and additions to a firm’s inventories of goods.

Investment is of 4 types: Business Fixed Investment, Inventory Investment, Residential

Construction Investment, Public Investment.

When regression of investment data and real GDP is done, the following relationship is
discovered:

I = 0.253435*Y -15.1648

The general trend of investment over the years is:

Capital investment billion USD

350

300

250

200

150

100

50

0
The investment multiplier is found to be I = 2.540726 i.e. with b = 0.6064 the investment
multiplier should result in 2.54 times increase in Y.

3. GOVERNMENT CONSUMPTION:

This component measures the government spending/consumption. It includes purchase of

intermediate goods and wages and salaries paid by the government, but transfer payments
are not counted.

When regression of government spending data and real GDP is done, the following
relationship is discovered:

G = 0.147042 * Y -27.6465

The government multiplier is found to be g = 2.540726 with b = 0.6064 the government

multiplier should result in 2.54 times increase in Y.

The general trend over the years is:

Government spending billion USD

180
160
140
120
100
80
60
40
20
0

4. NET EXPORTS:

It IS the difference between domestic spending on foreign goods or imports and foreign
spending on domestic goods or exports. Hence, the difference between Exports (X) and
Imports (M) of a country is called Net Exports (X- M).

When regression of Import data and real GDP is done, the following relationship is
discovered:

M=0.486*Y -144.67
Hence, Marginal Propensity to Import, MPI is 0.486

When regression of Export data and real GDP is done, the following relationship is
discovered:

X = 0.4723 * Y -147.965

The general trend over the years is:

X,M Trend
600
500
400
300
200
100
0
-100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Exports of goods and services billion USD Imports of goods and services billion USD
Net Exports

INFLATION

Inflation is a numerical measure of the rate at which the average price level of a basket of
selected goods and services in an economy rises over a period of time.

There are two popular ways to measure Inflation, Via: Consumer Price Index (CPI) and GDP
Deflator.

CPI:

The CPI is a measure that examines the weighted average of prices of a basket of goods and
services which are of primary consumer needs. They include transportation, food and
medical care. CPI is calculated by taking price changes for each item in the predetermined
basket of goods and averaging them based on their relative weight in the whole basket.

CPI for a year = (Cost of market basket of that year) / (Cost of market basket for base year)
*100

Inflation rate over a year = ((CPI for the Year) – (CPI for previous Year)) / (CPI for previous
Year) *100
GDP Deflator:

The GDP deflator equation is the following:

GDP delfator = Nominal GDP / Real GDP * 100

Then, Inflation is :

Inflation rate in year 2 = (GDP deflator in year 2 – GDP deflator in year 1) / GDP deflator in
year 1 * 100

The inflation when calculated from both shows variation, it can be plotted as:

Inflation : CPI & Deflator

25

20

15

10

Inflation: Consumer Price Index Inflation : Deflator

SECTORIAL DISTRIBUTION OF GDP

Mexico’s GDP predominantly consists of the following sectors:

 Agriculture

Agriculture as a percentage of total GDP has been steadily declining, and now resembles
that of developed nations in that it plays a smaller role in the economy.

 Financial and banking sector

The financial and banking sector is increasingly dominated by foreign companies or

mergers of foreign and Mexican companies with the notable exception of Banorte.

 Education

Government expenditure on education, total (% of GDP) in Mexico was 5.31 as of 2014.

Its highest value over the past 25 years was 5.31 in 2014.
  Public care

Public care is fully or partially subsidized by the federal government, depending upon
the person's employment status.

The distribution is as follows:

Distribution of GDP viz. Sectors

5% 4%
6%

14%
35%

36%

Agriculture value added billion USD Bank assets

Stock market capitalization billion USD Nonbank financial institutions
Health spending Public spending on education

OKUN’S LAW:

Okun’s law is a rule of thumb which states that 2% increase in GDP corresponds to a 1%
decline in the rate of cyclical unemployment.

After doing regression for the Unemployment rate and Economic growth rate for Mexico it
iis found that:

ΔY = -0.125275393* ΔU +2.690238628

Where,

Y is the GDP and U is the unemployment rate.

This states that for every 1% decrease in unemployment there is 12.58% rise in GDP.
Okun’s law has failed as the Okun’s coefficient is negative and the contention is proved
wrong.

Okun's Law
6

4
Economic Growth Rate

0
0 1 2 3 4 5 6
-2

-4

-6
Unemployment rate

MULTIPLIERS

From the regression analysis of Consumption and Import data, it is found that MPI = 0.486 =
m and MPC = 0.606 = m. These values can be used to find other multipliers from the derived
relationships between change in real Income and the respective change in the components.

Calculations of the multipliers:

 Investment Multiplier

As,

∆Y/∆I = 1/(1-b)

Therefore, Multiplier = 2.540726

i.e. with the increase in Investment by 1 unit the national output will increase by
2.540726 units

 Tax Multiplier

As,

∆Y/∆T = -b/(1-b)
Therefore, Multiplier =

i.e. with the increase in Tax by 1 unit the national output will decrease by units

 Government Expenditure Multiplier

As,

∆Y/∆G = 1/(1-b)

Therefore, Multiplier = = 2.540726

i.e. with the increase in Government expenditure by 1 unit the national output will increase
by = 2.540726 units

 Export Multiplier

As,

∆Y/∆X = 1/(1-b)

Therefore, Multiplier = 2.540726

i.e. with the increase in Export by 1 unit the national output will increase by 2.540726 units

 Import Multiplier

As,

∆Y/∆M = -1/(1-b+m)

Therefore, Multiplier = -1.13693

i.e. with the increase in Import by 1 unit the national output will decrease by -
1.13693 units

UNEMPLOYMENT

Unemployment occurs when a person who actively seeks a job cannot find a job. Often,
unemployment is used as a measure of the economy's health. The most common measure
of unemployment is the rate of unemployment, which is the number of unemployed people
divided by the number of workers.
A few key takeaways -

1. Unemployment happens when people who want to work cannot find jobs, which
means lower economic output while still providing livelihood.
2. High unemployment rates are a sign of economic distress, but extremely low
unemployment rates can indicate an overheated economy.
3. It is possible to classify unemployment as frictional, cyclical, structural, or
institutional.
4. Unemployment data is collected and distributed in a variety of ways by government
agencies.

Unemployment is a key economic indicator because it demonstrates the (in) ability of

employees to obtain earned jobs readily in order to contribute to the economy's productive
output. Further unemployed workers mean that there will be less total economic
production than otherwise might have been. And unlike idle capital, unemployed workers
during their period of unemployment will still need to maintain at least subsistence
consumption. This means that the economy with high unemployment has lower output
without the need for basic consumption decreasing proportionally. High, persistent
unemployment can be a sign of serious economic distress and even lead to social and
political upheaval.
Unemployment is not distributed fairly; for young people, it is usually higher. In June 2015,
the national unemployment rate was 4.4% of the Economically Active Population (EAP), 2.2
million people in absolute terms, down 0.4% from the same month in 2014. On the other
hand, the EAP employed 95.6 percent of 52 million Mexicans. Six out of ten people, aged 15
and over, are employed or seeking employment, while four out of ten are dedicated to
home, study, retire, or retire.
Services accounted for 42.7 percent, trade for 19.4 percent, manufacturing for 15.3 percent,
agricultural activities for 13.6 percent, construction for 7.6 percent, other economic
activities including mining, electricity, water and gas supply for 0.9 percent and the
remaining 0.5 percent did not specify their activity.

Globalization and technological change have created confusion and instability for millions of
people; these developments have widened the gap in the labor market between young
people and experienced workers.
Young people do not achieve a secure market placement, resulting in unemployment or
low-paid jobs with little future, little protection and security and no real future prospects.
Hundreds of millions of young people also work long hours for low wages and in the
informal economy without social protection.

IS MODEL

SAVINGS
Savings are the difference between the income and expenditure of a person. Gross national
savings not only include the household savings of people, but also those of the businesses
and government of a state. The national savings rate of a country is represented as a
percentage of GDP. Countries with the highest savings rates fit into four levels of income,
including high income, high middle income, low middle income, and low income. The factors
driving the economy of each country are as diverse as the countries themselves.
INVESTMENTS
Investing is putting money to work in order to start or expand a project-or to buy an asset or
interest-where those funds are then put to work, with an income goal and increased value
over time. Any mechanism used to generate future income can be referred to as
"investment." This includes, among other things, the purchase of bonds, stocks or real
estate in the financial sense. In addition, an investment can be seen as an investment in a
constructed building or other facility used to produce goods. Development of products
needed for the development of other goods can also be regarded as investment.
IS CURVE
For the IS curve, the autonomous variable is the loan cost and the dependent variable is the
degree of pay. The IS bend is drawn as descending inclining with the interest rate r on the
vertical side and GDP (total national output: Y) on the horizontal side. The IS curve can be
said to speak about the equilibria where absolute private investment equals all savings,
where the last equivalents consumer saving in addition to government saving in addition to
outside saving.
One speculation is that a government's deficit spending ("monetary strategy") has an impact
like that of a lower saving rate or expanded private fixed venture, expanding the measure of
demand at interest rate. An expanded deficiency in spending by the national government
moves the IS curve to the right side.
In Mexico there has been a decrease in government spending and an increase in taxes. This
will have a negative effect on demand of the country for goods and services. Hence, the IS
curve will experience a leftward shift.

FISCAL POLICY
The Federal Government, through the Ministry of Finance (SHCP), effectively deals with
characterizing and actualizing fiscal policies to arrive at an equilibrium between
government's income and consumption.
Given the above, it meant to increase the taxpayers base and to make tax collecting
increasingly effective, Mexico has reliably expanded its tax income, while diminishing its
reliance on oil incomes during the most recent years. For 2019, it is proposed to have an
primary surplus of 1% of the GDP
Concerning consumption, it had been attempting to channel public resources towards
exercises that guarantee a more prominent effect on individuals' prosperity and an effective
public expenditure capable and judicious administration of public finances.
Mexico has a strong and reasonable organization of its public obligations dependent on risk
diversification and sustainability. As a percentage of GDP, this debt is lower compared to
nations like Japan, Brazil, Germany and the United States.

LM MODEL

BALANCE OF TRADE

The balance of trade is the value difference between country's imports and exports for a
given period. The balance of trade is the component contributing most to the country's
balance of payments. It is used to measure the relative strength of a country's economy. It is
also referred to as the trade balance or the international trade balance.

A country that imports more goods and services than it exports in terms of value is said to
have trade deficit. In contrast, a country that exports more goods and services than it
imports has a trade surplus. The total value of imports minus the total value of exports can
be described as the formula to calculate BOT

MEXICO

U.S. products and enterprises exchange with Mexico totaled to an expected of $671.0 billion
as of year 2018. Fares were $299.1 billion and imports were $371.9 billion. The U.S.
products and enterprises exchange deficiency with Mexico was $72.7 billion for the year
2018. The U.S. information report a shortage of $19.8 billion with Canada in 2018, and a
$81.5 billion merchandise deficiency with Mexico. The two nations, notwithstanding,
revealed considerably Higher U.S. merchandise surpluses in a similar relationship. In 2018,
Canada reported an expected $103.2 billion overflow, and Mexico an expected $128.5
billion excess. This mirrors a huge job of re-sending the merchandise in different nations.
U.S. measurements tally of merchandise coming into the U.S. traditions dominantly from
third world nations and being sent out to the exchanging accomplices, without generous
change. Similarly, Canadian and Mexican fare information may incorporate re-sending out
items originating in different nations as a feature of their fares to the United States. As per
the information, these items imports from the nation of their roots. These reports strategies
make every nation's reciprocal offset information reliable with its general parity, yet yield
enormous disparities in national proportions of two-sided balance. All things considered, a
proportion of the U.S. exchange shortage with Canada and Mexico barring re-sends out in
all records would be some place in the middle of the qualities determined by the United
States and by the nation exchanging accomplices.

According to the Department of Commerce, U.S. exports of Goods and Services to Mexico
supported an estimated 1.2 million jobs in 2015 (latest data available) (968 thousand
supported by goods exports and 201 thousand supported by services exports).

Mexico's Exports

• Mexico was the United States' 2nd largest goods export market in 2018.

• U.S. goods exports to Mexico in 2018 were $265.0 billion, up 8.9% ($21.7 billion)
from 2017 and up 75.2% from 2008. U.S. exports to Mexico are up 537% from 1993 (pre-
NAFTA). U.S. exports to Mexico account for 15.9% of overall U.S. exports in 2018.

• The top export categories (2-digit HS) in 2018 were: machinery ($46 billion),
electrical machinery ($43 billion), mineral fuels ($34 billion), vehicles ($22 billion), and
plastics ($18 billion).

• U.S. total exports of agricultural products to Mexico totaled $20 billion in 2018, our
2nd largest agricultural export market. Leading domestic export categories include: corn
($3.1 billion), soybeans ($1.7 billion), dairy products ($1.4 billion), pork & pork products
($1.3 billion), and beef & beef products ($1.1 billion).

• U.S. exports of services to Mexico were an estimated $34.1 billion in 2018, 3.8%
($1.2 billion) more than 2017, and 30.1% greater than 2008 levels. It was up roughly 228%
from 1993 (pre-NAFTA). Leading services exports from the U.S. to Mexico were in the travel,
transport, and intellectual property (computer software, industrial processes) sectors.

Mexico's Imports

• Mexico was the United States' 2nd largest supplier of goods imports in 2018.

• U.S. goods imports from Mexico totaled $346.5 billion in 2018, up 10.3% ($32.3
billion) from 2017, and up 60.5% from 2008. U.S. imports from Mexico are up 768% from
1993 (pre-NAFTA). U.S. imports from Mexico account for 13.6% of overall U.S. imports in
2018.

• The top import categories (2-digit HS) in 2018 were: vehicles ($93 billion), electrical
machinery ($64 billion), machinery ($63 billion), mineral fuels ($16 billion), and optical and
medical instruments ($15 billion).

• U.S. total imports of agricultural products from Mexico totaled $26 billion in 2018,
our largest supplier of agricultural imports. Leading categories include: fresh vegetables
($5.9 billion), other fresh fruit ($5.8 billion), wine and beer ($3.6 billion), snack foods ($2.2
billion), and processed fruit & vegetables ($1.7 billion).

• U.S. imports of services from Mexico were an estimated $25.3 billion in 2018, 0.6%
($164 million) less than 2017, but 59.3% greater than 2008 levels. It was up roughly 241%
from 1993 (pre-NAFTA). Leading services imports from Mexico to the U.S. were in the travel,
transport, and technical and other services sectors.

Trade Balance

• The U.S. goods trade deficit with Mexico was $81.5 billion in 2018, a 14.9% increase
($10.6 billion) over 2017.

• The United States has a services trade surplus of an estimated $8.8 billion with
Mexico in 2018, up 19.1% from 2017.