Mexico experienced large-scale trade decits, depletion of foreign reserve holdings

Mexico experienced large-scale trade decits, depletion of foreign reserve holdings and a major currency devaluation in December 1994, followed by the
decision to freely oat the peso. These events also brought about a severe recession and higher unemployment in Mexico. Since the devaluation, however, the
trade balance has improved.

1. Investigate the Mexican experiences in detail and write an APA style 5 – 8 page report on the subject. In the report, you may:

(a) document the trend in Mexico’s key economic indicators, such as the balance of payments, the exchange rate, and foreign reserve holdings, during the period
1994.1 through 1995.12.;

(b) investigate the causes of Mexico’s balance of payments diculties prior to the peso devaluation;

(c) discuss what policy actions might have prevented or mitigated the balance of payments problem and the subsequent collapse of the peso; and

(d) derive lessons from the Mexican experience that may be useful for other developing countries.

In your report, you may identify and address any other relevant issues concerning Mexico’s balance of payment problem.

2. Dene the balance of payments.

3. Why would it be useful to examine a country’s balance of payments data?

4. The United States has experienced continuous current account decits since the early 1980s. What do you think are the main causes for the decits? What
would be the consequences of continuous U.S. current account decits?

5. In contrast to the U.S., Japan has realized continuous current account surpluses. What could be the main causes for these surpluses? Is it desirable to have
continuous current account surpluses?

6. Comment on the following statement: “Since the U.S. imports more than it exports, it is necessary for the U.S. to import capital from foreign countries to
nance its current account decits.”