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CURRENCY MOVEMENTS & INTERNATIONAL TRADE.
Term Paper ID:23565
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Essay Subject:
Examines relationships among trade, balance of payments, pricing, interest rates in U.S., Japan, Mexico & Canada. Charts.... More...
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8 Pages / 1800 Words
3 sources, 19 Citations,
APA Format
$32.00
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Paper Abstract:
Examines relationships among trade, balance of payments, pricing, interest rates in U.S., Japan, Mexico & Canada. Charts.
Paper Introduction:
CURRENCY MOVEMENTS AND INTERNATIONAL TRADE
This research examines currency movements and international trade. The examination focuses on Japan, the United States, Canada, and Mexico.
In Japan, the economic slowdown has been the most protracted in the post-war period, with last year being the fourth successive year with negligible economic growth (Morgan & Pain, 1996, pp. 26-55). The continued weakness of the Japanese economy reflects adverse developments within the Japanese financial system as well as the prolonged real appreciation of the yen since 1990. There are some signs that the economy may be about to gain momentum, with an improvement in business sentiment and a significant relaxation in the stance of both monetary and fiscal policy.
Finan
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Inthe absence of that rescue package, it is difficult to imagine what theeffects on the Mexican economy and Mexican society might have been. 126). The Japanese trade surplus declined sharply in 1995, the first suchdrop for five years (Morgan & Pain, 1995, pp. The Mexican financial crash exposed the motivations underlying theinternationalization of investment portfolios (Naim, 1995, p. Imports rose rapidlyin this period, helped by the improved market access brought about by theNorth American Free Trade Agreement (NAFTA). (3 September 1995). The current accountbalance for the United States stabilized over the last year, with anestimated calendar year deficit of 2.25 percent of GDP. Economist,336, 124. While Mexico's trade deficits overthe period were somewhat less than the country's current account deficit,the pattern was nearly identical to that for the current account deficitillustrated in chart 4.Chart 4Change in Mexican Balance of Payments: 199 -1996________________________________________________________________US$ (billions) + 1 - 1 - 2 - 3 - 4 - 5 199 1991 1992 1993 1994 1995 1996 [Source: Emerging, 1995, p. The trade surplusfell by 11 percent to $1 7 billion, with import volumes rising by anestimated 11.75 per cent. The peso appears to bestabilizing, but at a level far higher than the trading level thatprevailed prior to the late-1994 financial crash. The Canadian current account has improved over the past 18 months,helped by the impact of the sustained decline of over 2 percent in thereal effective exchange rate over the last five years, the recent strengthof commodity prices and the stimulus provided by the NAFTA (Morgan & Pain,1996, pp. 112). The effects of the crashon these four variables are illustrated in Charts 1 through 4, which may onthe next several pages. 112). But Mexico's new economic systemshowed itself to be powerless in the face of external factors beyond itscontrol" (Naim, 1995, p. The Bank ofJapan reduced the discount rate to .5 per cent in the summer of 1995, andindicated that monetary conditions will not be tightened until there isclearer evidence of a sustained recovery in private sector activity. Mexico had attracted a "lot of acclaim forits economic reforms of the proceeding years, largely following the US-backed model for economic development. CURRENCY MOVEMENTS AND INTERNATIONAL TRADE This research examines currency movements and international trade.The examination focuses on Japan, the United States, Canada, and Mexico. Mexico's trade balance-net exports (exports minus imports) followed apattern for the 199 -1996 period similar to that of the country's balanceof payments (Emerging, 1995, p. There are some signs that the economy may be about to gainmomentum, with an improvement in business sentiment and a significantrelaxation in the stance of both monetary and fiscal policy. 26-55). 124). In Japan, the economic slowdown has been the most protracted in thepost-war period, with last year being the fourth successive year withnegligible economic growth (Morgan & Pain, 1996, pp. As the data presented in Chart 3 indicate, unemployment in Mexico wasaffected adversely in the year following the financial crash, although theincrease in Mexican unemployment was not as severe as were the effects ofthe crash on Mexican GDP and consumer prices in Mexico.Chart 3Change in Mexican Unemployment: 199 -1996________________________________________________________________% of Labor Force + 1 + 8 + 6 + 4 + 2 - 2 199 1991 1992 1993 1994 1995 1996 [Source: Emerging, 1995, p. 26-55). "Mexico soon became amain beneficiary of the unprecedented surge in private capital flow, afavorite son among the 'emerging markets.' Between 199 and 1994, Mexicobecame the world's second-largest recipient of foreign private investment,after China" (Naim, 1995, p. Early data for 1996, as indicatedin the chart, reflects the beginning of a recovery for Mexican GDP.Chart 1Change in Mexican GDP: 199 -1996________________________________________________________________% Change + 6 + 4 + 2 - 2 - 4 - 6 199 1991 1992 1993 1994 1995 1996 [Source: Emerging, 1995, p. The Mexican financial crash in late-1994 had dramatic effects on fourof the country's macroeconomic measures-GDP, consumer prices, unemployment,and balance of payments (Emerging, 1995, p. 117). Morgan, J., & Pain, N. "Thevoracious appetite in the United States and other industrialized countriesfor investments in emerging markets was initially interpreted as a reactionto opportunities created by economic reforms. The Bank ofCanada has been committed to specific inflation control targets since 1991. FederalReserve Board to raise interest rates or for the Mexicans to devalue theirpeso" (Naim, 1995, p. The explanation was thatinvestors had realized the benefits of diversifying the risk in theirportfolios by spreading them internationally, and emerging markets providedthe opportunity to do so. Foreign Policy, 112-13 . 26-55). 26-55). In the United States, the present economic expansion has been led bythe corporate sector (Morgan & Pain, 1996, pp. 127). Recent developments in Canada continue to reflect those in the UnitedStates, with export growth having slowed and final domestic demand provingunexpectedly weak in the aftermath of the moves to tighten fiscal andmonetary policy in early-1995 (Morgan & Pain, 1996, pp. REFERENCES Emerging market indicators: Mexico. Japanese Exports have been subdued over the present economicrecession, with the relative costs of Japanese firms having risensignificantly between 199 and 1995 (Morgan & Pain, 1996, pp. Mexico's larger story. By January 1995, thetrading level had risen to 5.76 pesos to one United States dollar, and byJanuary 1996, the trading level had risen to 7.54 pesos to the UnitedStates dollar. Early data for 1996reflects a continued increase in Mexican consumer prices, although the rateof increase appears to be moderating to some extent. United States export volumes have continued to rise, reflecting bothrapid market growth in the Pacific-Asia region as well as recentimprovements in the price competitiveness of United States products (Morgan& Pain, 1996, pp. Naim, M. 124]________________________________________________________________ As the data presented in Chart 2 indicate, consumer prices in Mexicoskyrocketed in the year following the financial crash. 124]________________________________________________________________ The Mexican peso has taken a beating in the wake of the late-1994financial crash in the country. The government of Mexican President Salinas renegotiated the country'smassive foreign debt, initiated market reforms that boosted the country'sinternational prestige, and successfully negotiated entry into NAFTA withCanada and the United States (Naim, 1995, p. These improvements reflect theactions taken by Japanese monetary authorities, with the exchange ratehaving been affected by measures to encourage capital outflows into foreigncurrency assets and by the joint intervention of the Bank of Japan andUnited States Federal Reserve in the foreign exchange markets. At presentthere is little sign of any incipient inflationary pressures. (1996, February). 124]________________________________________________________________Chart 2Change in Mexican Consumer Prices: 199 -1996________________________________________________________________% Change + 4 + 3 + 2 + 1 - 1 - 2 199 1991 1992 1993 1994 1995 1996 [Source: Emerging, 1995, p. Export volumes are projected to grow at a rateof eight-percent per annum, helped by faster growth elsewhere in the worldeconomy. 26-55). NationalInstitute Economic Review, (155), 26-55. The Mexican financial collapse of late-1994 took the world bysurprise (Naim, 1995, p. 124). The present objective is to ensure that underlying inflation defined asthe consumer price index excluding food, energy and indirect taxes, is heldwithin a band of one-percent to three-percent until 1998. 26-55). All it took to reduce the interest of investorsin the benefits of international diversification was for the U.S. The reason for this apparent anomaly was the financial rescue package forMexico that was structured by the United States (Naim, 1995, p. The previouswidening of the trade deficit largely reflected the "desynchronisation ofthe business cycles of OECD members, with demand rising more rapidly in theUS than elsewhere" (Morgan & Pain, 1996, pp. Thisdecline has been absorbed partly into exporters' margins, as the relativeprice of exports has risen less rapidly over the same period. (1995, Summer). This outcome reflects both the sustainedappreciation of the real effective exchange rate up until mid-1995, as wellas the measures recently taken to deregulate the Japanese distributionsystem. The declinein price competitiveness has been partially offset by the continued rapidgrowth of export markets. 26-55). 26-55). Imports of goods and services are now equivalent to 11.25 percentof gross domestic product (GDP) compared to 9.25 percent at the start ofthe present economic recession. Interest rates have fallen sharply in Canada over the last threemonths as the pressures placed on the Canadian dollar prior to the Quebecreferendum have dissipated (Morgan & Pain, 1996, pp. As of early-March 1996, the trading level had increasedfurther to 7.6 pesos to one United States dollar. The peso was trading at the level of 3.34pesos to one United States dollar in May 1994. As the data presented in Chart 1 indicate, Mexico's GDP plummeted inthe year following the financial crash. The Mexican crisis showed that the prospect ofhigh yields rather than prudence motivated this internationalization.Investors were looking abroad for the high returns that they were notgetting at home, given the bearishness of financial markets in the UnitedStates, Japan, and Europe. 26-55). Financial conditions have improved, with the real effective exchangerate at the end of December 1995 having depreciated by 18 percent since mid-1995 (Morgan & Pain, 1996, pp. The world economy. 117). The continuedweakness of the Japanese economy reflects adverse developments within theJapanese financial system as well as the prolonged real appreciation of theyen since 199 . 126). 26-55). 124]________________________________________________________________ As the data presented in Chart 4 indicate, Mexico's balance ofpayments was affected positively in the year following the financial crash. The surplus on merchandise trade is projected to havedoubled to US$2 billion in 1995-2.3 per cent of GDP, with the share ofexport volumes in real GDP having risen by eight-percent to 38 percent,over the last five years.
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