Saturday, February 26, 2011

Is the mexican peso over-valuated?

Out of insomnia, I'm reading about economics: inflation, exchange rates, and some other unlikely topics regarding my usual interest areas, this is derived from some Mexican Economy homework.

  1. Exchange rates are governed as everything else in our society by supply and demand. Some determining factors are :international commerce, foreign investments, attractive interest rates, insolvency risk, economical and political instability, etc. Besides these factors there are some others as important: productivity and inflation rates.

  2. The ideal scenario is where exchange rates reflect an equivalent value of goods and services between countries in function of the productivity (the capacity of producing goods and services efficiently) of each country.

  3. To measure the productivity of a country one important variable is the inflation rate.If the same good cost more to produce today than yesterday we're less efficient and the price to pay is the devaluation of our currency in order to keep the equivalence of value. If this relation is not endorsed, international commerce is affected negatively because exportations become more expensive. On the other hand, having an over-valuated peso increments artificially the buying power of our currency abroad and affects producers as consumers would prefer to consume cheaper foreign goods.

  4. It's said that our currency is over-valuated as our inflation rates are higher than those in the U.S. and that disparity is not reflected in the current exchange rates. But I don't know because I found some article that says that our peso is under-valuated, the effects of under-valuation are...well, this is it on these issues, these things are helping me regain my sleepiness =-D.

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