The economic world

Today's economic environment is very diverse, not just for investors but also for the federal government. The stock markets' uncertainty has exacerbated the situation. Economic agents and multiple buyers are constantly attempting to optimize the gains on their portfolios. However, it should not be ignored that the US dollar is used as a medium of exchange between the different agents in order for trading to take place. This increases the dollar's vulnerability to global shocks. Robert Triffin, a well-known economist, explored this phenomenon. He came up with the Triffin dilemma where he warned that the Federal government would need to run perpetual trade deficits to keep the world financial system from freezing as a result of the US dollar being used as the vehicle currency in the international trade (Rebelo). In this paper therefore, we will delve into the effect of US investors purchasing assets in Mexico. A graphical presentation will also be shown and conclusions will be drawn.

We begin with the effect of the US investors purchasing assets in Mexico. Generally USA investors will be interested in Mexico stocks in order to get returns from their investments. For them to buy the stocks/assets they will need Mexico currency because financial institutions in Mexico will only accept payments in form of Mexican Peso.Investing in Mexico therefore requires that the American investors purchase the Mexican Peso because they are in possession of the US dollars (Rebelo). An increase in the exchange rate of Mexican Peso will mean that the American investors will spend more in order to acquire the peso.Conversely, if the Peso was to depreciate in value, the American investor would spend less in order to acquire the aforementioned. An increase in demand for Mexico stock by American investors will mean that the US investors buy the Mexican Peso.This will lead to an increase in demand of the Mexican Peso.The increase in demand means the price of the Peso will be higher as compared to that one of the dollar. The exchange rate of the Mexican Peso will be higher as compared to that one of the US dollar. This will be as a result of a shortage in supply of the Mexican Pesos as a result of the increased demand.

The depreciation of the USA dollar will have many effects. Firstly, the United States exports will become cheaper as compared to those of world leading economies which are in competition for the same markets. This means the USA exports to be highly competitive in the global markets. This is in congruence to the basic economics theories which suppose that economic agents are rational i.e. they will always prefer to purchase commodities at a cheaper price as compared to higher prices. International customers therefore are no exemption to this basic rule.US exports will therefore increase as a result of them being more affordable. The increase in exports will lead to increase in the Gross Domestic Product and improvement of the Balance of trade. On the other hand, the increase in exchange rate of the Peso will lead to the Mexican exports becoming expensive in the global markets and therefore will be less competitive. This means that the exports from Mexico will decline.

On the other hand, the depreciation of the US dollar will make the imports more expensive for USA traders (Asseery). Thus the traders will buy less and less of Mexico goods in order to avoid the higher costs. This will lead to the Balance of Trade of the USA becoming more and better. Conversely, the Mexico imports will become cheaper as a result of appreciation of the Mexican Peso.This means they can acquire American goods at a lower cost. The imports will therefore increase which will in effect lead to worsening of the Balance of trade.





In the long run, American importers will find it more and more expensive to acquire raw materials as a result of the dollar being depreciated. This will lead to the manufactured products being expensive as a result of transferring the cost to the consumers. This as a result will lead to the exports becoming expensive in the global market which will lead to decline in the exports level and thus the worsening of the balance of payments.

In addition, it is important to note that there will be capital flight when the USA investors decide to purchase assets in Mexico. This will mean there will be fewer funds in the United States that can be used in development activities and other various governments projects (Chambers).

The graphs below fully demonstrate the effects clearly discussed above and sheds more light on the observations made.





































S1S

E

Exchange rate

(Peso per Dollar)D





D



Quantity of U.S Dollars Traded for Pesos







S

Exchange rateES1

D



Quantity of Pesos Traded for U.S Dollars

The demand and supply for the U.S. Dollar and Mexican Peso Exchange Rate are shown in graphs (a) and (b) above. (a) The quantity measured on the horizontal axis is in U.S. dollars, and the exchange rate on the vertical axis is the price of U.S. dollars measured in Mexican pesos. (b) The quantity measured on the horizontal axis is in Mexican pesos, while the price on the vertical axis is the price of pesos measured in U.S. dollars. In both graphs, the equilibrium exchange rate occurs at point E, at the intersection of the demand curve (D) and the supply curve (S).































References

Works Cited

Asseery, A., & Peel, D. A. The effects of exchange rate volatility on exports. New York: Economics letters, 1991.

Chambers, R. G., & Just, R. E. Effects of exchange rate changes on US agriculture: a dynamic analysis. Karnsas: American Journal of Agricultural Economics, 2009.

Rebelo, S., & Vegh, C. A. Real effects of exchange-rate-based stabilization: an analysis of competing theories. Washington: American Press, 2005.