Californias Trade with Mexico. Intra-Industry trade is beneficial to US firms such as Mercury, because it allows for specialization. Mexican factories are able to produce computer parts at cheap prices, and we are able to assemble these and provide spe

Californian Exports of electrical equipment and computers to Mexico in the 1990s

Graph of the change of California’s exports of electrical products in the 1990s

As can be seen above, except for the small decrease in growth in 1997-8, this export industry has grown throughout the 1990s.

        In 1999, Mexico became California’s largest export market, and in 2008, California exported US$ 20.5 million to the country. These exports amounted to 14% of California’s total export market. The leading export category for California was computers and electronic products, 29%. The demand for Californian computers has been steady from Mexico.

Cost Analysis

Imports From Mexico

Exports to Mexico

 Terms of Trade Analysis

Balance: 6,200,000 - 3,650,000 = + 2,550,000

The terms of trade is an index that shows the value of a country’s average export prices relative to their average import prices. It is calculated with the following equation:

Terms of Trade (TOT) = (Weighted index of average export prices/Weighted index of average import prices) x 100

Average export prices = (5000 + 1200)/2

                        = 3100

Average Import prices = (650 + 3000) / 2

                        = 1825

TOT= (3100/1825) * 100

TOT= 170

The terms of trade analysis can show us the import prices are greater than export prices or the other way around. Mercury Inc. has a very good terms of trade, because it imports cheap electrical products from Mexico, and is then able to add a lot of value by assembling and designing the PCs. This way, we outsource the work that can be done overseas to lower our costs.

The current exchange rate between Mexican peso and American dollar is:

1 mxn = 0.0759 USD

1 dollar = 13.334 Pesos

This graph shows the comparison between American dollars to Mexican pesos.

This graph shows the comparison between Mexican pesos to 1 USD.

 

Mexico has maintained a fixed peso dollar exchange rate system since 1954. However, there were several distortions which were caused by import substitution policies. The change in Mexico´s exchange policy in 1994 has increased it´s presence not only in the U.S. market but in every other country. In 1994, there was an economic crisis in Mexico which was also known as the Mexican peso crisis, this happened when there was a sudden devaluation of the Mexican peso in December. The country´s risk precipitating the crisis were because Mexico had a fixed exchange rate system which meant that Mexico accepted pesos during the reaction of inceptors to a higher perceived country risk and paid out dollars. Also, Mexico lacked sufficient foreign reserves to maintain the fixed exchange rate and they were running out of dollars by December. The peso was devalued despite several government assurances.

The Mexican economy is the 13th largest in the world and Mexico is the United States third - largest trading partner and second - largest market for US exports. According to NAFTA, the value of Mexican good imports to the US grew from 39.9 billion to 210.8 billion in 2007 which is an increase of 437 percent. Also, the united states is the largest source of FDI in Mexico accounting for over half of the 19 billion. In addition, US companies contribute to around 50 percent of the investment funds in Mexico, this has led to increased efficiency of U.S. domestic production.

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