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Chapter 22: Problem 1

Explain the link between the Mexican demand for U.S. goods and the supply of pesos. Next, explain the link between the U.S. demand for Mexican goods and the supply of dollars.

Short Answer

Expert verified
The Mexican demand for U.S. goods increases the supply of pesos in the currency exchange market as they convert pesos to dollars to make payments. Conversely, the U.S. demand for Mexican goods increases the supply of dollars in the currency exchange market as U.S. residents convert dollars into pesos for payments.

Step by step solution

01

Analyze the linkage between the Mexican demand for U.S. goods and the supply of pesos

To buy U.S. goods, Mexicans must exchange their pesos for dollars, as U.S. sellers accept payment in dollars. As a result, when Mexicans demand more U.S. goods, they also demand more dollars to carry out these transactions. This increases the supply of pesos on the international currency market as they are selling pesos to buy dollars. So, an increase in Mexican demand for U.S goods leads to a greater supply of pesos in the currency exchange market.
02

Explaining the connection between the U.S. demand for Mexican goods and the supply of dollars

For U.S. consumers to buy Mexican goods, they must convert their dollars into pesos, since Mexican sellers accept payment in pesos. Therefore, when U.S. demand for Mexican goods increases, more dollars are supplied to the currency exchange market as they exchange their dollars for pesos. Thus, a rise in U.S. demand for Mexican goods results in an increased supply of dollars on the currency exchange market.
03

Understand the implications

Understanding these concepts is key to understanding international trade. The exchange rate between two countries can be affected by the supply and demand for their goods and thus their currencies in the global market. Changes in exchange rates can have profound implications on the competitiveness of a country's products and its economic performance.

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Most popular questions from this chapter

Under a fixed exchange rate system, setting the official price of a peso in terms of dollars automatically sets the official price of a dollar in terms of pesos. Do you agree or disagree? Explain.

Country \(X\) wants to lower the value of its currency on the foreign exchange market. Under a flexible exchange rate system, how can it do that?

What does it mean to say that the U.S. dollar has depreciated in value in relation to the Mexican peso? What does it mean to say that the Mexican peso has appreciated in value relative to the U.S. dollar?

Country 1 produces good \(X,\) and country 2 produces good Y. People in both countries begin to demand more of good \(\mathrm{X}\) and less of good \(\mathrm{Y}\). Assume that there is no labor mobility between the two countries and that a flexible exchange rate system exists. What will happen to the unemployment rate in country \(2 ?\) Explain.

Under a flexible exchange rate system, if the equilibrium exchange rate is \(0.10 \mathrm{USD}=1 \mathrm{MXN}\) and the current exchange rate is \(0.12=1 \mathrm{MXN},\) will the U.S. dollar appreciate or depreciate? Explain.
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