Macroeconomics: Free-Trade Agreements - Paper Example

Published: 2021-08-15
668 words
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University of Richmond
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In 1994, North American Free-Trade Agreement (NAFTA) was implemented, laying the basis for strong economic growth and rising success for US and Mexico. Since NAFTA came into effect, it has shown how free trade increases wealth and affordability, delivery of real benefits to companies, consumers workers and families (Luckstead, Devadoss & Rodriguez, 2012). However, the signing of the deal was not welcomed by the Americans who said that it benefited the Mexico as compared to the United States.

This criticism is not real, looking at NAFTA, both America and Mexico benefitted from the deal, at the same time, there are instances where the trade deal is disadvantageous to both nations. For example, most of the United States companies moved to Mexico due to cheaper labor, and hence the American lost their jobs while more job opportunities were created to Mexicans (Zahniser & Link, 2002). On the other hand, a lot of Mexican farmers were put out of business leading to loss of 1.3 million jobs. It all happened when NAFTA removed trade tariffs and thus allowing corns and other grains to be exported to Mexico, and rural Mexican farmers could not compete (Villarreal & Cid, 2008). In 2015, the US- Mexico trade totaled $481.7 billion, and this shows how successful NAFTA continues to be (Villarreal, 2017). Currently, the two countries should focus on improving NAFTA especially the united states. The United States can liberalize trade and investment in the energy industry as vital to North America manufacturing; address opportunistic exports of subsidized commodities, and implement targeted upgrades to border procedures to accommodate increasing volume while managing risks efficiently.

Macroeconomics: Currency Exchange Rates

The exchange rate is the at which one currency will be exchanged for another. However, the exchange rate of any given country is not constant; it frequently fluctuates due to various microeconomic factors. The essay will focus on two factors which can impact the exchange rates, and they include the rate of inflation falling well below that of its trading partner and central bank raising interest rates sharply.

First, the inflation rate is closely linked to interest rates, which can impact exchange rates. When the inflation rate is low, the interest rates are always low, and during this particular period, there are a lot of transactions within the economy and the central bank tend to encourage borrowing to increase the quantity of money circulating in an economy to spur growth (Edwards,2006). Low-interest economic growth as a result of increased consumer spending and this directly impact the value of the currency. Also, the exports tend to be cheap to foreign consumers when inflation rate falls, and the imports become expensive to domestic consumers, and hence the currency will appreciate (Achsani, Fauzi & Abdullah, 2010).

Second, when the central bank raises its interest rates sharply, the countrys currency appreciates. Individuals with liquid capital abroad will decide to lend it out for short-term purposes in the country that has high-interest rates. If a nation through its central bank raises the rates sharply, the resulting flood of short-term capital into that economy tends to appreciate its currency in the foreign exchange market (Eggertsson, 2011).


Achsani, N. A., Fauzi, A. J. F. A., & Abdullah, P. (2010). The relationship between inflation and real exchange rate: comparative study between Asean+ 3, the EU and North America. European Journal of Economics, Finance and Administrative Sciences, 18, 1450-2275.

Edwards, S. (2006). The relationship between exchange rates and inflation targeting revisited (No. w12163). National Bureau of Economic Research.

Eggertsson, G. B. (2011). What fiscal policy is effective at zero interest rates? NBER Macroeconomics Annual, 25(1), 59-112.

Luckstead, J., Devadoss, S., & Rodriguez, A. (2012). The Effects of North American Free Trade Agreement and United States Farm Policies on Illegal Immigration and Agricultural Trade. Journal of Agricultural and Applied Economics, 44(1), 1-19.

Villarreal, M. A. (2017). US-Mexico economic relations: trends, issues, and implications. library of congress Washington D.C congressional research service.

Villarreal, M., & Cid, M. (2008). NAFTA and the Mexican economy. Federal Publications, 565.

Zahniser, S., & Link, J. (2002). Effects of North American Free Trade Agreement on agriculture and the rural economy. Economic Research Service, USDA.

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