This article has originally been written for the purpose of the class ECO 243: MacroEconomics, being taught by Professor Prateek Arora this winter term. As a part of this class, students are required to submit papers summarizing articles from the Financial Times in their own words, hence indulging them to delve deeper into the subject matter and understand its implication in the real world. Students are hence able to deepen their understanding of real-world economics while also enhancing their writing skills.
Remittances, funds sent by individuals working abroad to their home countries, do not directly contribute to the Gross Domestic Product (GDP) but have significant indirect effects. In the case of Mexico, where remittances from the U.S. have reached $63.2 billion, these funds primarily provide financial support to families and communities.
Although not counted as part of GDP, which measures the value of goods and services produced within a country, remittances can boost consumption and investment. When recipients in Mexico spend this money, it stimulates local businesses and can lead to increased production of goods and services, thereby indirectly contributing to Mexico’s GDP.
Remittances, amounting to 20% of the federal government’s budget in Mexico, underscore their economic significance. This inflow of foreign currency strengthens the Mexican peso by increasing its demand relative to other currencies. A stronger currency can make imports cheaper, potentially impacting the trade balance in Mexico.
The growth in remittances, despite a decline in the number of Mexican-born migrants in the U.S., raises questions about their sources. Factors such as improved earnings in sectors where Mexicans are predominantly employed, like hospitality and food services, could explain this increase. However, concerns about a portion of these remittances being sourced from illicit activities like drug trafficking also exist.
The strength of cartels and the illicit economy can inversely affect the country’s overall economic stability and the strength of its currency. The strengthening of the Mexican peso reflects a positive aspect of these remittances, but it also brings forward the complexities of managing foreign currency inflows.
Adapted from The darker side of Mexico’s $63bn remittances boom (Financial Times)
