Exchange Rates, Unit Labor Costs and Free Trade: The Mexican Experience

Abstract

This work is intended to show that the Absolute Advantages trade theory and the Unit Labor Costs approach to exchange rates, between Mexico and the United States, are more meaningful to explain Mexican exports pattern than Comparative Costs theory and the Purchasing Power Parity approach. The analysis employed the use of Input-Output and Econometrics techniques and covered the period of neoliberal policies applied in Mexico by the government. One of our main findings is that the ratio of Unit Labor Costs between Mexico and the US is highly correlated in the long run with the Real Exchange Rate, calculated by Mexican monetary authorities. This result is especially important for policy-making in Mexico.