Assignment 2: Executive Brief
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From: [Name]
Date:
RE: Managerial Economics 515 – Assignment 2 – Executive Brief
Introduction
TireHub is a tire retailer and distributor in the United States of America. The company started in July 2018 with a solid dedication to meet, and even exceed their dealers and customers’ expectations through nationwide networks in its parent country—the U.S. Thus, Tirehub operates in the tire industry, which was worth about $112.16 billion as of 2019. The firm is one of this industry’s new entrants to experience massive growth in the recent past expanding to new markets rampantly. Tirehub’s current target market for expansion is Mexico.
Mexico’s Economic Status
The U.S. has stuck in the business cycle’s expansion phase for decades now. Mexico, on the other hand, is also in the expansion business phase. However, Mexico’s economic cycle depends on political patterns. Six months before any general election, the country’s fiscal expenditure often stimulates government infrastructural development, influencing employment, sales, and industrial productivity. However, these patterns decline due to delayed public spending, environmental uncertainties, new directives, and private sector economic decisions (Cooke et al., 2015). Five years into the election, the country’s economic stimulants emerging from government correction of the accumulated macroeconomic irregularities orchestrate rapid economic growth once again.
Three indicators that facilitated Mexico’s economic health assessment are unemployment rates, inflation rates, and government debts. The rationale behind the factors is that they give better and more accurate insights into economies’ health. Low unemployment rates decrease gross domestic product (GDP) because the economy is operating below its full potential; hence, leading to lower output and revenues. Okun’s law backs up this reasoning, illustrating that a 1% increase in unemployment occasions a 2% fall in GDP (Tenzin, 2019). Generally, Mexico (3.65%) has a lower unemployment rate than the U.S. (6.3%) according to Pletcher (2020), despite America experiencing a 0.4% decline in unemployment as reports BLS (2021). The unemployment rate is inversely proportional to GPD; hence, the higher the rate, the lower the GPD and vice versa. Judging by this data, Mexico has most of its citizens in income-generating positions that the U.S.
The high inflation rate, on the other hand, denotes to a poor economy. The phenomenon usually raises the cost of living because, doing business, borrowing loans, and government bond yields because of high prices. Tenzin (2019) argues that inflation lowers the bottom quintile share and the real minimum wage; hence, increasing poverty. Inflation also tends to increase unemployment rates, which also affect the economy negatively. Mexico has a better inflation rate today (3.26%) than in 2019, (3.4%) and 2018 (3.64%). However, America enjoys a better rate of 1.81% (Pletcher, 2020). Given this data, America’s economy seems more stable than Mexico’s.
Lastly, huge government debts are also unhealthy for any economy. When these debts are high, governments spent more on their budgets on interest costs. The trend results in poor economies because it means little money goes for investment in areas crucial for economic growth. According to the IMF, the U.S. had the highest government debt in the world ($21,465) as of 2019. On the other hand, Mexico’s debt was $655 and was the world’s 12th most indebted nation (Desjaridins, 2019). With a lower government debt than the U.S., Mexico presents a conducive environment for investment; hence, growth.
A combined holistic assessment of these data implies that Mexico is a potential market for exploitation by Tirehub. A low unemployment rate means that people have income, which they can spend on goods and services. Thus, most Mexican’s have purchasing power. Although its inflation rate is higher than that of the U.S., its trend points to a downward curve. The rate has been reducing significantly in the past two years: today, the rate is 3.26%, in 2019, it was 3.4%, and in 2018, it was 3.6%. Reducing inflation rates hints at a stabilizing economy, which lays down a proper framework and atmosphere for business success. The same applies to government debt. With a relatively smaller debt than the U.S., Mexico presents favourable investment opportunities including to foreign ventures.
Recommendation
Following this analysis, the recommendation is that Tirehub should enter the new market in Mexico. The rationale is that Mexico’s current economic situation supports investments; hence, it is conducive for commerce. Tirehub’s business outlook will also fit in Mexico. Among the key indicators that influenced Tirhub’s business outlook and its industry’s assessment include competition and labour. The tire business is less competitive in Mexico than in the U.S.; hence, Tirehub, would be able to compete effectively. Labour is also cheaper in Mexico than in the U.S. As such, the production costs in Mexico are lower than in the U.S.; hence, Tirehub would have a competitive advantage over its rivals especially over price on the international podium. Accordingly, Mexico is a market that Tirehub should consider exploiting.
References
BLS, (January 2021). The employment situation. Retrieved on 7/2/2020 from https://www.bls.gov/news.release/pdf/empsit.pdf
Desjaridins, J., (November 14, 2019). $69 trillion of world debt in one info-graphic. Retrieved on 7/2/2021 from https://www.visualcapitalist.com/69-trillion-of-world-debt-in-one-infographic/
Pletcher, H., (2020). Mexico: Inflation rate from 1985 to 2025. Statista. Retrieved on 7/2/2020 from https://www.statista.com/statistics/275414/inflation-rate-in-mexico/
Pletcher, H., (2020). Mexico: Unemployment rate from 1999 to 2020. Statista. Retrieved on 7/2/2020 from https://www.statista.com/statistics/263702/unemployment-rate-in-mexico/
Tenzin, U. (March 01, 2019). The Nexus Among Economic Growth, Inflation and Unemployment in Bhutan. South Asia Economic Journal, 20,(1), 94-105. https://doi.org/10.1177/1391561418822204