Team D has been tasked with finding the best location outside the US to open a new manufacturing facility. The report analyzes Mexico based on several economic criteria. It finds that Mexico has high productivity growth linked to total factor productivity. Government policies that encourage investment, education, and trade can boost productivity. Mexico's financial system matches savings with investment, fueling capital growth. Relocating risks like operational, financial, and communication issues can be reduced through expert advice and cultural preparation. Mexico has a large labor force and relatively low current unemployment projected to decline further. Overall Mexico presents a favorable environment for the new facility.

1. 1
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The Real Economy in the Long RunECO/372
The Real Economy in the Long Run
Team "D" has been given the task of determining where outside
the United States our company should open a new
manufacturing facility. The organization has developed a
strategic plan for growth over the next five years, which
requires the investment in facilities and equipment as well as
labor. The team has been asked to include certain criteria in our
efforts in finding the right offshore location for the new
facility. The company is concerned with current and projected
unemployment over the next five years. As well as what factors
aid in determining the country's productivity. There is also
concern about how the country's policies influence and regulate
behavior concerning productivity growth. An analysis of how
the country's financial system adheres to key macroeconomic
variables has been asked for. The team was also asked how the
organization can reduce risks that they may face in the
relocation process. All the following concerns have been
researched and explained in the following report.
The factors that determine the productivity for Mexico
Toro Company is known for its strategic plan that calls for an
establishment a growth plan that is very aggressive. The plan
should always be focused on making investments in the
equipment and facilities, labor and rampant growth in the
productivity in a span of five years. The best area for the firm's
expansion is the fast-growing Mexican market. The growth of
economies today depends on how well the inputs are being

2. utilized to the increase recorded in the productivity’s total
factor. This statement can always be summarized in the growth
equation below (from www.banxico.org.mx).
ΔY = w ΔL + ρΔK + R
Where ‘Y’ is the real gross output, ‘K’ is the actual capital
stock, ‘L’ is the labor force that is employed, ‘w’ is the average
of the actual wage and ‘ρ’ is the average of the actual gross
return rate concerning capital. When talking about the Mexican
economy, then one should be aware of the great relationship
that exists between the Total Factor Productivity (TFP) and the
growth of output within the Mexican economy. It should also be
noted that almost half of the cross-country variances in the per
capita income and the subsequent growth are also determined by
the variations found in the Total Factor Productivity. The
following are the sets of KLEMS data provided by the INEGI, a
compilation of the factors influencing growth in Mexico
between 1991 and 2011.
From the Table A, it can be noted that, during the time when
TFP had the highest growth (1.11% between 1996 and 2000),
the average growth output that was recorded was also the
highest (at 7.1%). On the other hand, when the growth of TFP
was at its lowest (-0.93% between 1991 and 2011), the average
increase output was interestingly at its lowest point (at 2.09%).
Clearly, this shows that the Mexican market also tends to have
deep attachment between the output growth and TFP.
How the country's policies influence its productivity growth
Government policies have a direct impact on productivity
growth in a country. Policies which encourage or support the
growth of gross domestic product (GDP) will increase
productivity in that country. There are various policies which
promote the growth of GDP. Policies which encourage the
production of capital goods which can be used for future
production rather than immediate consumption will help to
increase GDP. Another way a country can increase GDP through
increased capital goods is to encourage foreign investors to
either build factories, or invest in companies owned within the

3. country. Although some of the growth will go to gross national
product growth (GNP) it will also increase GDP which is the
goal of such policies which encourage foreign companies to
build manufacturing within the country.
There are other factors which can increase productivity in a
country. Policies which improve education, health, and
nutrition. These policies can have a large impact on what is
termed as human capital. When the population of a company has
a greaterdegree of health and wellness they are more capable of
work and more economically viable for employers. Ultimately
this increases the production capability within a country.
Countries can also improve productivity through policies which
encourage free trade with foreign markets, property rights, and
political stability. Policies which protect the rights of its
citizens and foreign investors are going to have a higher
productivity because people can focus their time on increasing
GDP without worry about whether they can feel secure in their
ability to retain the accumulation of wealth.
How the country's financial system is related to key
macroeconomic variables
When a country like Mexico saves a significant portion of its
income, then more resources become available for investment in
capital. Higher capital means a rise in Mexico's economic
productivity, thus raising the living standards further still.
However, within a country, at any given time, some people will
want to put back and save a portion of their income for their
future. Meanwhile, other people will want to borrow to finance
investments in physical capital. A country’s financial system
consists of such institutions within the economy that helps to
match one person’s investment with another person’s savings.
The GDP can be broken down into four components:
investment, consumption, net exports, and government
purchases (Y = C + I + G + NX). A closed economy is one that
does not trade with the rest of the world, and an open economy
is one that does. When a country’s economy does not have a
balanced budget or has created a deficit, then it takes away from

4. national saving, which shifts supply curves. If the supply curve
shifts too far to the left, then fewer people make big purchases
such as houses, and fewer firms make such big purchases for
things like new capital equipment.
How Toro can reduce the risk, they would face in relocating
Relocating an organization can be quite of a hassle.
Organizations may face many different risks whenever they
decide to relocate to another country. Toro can do many things
to reduce the risks they would face when relocating to Mexico.
The first risk that Toro would face when relocating to Mexico is
operational risks. "Operational risk is the risk of (operational)
losses resulting from the failure of people, processes, systems
and external factors" (Moosa, 2015). Toro can reduce
operational risks by seeking advice from a professional expert
who has knowledge about relocating the organization to
Mexico. Speaking to the professional expert would allow Toro
to be able to know what all to expect and to prepare for the
relocation process.
A second risk that Toro would face when relocating is financial
risks. Relocating could potentially cause Toro to lose money.
Toro can reduce the financial risks by first checking out the
relocation area for competition so that their business will
continue to thrive. The third risk that Toro would face is
miscommunication risks. Since there is a language and cultural
difference in Mexico, Toro may face some miscommunication
risks. Toro can reduce the possibility of miscommunication by
getting all of its workers who are relocating accustomed to
Mexico's language and cultural differences.Current and
Projected Unemployment
Unemployment rates are measured by what percentage of the
labor force that is currently not employed. This does not include
persons that are not in the workforce; children, students, stay at
home parents and retirees (Mankiw, 2015). Mexico has a current
labor force participation rate of 59.7% as compared to the U.S.
rate of 65.3%. This is slightly offset by the annual rate of hours
worked per employee for Mexico at 2,228 hours as compared to

5. the U.S. level of 1,789 hours (Organization for Economic Co-
Operation and Development, 2016).
Unemployment for the last year measured was at 4.25% in 2015
(International Monetary Fund, 2016). Projected levels of
unemployment for the next six years is shown in Figure 1.
Unemployment levels are higher in urban areas where workers
crowd in seeking the few higher paying jobs available. The rural
areas have an extremely low unemployment rate offsetting the
higher unemployment in the urban areas (Ball, De Roux, &
Hofstetter, 2013).
Conclusion
The above report gives in detail the environment that our
organization can expect if the final decision is to move to the
new facility to Mexico. Team "D" laid out all of the requested
Macroeconomic conditions of Mexico regarding growth,
unemployment, and government policies. The team has also
addressed concerns about the risks involved in the move in
regards to the country's financial system and the potential for
the growth of productivity. It is our belief that this report will
serve as a great tool in aiding the planning team in making their
final decision about if the facility should be placed in Mexico.
References
Ball, L., De Roux, N., & Hofstetter, M. (2013, July).
Unemployment in Latin America and the Caribbean. Open
Economies Review, 3(3), 397.
Banco de Mexico Documentos de Investigacion. (2016)
Retrieved from
http://www.banxico.org.mx/publicaciones-y-
discursos/publicaciones/documentos-de-
investigacion/banxico/%7B19ADD808-F06A-9D48-2E78-
9256C7044AEF%7D.pdf
International Monetary Fund. (2016). Retrieved from
http://www.imf.org/external/pubs/ft/weo/2016/01/weodata/weor
ept.aspx?sy=2014&ey=2021&scsm=1&ssd=1&sort=country&ds
=.&br=1&c=273&s=LUR%2CLP&grp=0&a=&pr1.x=41&pr1.y=

6. 4
Mankiw, N. G. (2015). Principles of Macroeconomics (7th ed.).
Stamford, CT: Cengage Learning.
Moosa, I. (2015). Governance indicators as determinants of
operational risk. International Journal of Disclosure and
Governance, 12(2), 132-143.
Organization for Economic Co-Operation and
Development. (2016). Retrieved from
http://stats.oecd.org/Index.aspx?DataSetCode=EO#
Tables and Figures
Shaded cells indicate IMF staff estimates
Country
Subject Descriptor
Units
Scale
Country/Series-specific Notes
2014
2015
2016
2017
2018
2019
2020
2021
Mexico
Unemployment rate
Percent of total labor force
4.750
4.250
4.000
3.875
3.813

7. 3.781
3.766
3.758
Mexico
Population
Persons
Millions
125.386
127.017
128.632
130.223
131.788
133.327
134.837
136.318
Figure 1 – Unemployment Rates, Mexico
(Adapted from International Monetary Fund, 2016. Retrieved
from
http://www.imf.org/external/pubs/ft/weo/2016/01/weodata/weor
ept.aspx?sy=2014&ey=2021&scsm=1&ssd=1&sort=country&ds
=.&br=1&c=273&s=LUR%2CLP&grp=0&a=&pr1.x=41&pr1.y=
4 , Copyright 2016, adapted with permission.)
The Averages for Annual Arithmetic (%)
Period
The Output
Value
The
The Labor Services
The Energy

8. The Materials
The Services
Contributions by the inputs
Total Factor
Productivity
Y
K
L
E
M
S
K+L+E+M+S
TFP
(I)
(II)
(III)
(IV)
(V)
(VI)
(VII)
(VIII)
1991-1995
2.09
1.28
0.47
0.06
0.83
0.38
3.03
-0.93
1996-2000
7.10
1.47
0.72

9. 0.20
2.54
1.05
5.99
1.11
2001-2005
2.39
1.61
0.29
0.08
0.55
0.61
3.15
-0.76
2006-2011
2.88
1.90
0.26
0.04
0.79
0.76
3.76
-0.87
1991-2011
3.58
1.58
0.43

10. 0.09
1.16
0.7
3.97
-0.39
Table A: Growth Accounting for the Mexican Economy 1991-
2011
(Adapted from Banco de México, 2015, Retrieved from
http://www.banxico.org.mx/publicaciones-y-
discursos/publicaciones/documentos-de-
investigacion/banxico/%7B19ADD808-F06A-9D48-2E78-
9256C7044AEF%7D.pdf , Copyright 2015, adapted with
permission.)
Averages of the Annual Arithmetic (%)
Period
The Output
Value
The
The Labor Services
The Energy
The Materials
The Services
Contributions by the inputs
Total Factor
Productivity
Y
K
L
E
M
S
K+L+E+M+S

11. TFP
(I)
(II)
(III)
(IV)
(V)
(VI)
(VII)
(VIII)
1991-1995
100
61.2
0.47
2.9
39.7
18.2
144.5
-44.5
1996-2000
100
20.7
10.122.5
2.8
35.8
14.8
5.99
15.6
2001-2005
100
67.4
12.10.29
3.3
23.0
25.5
3.15

12. -31.8
2006-2011
100
66.0
9.0
1.4
27.4
26.4
3.76
-30.2
1991-2011
100
44.1
12.0
2.5
32.4
19.6
110.6
-10.9
Table B. Relative Contribution of Inputs and TFP to Output
Growth of the Mexican economy
(Adapted from Banco de México, 2015, Retrieved from
http://www.banxico.org.mx/publicaciones-y-
discursos/publicaciones/documentos-de-
investigacion/banxico/%7B19ADD808-F06A-9D48-2E78-
9256C7044AEF%7D.pdf , Copyright 2015, adapted with

13. permission.)