Question

In August \(2007,\) a sharp downturn in the U.S. housing market reduced the income of many who worked in the home construction industry. A Wall Street Journal news article reported that Walmart's wire-transfer business was likely to suffer because many construction workers are Hispanics who regularly send part of their wages back to relatives in their home countries via Walmart. With this information, use one of the principles of economy-wide interaction to trace a chain of links that explains how reduced spending for U.S. home purchases is likely to affect the performance of the Mexican economy.

Short answer

Answer: The downturn in the U.S. housing market impacts the Mexican economy by reducing the income of construction workers, including Hispanics, which results in less money being sent back to Mexico through remittances. As remittances decrease, the purchasing power of Mexican families reduces, leading to lower consumption levels. This negatively affects businesses in Mexico and their ability to invest, create jobs, and contribute to overall economic growth.

Step-by-step solution

Identify the initial event

The initial event is the sharp downturn in the U.S. housing market in August 2007 which reduces the income of many people working in the home construction industry.

Impact on construction workers' income

Due to the downturn in the housing market, the demand for new homes decreases. This decrease leads to a reduction in the number of homes under construction and a lowering in the income of construction workers, including many Hispanics.

Effect on Walmart's wire-transfer business

As many Hispanic construction workers' incomes decrease, they have less money to send back to their home countries via Walmart's wire-transfer business. Thus, the downturn in the housing market negatively affects Walmart's wire-transfer business since there will be less demand for the service.

Less remittances sent to Mexico

As construction workers send less money through Walmart's wire-transfer service, the amount of remittances going to Mexico decreases. Remittances are an important part of the Mexican economy as they provide a significant source of income for many Mexican families.

Impact on the Mexican economy

With less remittances being sent from the U.S., the Mexican economy suffers. A decrease in remittance inflows affects the purchasing power of many Mexican families, leading to lower consumption levels. Reduced consumption then has a negative impact on businesses, as they experience lower demand for their products and services. This in-turn affects their ability to invest, create jobs, and contribute to overall economic growth. By using the principles of economy-wide interaction, we can trace a chain of links which show that a downturn in the U.S. housing market can have a significant impact on the performance of the Mexican economy through the reduction of income in construction workers and their remittances sent to Mexico.

Key concepts

Remittances

Remittances are funds transferred by migrants working abroad back to their home countries. These funds play a crucial role in supporting families and local economies in the recipient country. In the context of the Mexican economy, remittances are essential, as they help with basic needs such as housing, food, and education.

When U.S. construction workers, many of whom are of Hispanic origin, experience a decrease in income due to a downturn in the housing market, the amount they can regularly send back home drops. This leads to a substantial decrease in the inflow of remittances to families and communities reliant on these funds.

The decline in remittances subsequently puts pressure on household consumption, affecting the overall economic landscape of the recipient nation. This highlights the interconnected nature of global economies.

U.S. Housing Market

The U.S. housing market is a key driver of the American economy. It encompasses the buying, selling, and construction of residential properties. A downturn in this market, such as the one experienced in 2007, can lead to widespread financial instability.

When demand for housing declines, the construction industry feels the impact, as fewer homes are built and construction projects slow down or halt entirely. This not only affects those directly employed in the industry but also related businesses like suppliers and service providers.

The financial health of millions of workers in the sector is at stake, and their decreased purchasing power can lead to a cascade of negative effects throughout the economy, both domestically and internationally.

Mexican Economy

The Mexican economy is significantly influenced by remittances, especially from the United States. These financial transfers contribute to personal household incomes and have a broader economic impact by boosting consumption and supporting local businesses.

When there is a downturn in sectors that employ many remittance-sending workers, such as the U.S. construction industry, the reduction in remittance flows can diminish economic growth in Mexico.

As families receive less financial support from abroad, their purchasing power decreases. This reduction leads to lower consumption levels, negatively impacting businesses and leading to potential decreases in employment and investment, thus affecting the overall economic health of the country.

Construction Industry

The construction industry is a major economic sector that provides numerous jobs and drives related industries. In the context of economic interdependence, this industry is sensitive to wider economic trends and shifts.

In the U.S., the construction sector is heavily linked to the housing market. As the 2007 downturn illustrated, a dip in housing demand can lead to fewer construction projects, affecting income levels for workers. Many of these workers send remittances to their home countries, such as Mexico.

Consequently, fluctuations in the construction industry have ripple effects internationally, highlighting how specific industries are interconnected across borders, influencing economies on a global scale.

Wal-Mart Wire-Transfer Business

Wal-Mart's wire-transfer business provides a crucial financial service for those wanting to send money internationally. It is especially popular among migrant workers, such as those in the U.S. construction industry, who regularly transfer money to their families in other countries, including Mexico.

The chain of economic events begins with changes in income for these workers. When they earn less due to a downturn in their industry, they are less able to send money home. This directly impacts businesses like Wal-Mart, which rely on a steady flow of wire transfers for revenue.

Therefore, reductions in wire-transfer activities reveal the broader economic implications of income changes in key U.S. industries, demonstrating the interconnected nature of employment, consumer services, and international economies.