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Archives of Business Research – Vol. 9, No.2
Publication Date: February 25, 2021
DOI: 10.14738/abr.92.9733.
Ledesma-Carrión, D. E., Hernández-Hernández, L. & Muciño-Porras, M. T. L. (2021). Optimization of the Consumption Function
Under the North American Free Trade Agreement. Archives of Business Research, 9(2). 87-103.
Optimization of the Consumption Function Under the North
American Free Trade Agreement
Dora Elena Ledesma-Carrión
National Institute of Statistic and Geography, México
PhD in Engineering, Master in Operations Research and
Bachelor in Physics by National Autonomous University of Mexico
Lidia Hernández-Hernández
National Institute of Statistic and Geography, México Master in Operations Research by
National Autonomous University of Mexic and
Bachelor Sc. by National Polytechnic Institute
María Teresa Leonor Muciño-Porras
Bachelor Sc. by National Autonomous University of Mexico.
ABSTRACT
In the last 40 years, the country has turned to developing the primary
and tertiary sectors with a tax policy heavily taxing goods outside the
basic basket and generalizing others. On the other hand, Government
implemented support programs for vulnerable sectors. The imbalance
between what the government receives and grants created greater
poverty, affecting mainly households in the first three income deciles.
This work shows this imbalance in different scenarios using an
optimization model.
Keywords: Consumption functions; social programms; government
incomes.
INTRODUCTION
After NAFTA was signed, Mexico contained inflation, built a solid macroeconomic framework, and
showed a major opening to world markets. Many modern companies employ highly skilled and
well-educated workers, particularly in the aerospace, automotive, food and beverage industries
[1]. However, there are sectors of the economy that continue to be characterized by high levels of
informality, low-skilled work, low productivity, and obsolete technologies. About 54% of workers
have informal jobs, while non-formal businesses employ millions of people who lack access to
stable income, good education, comprehensive health care and affordable financial services,
which impedes formation of human capital [1,2].
Government companies and monopoly firms have been protected against competition for
decades, especially the dominant companies in the energy and telecommunications sectors. For
this reason, these companies have earned large incomes from consumers and have not had
sufficient incentives to invest in or improve productivity. From the 1980s onwards, previous
governments tried to solve these problems by implementing a series of reforms, but many of
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Ledesma-Carrión, D. E. L., Hernández-Hernández, L. H., & Muciño-Porras, M. T. L. (2021). Optimization of the Consumption Function Under the
North American Free Trade Agreement. Archives of Business Research, 9(2). 87-103.
URL: http://dx.doi.org/10.14738/abr.92.9733. 88
them were not completed, or were reversed during their implementation, so they did not produce
expected results [2].
In 1994 Mexico had undertaken a bold package of structural reforms with which it tried to stop
the slow growth, low productivity, generalized informality in the labor market and a high-income
inequality. Mexico was unable to take full advantage of these reforms, as it had to strengthen its
institutional and governance capacity to ensure that they were implemented effectively. Between
the reforms was the opening of its energy industry, key sector [1-5].
This paper measures the shocks of consumption functions of the Mexican economy for the year
2012 from a matrix of social accounting (SAM-MX12) based on the system of national accounts
(SCNM)[3,4,5]. The income distribution was obtained from the National Household Income- Expenditure Survey (ENIGH in spanish) in terms of minimum salaries and deciles of household
income. From the analysis of accounting multipliers[5], the most valued branch of economic
activity is the manufacture of products derived from oil and coal (key activity). The calculations
and results of the direct, crossed and cyclical multipliers and their net impact and production
fuctions can be consulted in Ledesma-Carrión DE & Hernández-Hernández L [5].
Among the Organisation for Economic Co-operation and Development's recommendations for
sharing the fruits of economic growth is "Maximizing the new Prosper (Education, Health and
Food Program) cash transfer program to help its beneficiaries expand their skills, complete their
studies, join the formal sector and get good jobs Paid"[6].
Mexico has undertaken a bold package of structural reforms with which it tries to stop the slow
growth, low productivity, generalized informality in the labor market and a high-income
inequality. Mexico wishes to make the most of these reforms, it must strengthen its institutional
and governance capacity to ensure that it is effectively implemented. And one item was release of
the price of gasolines.
Economic branch of the manufacture of petroleum and coal products is related to the extraction
of crude oil and gas, which occupies place 74 in the list of direct multipliers of the economy. There
is a large difference in the direct multiplier values of 31.3% between the next economic activity
which is again the manufacture of petroleum and coal products. The successive branches already
show greater differences of 89%, for example, the manufacture of basic chemical products
(89.9%), wholesale grocery and food (96.1%), multiple banking (99.4%), among others. With
regard to cross-multipliers, the difference between the tenth and the first decile of income of the
beneficiary households by this economic branch is enormous, at least 1750%. And between the
first two deciles of about 43%. The trajectory closes with the cyclical multipliers, the most
striking economic branch is the wholesale grocery and food trade, where the difference between
income levels of households is minimal ~ 2.4%. It is followed by the rental without real estate
brokerage with a difference in impact of 12.7%, manufacture of petroleum and coal products
(56.7%) and the differences increase rapidly. Therefore, Mexico became a merchant and service
provider and not in a productive country that explored its inputs and optimized its production
processes through technological innovations.
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Archives of Business Research (ABR) Vol 9, Issue 2, February-2021
In the other hand, for optimization model, the factors that are taken into account to establish
prices and taxes on gasoline are as follows:
Gasoline Pemex Magna
Special tax on production and services (IEPS) fee for Federative Entities (FE).
Weighted retail price without IEPS (FE).
Loss of the weighted public Price.
Price to the public without IEPS (FE) and without loss
Value-added tax of the weighted price without IEPS (FE) and without loss.
IEPS Fossil fuel quota.
Freight from Storage and Distribution Terminal (TAR) to service station.
Commercial margin to Pemex clients.
Special tax on production and services (TASA, this is the IEPS amount reported by Pemex- Refining) of the weighted public Price.
Weighted price of admission to Pemex considering national production.
Gasoline Pemex Premium
Special tax on production and services (IEPS) fee for Federative Entities (FE).
Weighted retail price without IEPS (FE).
Loss of the weighted public Price.
Price to the public without IEPS (FE) and without loss
Value-added tax of the weighted price without IEPS (FE) and without loss.
IEPS Fossil fuel quota.
Freight from Storage and Distribution Terminal (TAR) to service station.
Commercial margin to Pemex clients.
Special tax on production and services (TASA, this is the IEPS amount reported by Pemex- Refining) of the weighted public Price.
Weighted price of admission to Pemex considering national production.
Pemex Diesel
Special tax on production and services (IEPS) fee for Federative Entities (FE).
Weighted retail price without IEPS (FE).
Value-added tax of the weighted price without IEPS (FE).
IEPS Fossil fuel quota.
Freight from Storage and Distribution Terminal (TAR) to service station.
Commercial margin to Pemex clients.
Special tax on production and services (TASA, this is the IEPS amount reported by Pemex- Refining) of the weighted public Price.
Weighted price of admission to Pemex considering national production
Turbosine
Value-added tax of the weighted Price
IEPS Fossil fuel quota.
Freight
Weighted price of admission to Pemex