The North American Free Trade Agreement (NAFTA), which took effect on January 1, 1994, called for the phasing out of virtually all restrictions on trade and investment flows among the United States, Canada, and Mexico over a ten year period. The United States and Canada were already well into the elimination of bi-lateral trade barriers in accordance with the Canada-United States Free Trade Agreement, so the new feature of NAFTA involved removal of the barriers between Mexico and the other two nations.
GDP dollar estimates for all three countries as shown above are derived from purchasing power parity (PPP) calculations rather than from conversions at official currency exchange rates. According to Wikipedia (online) the PPP method involves the use of standardized international dollar price weights, which are applied to the quantities of final goods and services produced in a given economy (Purchasing Power Parity, 2005).รก
While it is not possible to say with certainly to what extent NAFTA is responsible for the increases shown in the charts above relating to GDP per capita, the following comments can be made:
All three nations economies have improved
Mexico has benefited more than the other two nations to the extent that GDP per capita essentially doubled during the ten year period reviewed in the first graph.
The economic theory that explains why international trade could benefit all three countries listed above as members of NAFTA is the theory of comparative advantage. According to Wikipedia (online), the economic theory of comparative advantage that if, in bilateral trade, one country specialized in producing one of two goods, and if the other country produced the second product, then total world output of both goods could rise. If an appropriate exchange rate, such as a barter rate were chosen, both countries would benefit by having more of both goods after specialization and free trade then they each had befor...