NCERT Books Class 12 Macroeconomics Chapter 6- Open Economy Macroeconomics

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NCERT Books Class 12 Macroeconomics Chapter 6- Open Economy Macroeconomics is available here. You may find links to Class 12 Macroeconomics Notes, NCERT Solutions, Important Questions, Practice Papers, and more after each chapter. Scroll down for crucial study materials on the Open Economy Macroeconomics from the NCERT Book Class 12 Macroeconomics Book.

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Table of Contents

Topics Covered
Starting of the Chapter
Glimpses of the Chapter
PDF Link
 

Chapter Open Economy Macroeconomics Explains the following-

6.1 THE BALANCE OF PAYMENTS

• 6.1.1 Current Account
• 6.1.2 Capital Account
• 6.1.3 Balance of Payments Surplus and Deficit

6.2 THE FOREIGN EXCHANGE MARKET

• 6.2.1 Foreign Exchange Rate
• 6.2.2 Determination of the Exchange Rate
• 6.2.3 Merits and Demerits of Flexible and Fixed Exchange Rate Systems
• 6.2.4 Managed Floating

Open Economy Macroeconomics Starts Like This

An open economy is one which interacts with other countries through various channels. So far we had not considered this aspect and just limited to a closed economy in which there are no linkages with the rest of the world in order to simplify our analysis and explain the basic macroeconomic mechanisms. In reality, most modern economies are open. There are three ways in which these linkages are established.

Output Market: An economy can trade in goods and services with other countries. This widens choice in the sense that consumers and producers can choose between domestic and foreign goods.

Financial Market: Most often an economy can buy financial assets from other countries. This gives investors the opportunity to choose between domestic and foreign assets.

Labour Market: Firms can choose where to locate production and workers to choose where to work. There are various immigration laws which restrict the movement of labour between countries.

Movement of goods has traditionally been seen as a substitute for the movement of labour. We focus on the first two linkages. Thus, an open economy is said to be one that trades with other nations in goods and services and most often, also in financial assets. Indians for instance, can consume products which are produced around the world and some of the products from India are exported to other countries.

Foreign trade, therefore, influences Indian aggregate demand in two ways. First, when Indians buy foreign goods, this spending escapes as a leakage from the circular flow of income decreasing aggregate demand. Second, our exports to foreigners enter as an injection into the circular flow, increasing aggregate demand for goods produced within the domestic economy.

When goods move across national borders, money must be used for the transactions. At the international level there is no single currency that is issued by a single bank. Foreign economic agents will accept a national currency only if they are convinced that the amount of goods they can buy with a certain amount of that currency will not change frequently. In other words, the currency will maintain a stable purchasing power. Without this confidence, a currency will not be used as an international medium of exchange and unit of account since there is no international authority with the power to force the use of a particular currency in international transactions.

In the past, governments have tried to gain confidence of potential users by announcing that the national currency will be freely convertible at a fixed price into another asset. Also, the issuing authority will have no control over the value of that asset into which the currency can be converted. This other asset most often has been gold, or other national currencies. There are two aspects of this commitment that has affected its credibility — the ability to convert freely in unlimited amounts and the price at which this conversion takes place. The international monetary system has been set up to handle these issues and ensure stability in international
transactions.

With the increase in the volume of transactions, gold ceased to be the asset into which national currencies could be converted (See Box 6.2). Although some national currencies have international acceptability, what is important in transactions between two countries is the currency in which the trade occurs. For instance, if an Indian wants to buy a good made in America, she would need dollars to complete the transaction. If the price of the good is ten dollars, she would need to know how much it would cost her in Indian rupees. That is, she will need to know the price of dollar in terms of rupees. The price of one currency in terms of another currency is known as the foreign exchange rate or simply the exchange rate. We will discuss this in detail in section 6.2. 
 

Glimpses of the Chapter Open Economy Macroeconomics are-

 

NCERT Books Class 12 Macroeconomics Chapter 6- Open Economy Macroeconomics - PDF Download

Macroeconomics Chapter 6- Open Economy Macroeconomics

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