Open-Economy Macroeconomics FULL CHAPTER | Class 12 Economics Chapter 6 | UPSC Preparation

PW OnlyIAS Prarambh・2 minutes read

The economy involves producers, employers, consumers, and employees, with different countries having their own economic systems. International trade relies on credible currencies like the US Dollar, while the balance of payments records transactions between countries for goods, services, and investments.

Insights

  • The economy consists of producers, employers, consumers, and employees, with open and closed economies existing based on external financial relationships. Cash flow is crucial for growth, and credible currencies like the US Dollar facilitate international transactions, with gold historically used for settling accounts post-World War.
  • The international monetary system revolves around the balance of payments, tracking transactions between countries, including exports, imports, and investments. A surplus or balanced current account is ideal for stability, while deficits are common in developing economies. Exchange rates can be floating or fixed, with depreciation and appreciation affecting currency values, and a dirty floating exchange rate combines elements of both systems for economic stability.

Get key ideas from YouTube videos. It’s free

Recent questions

  • What is an economy?

    An economy is a system involving producers, employers, consumers, and employees, where goods and services are exchanged for payment. It provides livelihood, wages, and necessary products within a country's borders.

  • What is an open economy?

    An open economy involves financial relationships with other economies through trade, investment, and labor movement. It interacts with external economies for growth and development.

  • How do currencies facilitate international transactions?

    Currencies like the US Dollar enable international transactions for goods and services by providing a common medium of exchange. They establish fixed conversion rates between different currencies for transactions.

  • What is the Balance of Payment (BOP)?

    The Balance of Payment (BOP) records a country's transactions of goods, services, and payments with the world over a specific period. It includes the current account for exports, imports, and transfers, as well as the capital account for investments.

  • What is the exchange rate system?

    The exchange rate system determines the price of one currency in terms of another for transactions. It can be floating, based on market forces, or fixed, controlled by the government. Depreciation and appreciation refer to the decrease or increase in a currency's value over time.

Related videos

Summary

00:00

Understanding the Basics of Global Economics

  • Economy is a system with producers, employers, consumers, and employees.
  • Producers sell to consumers, who pay in return, while employers hire employees.
  • Economy provides livelihood, wages for survival, and necessary goods and services.
  • Every country has its own economy within its borders.
  • Open economy involves financial relationships with other economies through trade, investment, and labor movement.
  • Closed economy is self-reliant, with all needs met within its borders.
  • Cash circulation is vital for economic growth, requiring external investment for expansion.
  • Linkages between economies are established through output market, financial market, and labor movement.
  • Consumers and producers choose between domestic and foreign products, creating connections.
  • Credible currencies like the US Dollar facilitate international transactions for goods and services.

16:29

International Monetary System and Balance of Payments

  • Different countries use dollars as a strong currency, leading to fixed conversion rates between currencies for transactions.
  • Gold is also used as a commodity for international exchange, as seen post-World War when countries settled accounts with gold payments.
  • The international monetary system has rules and regulations for stable transactions.
  • Foreign exchange rate determines the price of one currency in terms of another for transactions.
  • Balance of Payment (BOP) records transactions of goods and services between a country and the world for a specific period.
  • BOP's current account includes export, import goods, and transfers for payments.
  • Capital account tracks daily, monthly investments like asset purchases or investments in other countries.
  • Balance of Payment accounts can be surplus, balanced, or deficit based on receipts and payments.
  • A surplus or balanced current account is preferred for a stable economy, while a deficit is common in developing economies.
  • Balance of Trade and Balance of Invisibles are components of BOP, tracking visible and invisible transactions like services, income, and transfers between countries.

31:24

Foreign Exchange and Currency Systems Explained

  • Purchasing goods and services from other countries requires US dollars, as transactions with the US necessitate this currency.
  • Foreign currency flows to a home currency through exports, leading to the purchase of domestic goods and services by foreigners.
  • The exchange rate system can be floating, where the rate is determined by market forces of supply and demand, or fixed, where the government controls the rate.
  • Depreciation in a floating exchange system refers to the fall in the value of a currency over time, while appreciation is the increase in value.
  • A dirty floating exchange rate involves a country's central bank adjusting the currency value to absorb economic shocks, creating a mix of flexible and fixed exchange rate systems.
Channel avatarChannel avatarChannel avatarChannel avatarChannel avatar

Try it yourself — It’s free.