MACRO ECONOMICS Chapter 6 Open Economy

                                            Chapter 6  Open Economy

1. Open Economy It is one in which trading is done with other nations in goods and service and most often in financial assets.

2. Balance of Payment It is a systematic record of all economic transaction between the residents of a country, and the rest of the world during a year.

3. Current Account Transactions relating to trade in goods and services and transfer payment constitute the current account. Components of Current Account
(i) Visible Trade

(ii) Invisible Trade

(iii) Transfer Payment

4. Capital Account It represents international capital transactions which include sale and purchase of assets such as bonds equities, lands, loans, bank account etc. Components of capital account
(i) Foreign Investment

(ii) Loans

(iii) Banking Capital Transaction.

5. Balance of trade It means the systematic records of visible imports and exports in a given year. BOP = Visible Exports – Visible Imports

6. Autonomous Transaction It refers to those international economic transaction which are taken with the motive of profit.

7. Accommodating Items All the items related to the monetary transfers correcting balance of payments dis equilibrium are accommodating items.

8. Foreign Exchange Market The market in which foreign currencies are bought and sold is called the foreign exchange market,

9. Foreign Exchange Rate The rate at which one currency is exchanged for other is known as the rate of exchanges or foreign exchange rate.

10. Fixed Exchanges Rate System It refers to the rate of exchange fixed by the government . It has two important variants

(i) Gold standard system of exchanges rate.

(ii) Bretton woods system of exchanges rate.

11. Determination of Foreign Exchange Rate It is determined by the forces of supply and demand in the foreign exchanges market.

12. Devaluation It is the fall in the value of domestic currency  in relation to foreign currency as planned by the government. In a situation exchanges rate is fixed by government,

13. Depreciation It is the fall in the value of domestic currency in relation to foreign currency in a situation when exchange rate is determined by the forces of demand and supply in the international money market.

14.  Managed Floating It is a system that allows adjustments in exchanges rate according to set of rules and regulation which are officially declared in the foreign exchanges market