CBSE Class 12 Macro Economics Revision Notes Chapter 6 - Open Economy Macroeconomics

Revision Notes for CBSE Class 12 Macro Economics Chapter 6 - Free PDF Download

While studying for class 12, students need to juggle between many subjects, and it can get hectic to solve all the assignments and carry other extracurricular activities. The subject matter experts at Vedantu make these notes for Chapter 6 Macroeconomics Class 12 to enable students to manage their time better by giving them accurate solutions. By availing of these Open Economy Macroeconomics Class 12, students can be sure of getting good grades as these are based on the updated CBSE curriculum. 

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CBSE Class 12 Macro Economics Revision Notes Chapter 6 Open Economy Macroeconomics part-1

MacroEconomics Class 12 Chapter 6 PDF Download

If you can get your hands on Chapter 6 Macroeconomics Class 12 notes in a downloadable format, it makes revision very easy. You can now download the MacroEconomics Class 12 Chapter 6 notes from the official website of Vedantu and print them out to study at your own pace, even without any internet connection.


Chapter 6 Macroeconomics  Class 12 Notes 

Balance of Payment - The balance of payment in an accounting year is a systematic and comprehensive record of every economic transaction between the resident of a particular country and the ROW (rest of the world).


Accounts of Balance of Payment 

There are two types of accounts of the balance of payment:

  1. Current Account - This is a record of unilateral transfers and import or export of goods and services.

  2. Capital Account - All the transactions like sales and purchase of foreign assets between normal residents of a country and the rest of the world (during an accounting year)  are recorded in capital accounts. 


Comparison of Current and Capital Accounts

Components of Current Account

Components of Capital Account

Visible items - This comprises the import or export of goods.

It has foreign direct investments.

Invisible items This comprises the import or export of services.

Loans

The transactions are unilateral transfers

Here the transactions are portfolio investments.

It shows the net income of the country.

It shows the net change in the ownership of national assets.


Balance of Trade - The difference between a country’s import and export value within an accounting year is called BOT or balance of trade. It is the largest component of a country’s BOP (Balance of payment). If a country imports more goods and services than it exports in value, then the country has a trade deficit. Whereas, when a particular country exports more goods and services than imports, then the country has a trade surplus.

Autonomous Items - In a balance of payment, those items or transactions related to maximizing profit rather than maintaining equilibrium in the BOP are called accounting items. In a balance of payment a/c, accounting items are recorded as the first line items before the trade deficit or trade surplus is calculated. In the balance of payment, these line items are also referred to as “Above the line items.” 

Accommodating Items - Certain transactions in the balance of payment restore its identity. Such transactions are called accommodating items, and they occur because of other activities in the balance of payment. These line items are also referred to as “Below the line items.”

The Deficit of BOP Account - A deficit in the balance of payments happens when the value of total inflow of foreign exchange on account of autonomous transactions is less than total outflows. 

Foreign Exchange Rate - Foreign exchange Rate is the rate at which one can exchange one unit of a country’s currency with that of another country’s currency. In other words, the exchange rate is the price of one country’s currency in terms of another country’s currency.


System of Exchange Rate

There are two systems of exchange rate:

  • Fixed Exchange Rate - In this system, the rate of exchange is fixed and determined by the government or the monetary authority of the country.

  • Flexible Exchange Rate - This is also known as the floating exchange rate and in this system, the forces of market and demand and supply of foreign exchange determine the exchange rate.

Devaluation of a Currency - When the external value of a currency is officially lowered by the government or the monetary authority of a country then that is called the devaluation of a currency. This lowering of domestic currency is for all other foreign currencies. This is done under the fixed exchange rate system by the government’s order.

FAQs (Frequently Asked Questions)

1. What are some of the merits of a Fixed Exchange Rate System?

Some of the benefits of a fixed exchange rate system are:

  • It provides stability to the exchange rate.

  • It encourages international trade and capital movement.

  • It also attracts foreign capital.

  • There is no speculation in a Fixed Exchange Rate system.

  • It puts pressure on the government to keep a check on inflation.

2. What are some of the sources of supply of foreign exchange?

Some of the main sources of foreign exchange are:

  • When foreigners directly buy commodities in the domestic market.

  • When foreign companies or businesses invest directly in the domestic market.

  • When remittances are done by NR (non-residents) who are living out of their countries.

  • When non-residents make speculative purchases in the domestic market, it leads to the flow of foreign exchange.

  • By exporting goods and services.

  • Foreign direct investments.

  • Portfolio investment from ROW (rest of the world).

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