PPT: Open Economy Macroeconomics | Economics Class 12 - Commerce PDF Download

 Page 1


Open Economy: 
Macroeconomics
Page 2


Open Economy: 
Macroeconomics
Understanding Open Economies
1
Output Market 
Linkages
Open economies trade 
goods and services 
internationally, expanding 
choices between 
domestic and foreign 
products. These import 
and export flows directly 
impact domestic 
production and 
consumption.
2
Financial Market 
Connections
Open economies allow 
international financial 
asset purchases, creating 
capital flows between 
countries. These flows 
influence domestic 
interest rates and asset 
values.
3
Labor Market 
Relationships
Companies strategically 
locate production globally 
while workers seek cross-
border opportunities, 
though immigration 
policies typically limit 
international labor 
mobility.
Page 3


Open Economy: 
Macroeconomics
Understanding Open Economies
1
Output Market 
Linkages
Open economies trade 
goods and services 
internationally, expanding 
choices between 
domestic and foreign 
products. These import 
and export flows directly 
impact domestic 
production and 
consumption.
2
Financial Market 
Connections
Open economies allow 
international financial 
asset purchases, creating 
capital flows between 
countries. These flows 
influence domestic 
interest rates and asset 
values.
3
Labor Market 
Relationships
Companies strategically 
locate production globally 
while workers seek cross-
border opportunities, 
though immigration 
policies typically limit 
international labor 
mobility.
Trade in Goods and Services
Movement of Goods
The cross-border movement of 
goods serves as a substitute for 
labor mobility. When products 
move freely between nations, 
workers face less pressure to 
relocate. This principle forms 
the foundation of modern 
international trade theory.
International Currency 
Requirements
International trade requires a 
trusted exchange medium. 
Foreign entities accept a 
national currency only when 
confident in its stable 
purchasing power. This trust is 
fundamental for any currency 
functioning in global markets.
Currency Convertibility
Governments build credibility 
by making currencies 
convertible into stable assets 
(gold or reliable foreign 
currencies) at fixed rates. This 
convertibility assures 
international traders and 
investors of currency value.
Page 4


Open Economy: 
Macroeconomics
Understanding Open Economies
1
Output Market 
Linkages
Open economies trade 
goods and services 
internationally, expanding 
choices between 
domestic and foreign 
products. These import 
and export flows directly 
impact domestic 
production and 
consumption.
2
Financial Market 
Connections
Open economies allow 
international financial 
asset purchases, creating 
capital flows between 
countries. These flows 
influence domestic 
interest rates and asset 
values.
3
Labor Market 
Relationships
Companies strategically 
locate production globally 
while workers seek cross-
border opportunities, 
though immigration 
policies typically limit 
international labor 
mobility.
Trade in Goods and Services
Movement of Goods
The cross-border movement of 
goods serves as a substitute for 
labor mobility. When products 
move freely between nations, 
workers face less pressure to 
relocate. This principle forms 
the foundation of modern 
international trade theory.
International Currency 
Requirements
International trade requires a 
trusted exchange medium. 
Foreign entities accept a 
national currency only when 
confident in its stable 
purchasing power. This trust is 
fundamental for any currency 
functioning in global markets.
Currency Convertibility
Governments build credibility 
by making currencies 
convertible into stable assets 
(gold or reliable foreign 
currencies) at fixed rates. This 
convertibility assures 
international traders and 
investors of currency value.
Page 5


Open Economy: 
Macroeconomics
Understanding Open Economies
1
Output Market 
Linkages
Open economies trade 
goods and services 
internationally, expanding 
choices between 
domestic and foreign 
products. These import 
and export flows directly 
impact domestic 
production and 
consumption.
2
Financial Market 
Connections
Open economies allow 
international financial 
asset purchases, creating 
capital flows between 
countries. These flows 
influence domestic 
interest rates and asset 
values.
3
Labor Market 
Relationships
Companies strategically 
locate production globally 
while workers seek cross-
border opportunities, 
though immigration 
policies typically limit 
international labor 
mobility.
Trade in Goods and Services
Movement of Goods
The cross-border movement of 
goods serves as a substitute for 
labor mobility. When products 
move freely between nations, 
workers face less pressure to 
relocate. This principle forms 
the foundation of modern 
international trade theory.
International Currency 
Requirements
International trade requires a 
trusted exchange medium. 
Foreign entities accept a 
national currency only when 
confident in its stable 
purchasing power. This trust is 
fundamental for any currency 
functioning in global markets.
Currency Convertibility
Governments build credibility 
by making currencies 
convertible into stable assets 
(gold or reliable foreign 
currencies) at fixed rates. This 
convertibility assures 
international traders and 
investors of currency value.
The Balance of Payments
Balance of Payments 
Definition
The balance of payments 
(BoP) records all economic 
transactions between a 
country and the rest of the 
world during a specific time 
period. It consists of two 
main components: the 
current account and the 
capital account.
Current Account 
Components
The current account tracks 
trade in goods and services, 
plus transfers. It includes 
exports and imports of 
physical goods, service 
transactions, and unilateral 
transfers like remittances 
and grants.
Impact on Domestic 
Economy
Imports represent outward 
expenditure, reducing 
aggregate demand. Exports 
bring income into the 
country, increasing domestic 
aggregate demand.