6. THE BALANCE OF PAYMENTS
An open economy is defined by its interactions with other countries through trade in goods, financial assets, and labor. Foreign trade significantly influences domestic aggregate demand as it involves both leakages and injections into the economy. The balance of payments includes crucial accounts such as the current account and capital account, which reflect the status of a country’s international transactions. Understanding how exchange rates and economic policies interact is essential for managing an open economy effectively.
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What we have learnt
- An open economy engages with others through trade, financial markets, and labor markets.
- The balance of payments tracks a country's transactions with the world, consisting of current and capital accounts.
- Exchange rates are influenced by various factors including demand for foreign goods, interest rates, and monetary policy.
Key Concepts
- -- Balance of Payments
- A record of economic transactions between residents of a country and the rest of the world, consisting of the current account and the capital account.
- -- Current Account
- The part of the balance of payments that records the trade of goods and services, alongside transfer payments.
- -- Exchange Rate
- The price of one currency in terms of another, which facilitates international trade and investment.
- -- Open Economy Multiplier
- The ratio of change in equilibrium income to changes in autonomous expenditure in an open economy, affected by the marginal propensity to import.
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