An open economy interacts with the rest of the world through trade in goods and services, flows of capital (FDI/FPI), remittances and borrowing/lending. These transactions are recorded in the Balance of Payments (BOP). Exchange rates connect domestic prices with world prices and affect exports, imports and capital flows. Trade policy (tariffs and non-tariff measures) influences trade patterns and domestic industries. This topic covers BOP structure, exchange rate basics and introductory trade policy points for exam writing.
An open economy is an economy that engages in international trade and financial transactions with other countries (imports, exports, capital flows).
Balance of Payments is a systematic record of all economic transactions between residents of a country and the rest of the world during a period (usually a year).
Current account records:
It records capital movements like:
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Items of current account include:
(Any three items can be written.)
Items of financial/capital account include:
(Any three items can be written.)
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An open economy interacts with the rest of the world through trade in goods and services, flows of capital (FDI/FPI), remittances and borrowing/lending. These transactions are recorded in the Balance of Payments (BOP). Exchange rates connect domestic prices with world prices and affect exports, imports and capital flows. Trade policy (tariffs and non-tariff measures) influences trade patterns and domestic industries. This topic covers BOP structure, exchange rate basics and introductory trade policy points for exam writing.
An open economy is an economy that engages in international trade and financial transactions with other countries (imports, exports, capital flows).
Balance of Payments is a systematic record of all economic transactions between residents of a country and the rest of the world during a period (usually a year).
Current account records:
It records capital movements like:
Exchange rate is the price of one currency in terms of another (e.g., ₹ per US$).
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Balance of Payments (BOP) is a systematic record of all economic transactions between residents of a country and the rest of the world over a period, usually one year. It includes trade in goods and services, income flows, transfers and capital movements.
Structure of BOP can be explained as:
The current account shows whether a country earns enough from exports and services to pay for imports and transfers. The financial account shows how deficits or surpluses are financed through investments and borrowings.
Thus, BOP gives a complete picture of a country’s external transactions and helps in policy decisions on trade, exchange rate and external borrowing.