CBSE Class 12 Macro Economics Revision Notes Chapter 6

Introduction to Class 12 Macro Economics Chapter 6 Notes

The content of Class 12 Macro Economics Chapter 6 Notes deals with the concept of an open economy. An open economy is one in which there is an exchange of goods and services and financial assets between two countries. 

Class 12 students need to shuffle between many subjects and solve various assignments. The subject matter skilled staff at Extramarks make notes for Class 12 Macro Economics Chapter 6 to enable students to manage their time effectively by giving them definite solutions. By making use of these notes, students can get pleasant grades as they are based on the updated curriculum. 

An open economy explains how the economic variables will function in an economy. Importance has been given to the concerns related to the foreign exchange market, balance of payments, and income determination in an open economy. In an open economy, not only domestic factors but also establishments in other countries engage in the trade of products, that is, goods and services. There is trading in the form of technology transfers, managerial exchange, and all kinds of goods and services. A nation is considered to have an open economy when its policies allow market forces to decide production and pricing. An open market is a monetary system with limited to no barriers to free-market activity. An open market is characterized by the absence of taxes,  subsidies, tariffs, unionization,  licensing requirements, and any other laws or practices that prevent free-market activity.

Relatively open economies expand faster, and salaries and working conditions are normally better in companies that trade in an open economy. Higher prosperity and convenience around the world also promote enormous stability and reliability for everyone.

Students can refer to class 12 Macro Economics chapter 6 notes on Extramarks.

Key Topics Covered in Class 12 Macro Economics Chapter 6 Notes. 

Macro Economics concentrates on the performance of economies – inflation, poverty reduction, changes in economic output, the balance of payments, interest and foreign exchange rates, social equity, and sustainable growth. A sound economy can establish strong monetary and fiscal policies. An open economy interacts effortlessly with other economies around the world.

An open economy connects with other nations in two ways. 

• Goods and services are traded in world product markets.
• It buys and sells capital assets in world financial markets. 

The key topics covered under Class 12 Macro Economics Chapter 6 Notes provided by Extramarks include the following.

Introduction to Open Economy

Modern economies are open. An open economy trades with other countries in goods and services. It also welcomes other nations’ investments and invests in other countries’ assets. 

The open economy is of 3 types.

1. Output Market: Consumers and producers can select between domestic and foreign goods.
2. Financial Market: This allows investors to select domestic and foreign assets.
3. Labour Market: Various immigration laws limit labour movement between countries. Firms can choose the location with the availability of plenty of labour.

Accounts of Balance of Payment

The price of one currency in terms of another currency is known as the foreign exchange rate or exchange rate. The international monetary system has been instituted to handle currency-related issues and ensure balance in international transactions.

The balance of payment has two accounts as mentioned in class 12 Macro Economics chapter 6 notes:

1. Current Account: The record of dealings in import or export of goods and transfer of payments.
2. Capital Account: The record of all foreign assets transactions such as government debt, bonds, stock and money.

Comparison of Current and Capital Accounts

Balance of Trade

The discrepancy between a country’s import and export value within an accounting year is called BOT or balance of trade. It is the substantial component of a country’s BOP or balance of payment. 

• Trade deficit is when a nation imports more goods and services than exports. 
• Trade surplus is when a particular country exports more goods and services than imports.

Autonomous Items

As mentioned in class 12 Macro Economics chapter 6 notes, accounting items or transactions related to maximizing profit rather than maintaining equilibrium in the BOP are accounting items. In a balance of payment account, accounting items are recorded as the first line items ahead of the trade deficit or trade surplus.

Accommodating Items

Accommodating items are certain transactions in the balance of payment to restore their identity. And they take place because of other operations in the balance of payment. They are also known as “below-the-line items.”

The Deficit of BOP Account

A deficit in the balance of payments occurs when the value of the total foreign exchange inflow on account of autonomous transactions is less than the total outflows. 

Foreign Exchange Rate

The rate at which one can exchange one unit of a country’s currency with another country’s currency. By way of explanation, 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 mentioned in class 12 Macro Economics chapter 6 notes

• Fixed Exchange Rate: In this system, the rate of exchange is stable and determined by the government or the country’s monetary authority.
• Flexible Exchange Rate: In this system, the forces of the market and the demand and supply of foreign exchange determine the exchange rate. They are also referred to as the floating exchange rate.

Devaluation of a Currency

Devaluation of a currency is when the external value of a currency is officially lowered by the government or the monetary authority of a country. This lowering of domestic currency is for every foreign currency. The government’s order does this under the fixed exchange rate system.

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Class 12 Macro Economics Chapter 6 Notes – Exercises and Answer Solutions

As per NCERT regulations, the Extramarks website presents the latest and revised Class 12 Macro Economics Chapter 6 Notes. In order to prepare for the board examinations, students can access the notes by clicking on the links to Macro Economics Chapter 6 Class 12 Notes.

Click on the below links for clarifications on the topic:

• Very Short Answer Type Questions and Solutions- 5 Questions
• Short Answer Type Questions and Solutions- 7 Questions
• Long Answer Type Questions and Solutions- 6 Questions

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