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Lecture 9 
External Sector
Capstone IAS Learning 
Page 2


Lecture 9 
External Sector
Capstone IAS Learning 
What will we cover
Introduction 
Balance of Payment 
Exchange rate regime 
Factors on which exchange rate depends 
Important terms to be familiar with 
Economic Survey 2019-20 (1 Chapter)
Page 3


Lecture 9 
External Sector
Capstone IAS Learning 
What will we cover
Introduction 
Balance of Payment 
Exchange rate regime 
Factors on which exchange rate depends 
Important terms to be familiar with 
Economic Survey 2019-20 (1 Chapter)
Introduction 
An open economy is the one that interacts with other 
countries through various channels/linkages. 
These linkages are as following : 
1. Product Market Linkage - Consumers and firms have the 
opportunity to choose between domestic and foreign 
goods. 
2. Financial Market Linkage - Investors have the opportunity 
to choose between domestic and foreign assets. 
3. Factor Market Linkage - Firms can choose where to locate 
production and workers can choose where to work. 
Degree of Openness = 
(Imports + Exports)  X  100 
        GDP
Page 4


Lecture 9 
External Sector
Capstone IAS Learning 
What will we cover
Introduction 
Balance of Payment 
Exchange rate regime 
Factors on which exchange rate depends 
Important terms to be familiar with 
Economic Survey 2019-20 (1 Chapter)
Introduction 
An open economy is the one that interacts with other 
countries through various channels/linkages. 
These linkages are as following : 
1. Product Market Linkage - Consumers and firms have the 
opportunity to choose between domestic and foreign 
goods. 
2. Financial Market Linkage - Investors have the opportunity 
to choose between domestic and foreign assets. 
3. Factor Market Linkage - Firms can choose where to locate 
production and workers can choose where to work. 
Degree of Openness = 
(Imports + Exports)  X  100 
        GDP
Balance of Payment
Current 
Account
Capital 
Account
Trade  
Balance
Invisibles 
Balance
Goods 
Import
Goods 
Export
Services  
Trade
Transfer  
Payments
Factor  
Incomes
Foreign  
Investment 
(FDI & FPI)
ECBs, 
NRI deposits 
Etc.
External  
Assistance
Page 5


Lecture 9 
External Sector
Capstone IAS Learning 
What will we cover
Introduction 
Balance of Payment 
Exchange rate regime 
Factors on which exchange rate depends 
Important terms to be familiar with 
Economic Survey 2019-20 (1 Chapter)
Introduction 
An open economy is the one that interacts with other 
countries through various channels/linkages. 
These linkages are as following : 
1. Product Market Linkage - Consumers and firms have the 
opportunity to choose between domestic and foreign 
goods. 
2. Financial Market Linkage - Investors have the opportunity 
to choose between domestic and foreign assets. 
3. Factor Market Linkage - Firms can choose where to locate 
production and workers can choose where to work. 
Degree of Openness = 
(Imports + Exports)  X  100 
        GDP
Balance of Payment
Current 
Account
Capital 
Account
Trade  
Balance
Invisibles 
Balance
Goods 
Import
Goods 
Export
Services  
Trade
Transfer  
Payments
Factor  
Incomes
Foreign  
Investment 
(FDI & FPI)
ECBs, 
NRI deposits 
Etc.
External  
Assistance
For Example $1 = Rs 70.. This is a Nominal 
Exchange rate which is decided by demand and 
supply of USD and INR in the Forex Market. 
Depreciating currency brings gain to the exporter 
and loss to the importer. 
Vice Versa. 
So, when there is BOP Surplus, RBI buys dollars to 
counter the appreciating pressure on Rupees. 
And, when there is a BOP Deficit, RBI sells dollars 
to counter the depreciating pressure on Rupees. 
These transactions are called Official Reserve 
Transactions.
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FAQs on PPT: External Sector - Indian Economy for UPSC CSE

1. What is the external sector?
Ans. The external sector refers to the part of an economy that interacts with the rest of the world through international trade and financial transactions. It includes exports, imports, foreign direct investment, foreign exchange reserves, and other related activities.
2. How does the external sector affect a country's economy?
Ans. The external sector plays a crucial role in shaping a country's economy. It can contribute to economic growth by increasing exports and attracting foreign direct investment. However, it can also have negative effects, such as trade deficits, currency depreciation, and vulnerability to global economic shocks.
3. What are some key indicators of a country's external sector performance?
Ans. Key indicators of a country's external sector performance include the balance of trade, current account balance, foreign exchange reserves, exchange rates, and the level of foreign direct investment. These indicators reflect the country's competitiveness in international markets and its ability to attract foreign investment.
4. How does the external sector impact a country's currency exchange rate?
Ans. The external sector can influence a country's currency exchange rate. For example, a higher export volume and lower import volume can increase the demand for a country's currency, leading to currency appreciation. On the other hand, a trade deficit and capital outflows can put downward pressure on the currency, causing depreciation.
5. What are some challenges faced by the external sector in today's globalized economy?
Ans. Today's globalized economy presents several challenges for the external sector. These include protectionist trade policies, geopolitical tensions, currency fluctuations, and economic instability in major trading partners. Additionally, the COVID-19 pandemic has further disrupted global trade and investment flows, posing additional challenges for the external sector.
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