PPT: External Sector | Indian Economy for UPSC CSE

 Page 1


Lecture 9 
External Sector
Prelims 2020 Crash Course 
Capstone IAS Learning 
Page 2


Lecture 9 
External Sector
Prelims 2020 Crash Course 
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
Prelims 2020 Crash Course 
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
Prelims 2020 Crash Course 
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
Prelims 2020 Crash Course 
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.