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Karnataka Class 12 Commerce Economics Chapter 12 Open Economy Complete Information

Karnataka Class 12 Commerce Economics Chapter 12 Open Economy Complete Information

Karnataka Class 12 Commerce Economics Chapter 12 Open Economy : The Bombay legislature of the erstwhile Bombay Presidency established Karnatak University through the Karnatak University Act 1949. It became a statutory University on 1st March 1950. The jurisdiction of the University covers Dharwad. Gadag, Haveri and Uttar Kannada districts. It has several Post Graduate centres. The University (888 acres) is offering courses in the faculties of Arts, Commerce, Education, Law, Management, Science and Technology and Social Sciences. Symbolic of the University’s vision and mission the emblem of the University consists of papal tree at the centre, an open book. Figures of a bull, a rising sun and the legend ‘Arive Guru’ i.e., Wisdom is Guru, implying that both wisdom and knowledge should be all pervading like the ramifying papal tree and light up the world with knowledge and eradicate illiteracy.

Karnataka Class 12 Commerce Economics Chapter 12 Open Economy Complete Information

Karnataka Class 12 Commerce Economics Chapter 12 Open Economy :  An open economy is an economy in which there are economic activities between the domestic community and outside. People and even businesses can trade in goods and services with other people and businesses in the international community, and funds can flow as investments across the border. Trade can take the form of managerial exchange, technology transfers, and all kinds of goods and services. (However, certain exceptions exist that cannot be exchanged; the railway services of a country, for example, cannot be traded with another country to avail the service.)

It contrasts with a closed economy in which international trade and finance cannot take place. The act of selling goods or services to a foreign country is called exporting. The act of buying goods or services from a foreign country is called importing. Exporting and importing are collectively called international trade. There are a number of economic advantages for citizens of a country with an open economy. A primary advantage is that the citizen consumers have a much larger variety of goods and services from which to choose. Additionally, consumers have an opportunity to invest their savings outside of the country. If a country has an open economy, that country’s spending in any given year need not equal its output of goods and services. A country can spend more money than it produces by borrowing from abroad, or it can spend less than it produces and lend the difference to foreigners.

Karnataka Class 12 Commerce Economics Chapter 12 Open Economy Complete Information

Karnataka Class 12 Commerce Economics Chapter 12 Open Economy : We provides here Karnataka Class 12 Commerce Economics Chapter 12 Open Economy Complete Information Topic Wise in PDF Format and here we gave direct download links for Karnataka Class 12 Commerce Economics Chapter 12 Open Economy Topic Wise Complete Information in pdf format. Download  Karnataka Class 12 Commerce Economics Chapter 12 Open Economy Complete Information here and read well.

Karnataka Class 12 Commerce Economics Meaning Of Closed And Open Economies Notes

Karnataka Class 12 Commerce Economics Chapter 12 Open Economy :  A closed economy is an economy in which no activity is conducted with outside economies. A closed economy is self-sufficient, meaning no imports are brought in and no exports are sent out, the goal being to provide consumers with everything they need from within the economy’s borders. A closed economy is the opposite of an open economy, in which a country conducts trade with outside regions.

BREAKING DOWN ‘Closed Economy’

Maintaining a closed economy is difficult in modern society, where certain raw materials, such as crude oil, have such a vital role as inputs and final goods; a country is forced to import if these resources are not naturally within its borders. Closed economies run counterintuitive to modern, liberal economic logic, which preaches opening up domestic markets to international markets to capitalize on comparative advantages and gains from trade. Through the specialization of labor and allocation of resources to their most productive, efficient means, a person is able to become wealthier.

As late philosopher and economist Henry George expounded upon in “Progress and Poverty,” the concepts of division of labor and gains from trade can be described with a simple illustration. On a plot of undeveloped, resource-abundant land, 20 people can produce much more than 20 times the amount of wealth that one person can produce, if the people cooperate intelligently. This logic holds true for households, cities and whole economies.

Proliferation of Open Trade

In 2015, the five biggest exporters of crude oil alone accounted for over $370 billion worth of exports: Saudi Arabia at $133.3 billion; Russia at $86.2 billion; Iraq at $52.2 billion; United Arab Emirates at $51.2 billion; and Canada at $50.2 billion. Even the United States, the largest producer of oil in the world, imported roughly 2.682 million annual-thousand barrels in 2015, 36.4% of which was imported from OPEC members including Saudi Arabia, Venezuela, Ecuador, Iraq and Kuwait. This underscores how reliant the global economy is on international trade.

Argument for a Closed Economy

A completely open economy runs the risk of becoming overly dependent or having important industries not develop if domestic producers are not competitive at low, international prices. For this reason, governments use controls such as tariffs, subsidies and quotas to help keep domestic enterprises profitable. Truly closed economies are rare. If anything, a government closes off a specific industry from international competition. A number of oil-producing countries have a history of prohibiting foreign oil firms from doing business within their borders.

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Karnataka Class 12 Commerce Economics Basic Concepts Of Trade Important Notes

 Karnataka Class 12 Commerce Economics Chapter 12 Open Economy : Trade is a basic economic concept involving the buying and selling of goods and services, with compensation paid by a buyer to a seller, or the exchange of goods or services between parties. The most common medium of exchange for these transactions is money, but trade may also be executed with the exchange of goods or services between both parties, referred to as a barter, or payment with virtual currency, the most popular of which is bitcoin. In financial markets, trading refers to the buying and selling of securities, such as the purchase of stock on the floor of the New York Stock Exchange (NYSE).


Trade refers to transactions ranging in complexity from the exchange of baseball cards between collectors to multinational policies setting protocols for imports and exports between countries. Regardless of the complexity of the transaction, trading is facilitated through three primary types of exchanges. Trades are executed with the payment of sovereign currency, the exchange of goods and services, or payment with a virtual currency.

Currency as a Medium of Exchange

Money, which also functions as a unit of account and a store of value, is the most common medium of exchange, providing a variety of methods for fund transfers between buyers and sellers, including cash, ACH transfers, credit cards and wired funds. Money’s attribute as a store of value also provides assurance that funds received by sellers as payment for goods or services can be used to make purchases of equivalent value in the future.

Barter Transactions

Cashless trades involving the exchange of goods or services between parties are referred to as barter transactions. While barter is often associated with primitive or undeveloped societies, these transactions are also used by large corporations and individuals as a means of gaining goods in exchange for excess, underutilized or unwanted assets. For example, in the 1970s, Pepsi Co Inc. set up a barter agreement with the Russian government to trade cola syrup for Stolichnaya vodka. In 1990, the deal was expanded to $3 billion dollars and included 10 Russian-built ships, which PepsiCo leased or sold in the years following the agreement.

Virtual Currencies

As the newest medium of exchange, virtual currencies do not expose holders to foreign exchange risks, provide anonymity between trading partners if desired and avoid the often-significant processing fee for credit cards. The most popular virtual currency is bitcoin, which was introduced in 2009. Bitcoins are held in virtual wallets and can be used with a growing number of merchants, including and The virtual currency is also popular with small businesses, due in part to the lack of processing fees.

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Karnataka Class 12 Commerce Economics Balance Of Trade And Balance Of Payments Complete Information

Karnataka Class 12 Commerce Economics Chapter 12 Open Economy : Here we provide direct download links for Karnataka Class 12 Commerce Economics Balance Of Trade And Balance Of Payments Important Notes in pdf format. Download and read well. In this article you can see deference between Balance Of Trade And Balance Of Payments.

Download Karnataka Class 12 Commerce Economics Balance Of Trade And Balance Of Payments Important Notes in Pdf Format 

BALANCE OF PAYMENTS: The balance of payments accounts of a country record the payments and receipts of the residents of the country in their transactions with residents of other countries. If all transactions are included, the payments and receipts of each country are, and must be, equal. Any apparent inequality simply leaves one country acquiring assets in the others.

BALANCE OF TRADE: The difference between the value of goods and services exported out of a country and the value of goods and services imported into the country. The balance of trade is the official term for net exports that makes up the balance of payments. The balance of trade can be a “favorable” surplus (exports exceed imports) or an “unfavorable” deficit (imports exceed exports). The official balance of trade is separated into the balance of merchandise trade for tangible goods and the balance of services….

A balance of trade surplus is most favorable to domestic producers responsible for the exports. However, this is also likely to be unfavorable to domestic consumers of the exports who pay higher prices.

The differences between balance of trade (BOT) and balance of payment (BOP)  are as follows:

Balance of Trade (BOT)

i. It records only merchandise (i.e., goods) transactions.

ii. It does not record transactions of capital nature.

iii. It is a part of current account of BOP.

iv. It may be favourable, unfavourable or in equilibrium.

v. Defect in BOT cannot be met by BOP

vi. It is not true indicator of economic relations or economic prosperity of a country.

Balance of Payment (BOP)

(i) It records transactions relating to both goods and services.

(ii) It records transactions of capital nature.

(iii) It includes balance of trade, balance of services, balance of unilateral transfers and balance of capital transactions.

(iv) It always remains in balance in the sense that receipt side is always made to be equal to payment side.

(v) Defect in BOP can be met through BOT.

(vi) It is true indicator of economic performance of an economy.

Karnataka Class 12 Commerce Economics Foreign Exchange Market Complete Information

Karnataka Class 12 Commerce Economics Chapter 12 Open Economy : The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This includes all aspects of buying, selling and exchanging currencies at current or determined prices. In terms of trading volume, it is by far the largest market in the world, followed by the Credit market.

The main participants in this market are the larger international banks. Financial centers around the world function as anchors of trading between a wide range of multiple types of buyers and sellers around the clock, with the exception of weekends. Since currencies are always traded in pairs, the foreign exchange market does not set a currency’s absolute value but rather determines its relative value by setting the market price of one currency if paid for with another. Ex: 1 USD is worth X CAD, or CHF, or JPY, etc..

 The foreign exchange market works through financial institutions, and operates on several levels. Behind the scenes, banks turn to a smaller number of financial firms known as “dealers”, who are involved in large quantities of foreign exchange trading. Most foreign exchange dealers are banks, so this behind-the-scenes market is sometimes called the “interbank market” (although a few insurance companies and other kinds of financial firms are involved). Trades between foreign exchange dealers can be very large, involving hundreds of millions of dollars. Because of the sovereignty issue when involving two currencies, Forex has little (if any) supervisory entity regulating its actions.

The foreign exchange market assists international trade and investments by enabling currency conversion. For example, it permits a business in the United States to import goods from European Union member states, especially Eurozone members, and pay Euros, even though its income is in United States dollars. It also supports direct speculation and evaluation relative to the value of currencies and the carry trade speculation, based on the differential interest rate between two currencies.

The foreign exchange market is unique because of the following characteristics:

  • its huge trading volume, representing the largest asset class in the world leading to high liquidity;
  • its geographical dispersion;
  • its continuous operation: 24 hours a day except weekends, i.e., trading from 22:00 GMT on Sunday (Sydney) until 22:00 GMT Friday (New York);
  • the variety of factors that affect exchange rates;
  • the low margins of relative profit compared with other markets of fixed income; and
  • the use of leverage to enhance profit and loss margins and with respect to account size.

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