National income identity for open economy - class-XII

Imports of goods and services raises the demand of foreign exchange. It s a component of the demand of foreign exchange because payments for imports are made in foreign exchange only.

The output multiplier represents the ratio of the change in equilibrium output to the change in autonomous expenditure. It measures how much total output increases for a given increase in spending.

An open economy is one that operates a domestic sector and an international (foreign) sector and is interdependent. It is open to international trade. The economy will usually consist of 4 sectors, firms households, government and foreign sector when the economy is open.

Aggregate demand is the total demand for goods and services in an economy. Since government expenditure is a component of aggregate demand (AD = C + I + G + NX), an increase in government spending directly increases the total aggregate demand.

The paradox of thrift is a concept in Keynesian economics which states that while individual saving is a virtue, if everyone tries to save more during a recession, aggregate demand falls, leading to lower income and ultimately lower total savings.

For an economy to run smoothly and maintain order, there has to be an economic system that is governed by legislation, and constant planning  is undertaken in order to add new and review existing policies to further develop the economy.  

Open market operation is the method that the central bank employs to modify the level of money circulating in the banking system. It does this by selling or buying back government securities. If it wants to contract the money supply it will sell government securities in order to reduce the money available with people in the economy, usually to curb inflationary pressures.

Balanced growth in the context of the balanced budget multiplier refers to the effect on national income when government expenditure and tax revenue are increased by the same amount, which typically results in an increase in national income equal to the change in expenditure.

According to Keynesian theory, the level of output and employment in an economy is determined by the total amount of spending, known as effective demand, which is the point where aggregate demand equals aggregate supply.

In an open economy the GDP is calculated as the sum of the 4 sectors of the economy. 

The GDP is calculated using the formula

DEPB stands for Duty Entitlement Pass Book, which was an export incentive scheme in India that allowed exporters to import goods duty-free based on the value of their exports.

Given that $Y _d= 1000$

 The Export Oriented Units (EOU) scheme was introduced to boost exports, increase foreign earnings and created employment in India. The EOU scheme is complementary to the scheme for Free Trade Zone, Export Processing Zone.

Net exports are calculated as exports minus imports. If imports exceed exports, the value of net exports becomes negative.