The External Sector

All international economic interactions between inhabitants of the country (private and public sector) and the rest of the world are referred to as the external sector of a country’s economy. Export, import, international investment, external debt, current account, capital account, and balance of payment are all examples of economic operations that take place in foreign exchange. Few components of external sectors are discussed below:

• Foreign investment: Foreign direct investment and portfolio investment are the two types of foreign investment. Until 1999-2000, the majority of foreign direct investment (FDI) into and out of India was in the form of equity capital. Since 2000-01, the definition of FDI has been broadened to include, in addition to equity capital, reinvested earnings (retained earnings of FDI businesses), and ‘other direct capital,’ in line with worldwide best practices (intercorporate debt transactions between related entities). In addition to equity of incorporated organizations, data on equity capital includes equity of unincorporated businesses (mostly foreign bank branches in India and Indian bank branches operating overseas).
• Portfolio investment: FIIs, raise money through GDRs/ADRs by Indian firms, and funds raised through offshore funds make up the majority of portfolio investments. Since 2000-01, data on foreign investment has been divided into equity capital and portfolio investment.
• Exchange rate: The exchange rate is also one of the parts of the external sector. It is the rate at which one currency of a country will be exchanged with the currency of another country. The exchange rates are of two types. The first one is the fixed exchange rates, which are set by a country’s central bank, whereas the second one is floating exchange rates, which are determined by market demand and supply.

Conclusion:

Each of the four sectors receives compensation in lieu of products and services from the others, resulting in a steady flow of goods and physical services. With the advent of the foreign sector, the model is transformed from a closed to an open economy! The addition of the foreign sector will expose the local economy’s interactions with other countries. Foreigners engage with local businesses and consumers through products and service exports and imports, as well as financial market borrowing and lending operations. Exports are goods and services produced inside a country’s borders that are sold to foreigners. Each movement of money is accompanied by an equal and opposite flow of commodities or services.

For the macroeconomic analysis, the four aggregate macroeconomic sectors that form the basic foundation are household, business, government, and foreign—which account for four gross domestic product expenditures. On the macroeconomic stage, these four sectors are the major ‘actors’.