External sector
Also called: Rest of the world · Topic: Balance of Payments and Exchange Rates · NCERT: Class 12, Ch 1 "Introduction (Macroeconomics)"; Class 12, Ch 6 "Open Economy Macroeconomics"
Meaning
The external sector is the fourth sector of the macroeconomy, after households, firms and government. It is also called the "rest of the world". It covers a country's exports, imports and capital flows with other countries. Exports add to demand for home output (an injection). Imports take spending out of the home economy (a leakage). This sector's dealings are recorded in the balance of payments.
Example
India's external sector includes its merchandise exports and imports (crude oil, gold, electronics and coal are the main imports), its software and business-services exports, and foreign investment coming in and going out. It also includes remittances. India is the world's largest remittance recipient, receiving about US$135 bn in FY25.
Don't confuse with
- Foreign sector as a single flow: the external sector is not only trade in goods. It also covers services, income, transfers and trade in financial assets.
Related concepts
- Open economy
- Closed economy
- Export
- Import
- Demand for domestic goods
- Net exports
- Marginal propensity to import
- Autonomous imports