Components of the current account of the balance of payments: secondary income

International Trade and Globalisation – Current Account of the Balance of Payments

Objective

Understand the components of the current account, with a focus on secondary income.

What is the Current Account?

The current account records all transactions that affect a country’s income, expenditure and transfers with the rest of the world over a given period. It consists of three main components:

• Goods (exports and imports of tangible products)
• Services (tourism, transport, financial services, etc.)
• Secondary income (unrequited transfers)

Secondary Income – Definition

Secondary income, also called unrequited transfers, includes payments made to or received from abroad that are not in exchange for any goods, services or factor services. They are one‑way flows of money.

Key Types of Secondary Income

• Remittances – Money sent by migrant workers to families in their home country.
• Foreign aid and grants – Government or NGO assistance provided without expectation of repayment.
• Pensions and social security benefits – Payments to retirees living abroad.
• Interest and dividends on foreign assets – When the income is not linked to the provision of a factor service (e.g., a passive investment).
• Other private transfers – Gifts, charitable donations, and insurance claims received from abroad.

Recording Secondary Income in the Balance of Payments

Each secondary income transaction is recorded as either an inflow (credit) or an outflow (debit) in the current account:

• Inflow (credit) – Money received from abroad (e.g., remittances received).
• Outflow (debit) – Money sent abroad (e.g., foreign aid given).

Impact on the Current Account Balance

The net secondary income is calculated as:

\$\text{Net Secondary Income} = \text{Secondary Income Receipts} - \text{Secondary Income Payments}\$

The current account balance (CAB) is then:

\$\text{CAB} = \text{(Exports – Imports)} + \text{(Exports of Services – Imports of Services)} + \text{Net Secondary Income}\$

Typical Examples – Inflows and Outflows

Why Secondary Income Matters

• Provides a source of foreign exchange for developing economies, often exceeding export earnings.
• Can influence exchange rates: large inflows may lead to currency appreciation.
• Reflects social and demographic links (e.g., migration patterns).
• Policy relevance: governments may encourage remittances through lower transaction costs.

Common Examination Questions

1. Define secondary income and give two examples of inflows and two examples of outflows.
2. Explain how a rise in remittances would affect a country’s current account balance.
3. Using the formula for the current account balance, show how a large increase in foreign aid payments (outflows) could turn a current‑account surplus into a deficit.