Economics – International trade and globalisation - Current account of the balance of payments | e-Consult
International trade and globalisation - Current account of the balance of payments (1 questions)
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Secondary income in the balance of payments represents income earned and received from overseas investments. It's a crucial component reflecting a country's financial performance globally. The main components are:
- Compensation of Employees: This includes wages and salaries earned by a country's citizens working abroad, and the wages earned by foreign citizens working in the home country. Example: A British engineer working on a project in the USA earns wages that are recorded as a credit to the UK's secondary income.
- Investment Income: This encompasses profits, interest, dividends, and capital gains earned on overseas investments. Example: A UK company earning profits from a subsidiary in Germany records these profits as a credit. Interest earned on a US bond held by a UK investor is also included.
- Transfer Payments: These are payments made with no direct exchange of goods or services. Example: Remittances sent by UK citizens working abroad to their families in the UK are recorded as a credit. Overseas aid received by a country is also a transfer payment.
Global economic conditions significantly impact secondary income flows.
- Economic Growth: Strong global economic growth typically leads to increased business activity and investment, resulting in higher profits and therefore increased investment income for countries with overseas investments.
- Interest Rate Differentials: Changes in interest rates between countries can influence capital flows. Higher interest rates in a country can attract foreign investment, increasing interest income.
- Recessions: During recessions, businesses may reduce profits, leading to lower investment income. Reduced economic activity can also lead to job losses for citizens working abroad, reducing compensation of employees.
- Exchange Rate Fluctuations: Changes in exchange rates can affect the value of income flows. A weaker domestic currency can increase the value of income received from overseas.