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Balance of Payments and Exchange Rates: Question 1

Syllabus 6.3

Multiple choice AS 1 mark

A country's economy has many cross-border transactions in a single year, including the sale of goods abroad, migrant workers sending money home to relatives, and multinational companies moving profits between countries.

Which of the following is recorded as secondary income in the current account of the balance of payments?

Choose an answer to check it, then compare with the worked solution below.
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Worked solution

Step 1: Recall the four components of the current account

The current account of the balance of payments records four types of flow:

  • Trade in goods and trade in services, payments for physical exports/imports and for cross-border services.
  • Primary income, income earned from providing a factor of production abroad, or paid to foreign owners of factors employed at home: profits, interest, dividends, and compensation of employees.
  • Secondary income. Transfers between residents of different countries where nothing of direct economic value is given in return, for example workers’ remittances and international aid grants.

Step 2: Check option B

Money sent home by migrant workers to relatives is a personal transfer: the relatives receive money, but give nothing of direct economic value back in return. This is exactly what secondary income records.

Step 3: Rule out options A, C and D

  • Option A: repatriated factory profits are a return on foreign-owned capital invested in the country. This is primary income, not secondary income.
  • Option C: the furniture sale is a payment for a physical good crossing the border. This is trade in goods, not secondary income.
  • Option D: bank interest earned on an overseas loan is a return on a financial asset. This is also primary income, not secondary income.

Final answer

Option B. Remittances sent by migrant workers to relatives abroad are an unrequited transfer with no good, service or asset given in direct return, so they are recorded as secondary income; A and D are both primary income (profits and interest), and C is trade in goods.