Components of the current account of the balance of payments: secondary income
International trade and globalisation – Current account of the balance of payments
What is the current account?
The current account records all the money that flows in and out of a country in the form of trade, income and transfers. It is usually written as a balance: surplus if more money comes in than goes out, deficit if the opposite.
Components of the current account
- Goods and services (exports & imports)
- Primary income (investment earnings)
- Secondary income (gifts, loans, remittances)
Secondary income – the “money‑gift” part
Secondary income is the money that moves across borders without being tied to buying or selling goods. Think of it as a family reunion across countries where relatives send money to each other.
Exam tip: Secondary income is usually a small part of the total current account. In many exam questions it is omitted from the simple formula, but remember to write
SI if the question asks for it.
Example: The UK sends £500 m in gifts to a friend in Spain. This is counted as secondary income and added to the current account balance.
Analogy: Imagine a family reunion. The gifts and loans exchanged between relatives are like secondary income – they are not part of the family’s trade of goods, but they still move money across borders.
How secondary income is recorded
| Category | Example | Recorded as |
|---|---|---|
| Gifts | Money sent to a relative abroad | + (inflow) |
| Loans | Bank loan to a foreign company | + (inflow) |
| Remittances | Foreign workers sending money home | + (inflow) |
| Wages paid abroad | UK company paying a German employee | - (outflow) |
| Investment income | Dividends from foreign shares | + (inflow) |
Calculating the current account (including secondary income)
- Start with exports (X) and subtract imports (M).
- Add primary income (NI) – earnings from foreign investments.
- Add secondary income (SI) – gifts, loans, remittances, wages, investment income.
- Result:
CA = X - M + NI + SI(current account balance).
💡 Remember: Secondary income is usually a small part of the overall current account but it can be significant for countries that rely heavily on remittances.
Revision
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