Study Notes
The current account of the balance of payments records a country's transactions with the rest of the world, including trade in goods and services, primary income, and secondary income. It reflects the net result of a country's export and import activities.
- Trade in Goods (Balance of Trade) — records the value of a country's exports and imports of physical goods. Example: Machinery and raw materials.
- Trade in Services — accounts for the export and import of non-tangible services. Example: Tourism and financial services.
- Primary Income — involves earnings and payments related to factors of production. Example: Wages and profits from investments.
- Secondary Income (Transfers) — records transfers between countries without an exchange of goods or services. Example: Gifts and remittances.
- Current Account Balance — the sum of the trade in goods, trade in services, and primary income. Example: Net result of export and import activities.
Exam Tips
Key Definitions to Remember
- Trade in Goods
- Trade in Services
- Primary Income
- Secondary Income
- Current Account Balance
Common Confusions
- Confusing primary income with secondary income
- Misunderstanding the difference between trade in goods and trade in services
Typical Exam Questions
- What is meant by a trade in goods surplus? The value of exports of goods exceeds the value of imports of goods.
- Which of the following would appear as a credit item in primary income? Earnings of some of the country’s residents who work for a few months in other countries.
- Which of the following would be included in the current account of the balance of payments? Spending by French people on holiday in Mauritius.
What Examiners Usually Test
- Understanding of the components of the current account
- Ability to calculate the current account balance
- Causes and consequences of current account imbalances