Most of Pakistan’s foreign exchange earnings came from remittances sent by Pakistani workers in the Middle-east. In a country’s balance of payments, such remittances are recorded as:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Transfers, under invisibles in the current account
Remittances are money sent home by workers living abroad. The family receives it free, without giving any goods or services in return, so it is a transfer payment.
Transfers are part of invisibles, and the current account records trade in goods, services and transfer payments. So remittances go into the current account.
Foreign direct investment and borrowings are flows of assets and loans in the capital account, and exports of goods are visible trade.
This question uses Comparative Development Experiences of India and its Neighbours and Open Economy Macroeconomics together.
NCERT (2026-27): “… You will recall that India had to borrow from the IMF and World Bank to set right its balance of payments crisis; foreign exchange is an essential component for any country and it is important to know how it can be earned. If a country is able to build up its foreign exchange earnings by sustainable export of manufactured goods, it need not worry. In Pakistan most foreign exchange earnings came from remittances from Pakistani workers in the Middle-east and the exports of highly volatile agricultural products; there was also growing dependence on foreign loans on the one hand and increasing difficulty in paying back the loans on the other. …” Open Economy Macroeconomics: “6.1 The Balance of Payments … Current Account is the record of trade in goods and services and transfer payments. Figure 6.1 illustrates the components of Current Account. Trade in goods includes exports and imports of goods. Trade in services includes factor income and non-factor income transactions. Transfer payments are the receipts which the residents of a country get for ‘free’, without having to provide any goods or services in return. They consist of gifts, remittances and grants. They could be given by the government or by private citizens living abroad.” Open Economy Macroeconomics: “… Invisibles include services, transfers and flows of income that take place between different countries. …” |