---
title: "Remittances | Principles of Economics"
description: "Remittances are money migrants send home across borders, affecting exchange rates, trade balances, and household income in Principles of Economics."
canonical: "https://fiveable.me/principles-econ/key-terms/remittances"
type: "key-term"
subject: "Principles of Economics"
unit: "Unit 29"
---

# Remittances | Principles of Economics

## Definition

Remittances are money transfers that migrant workers send to people in their home country. In Principles of Economics, they show up as cross-border income flows that affect exchange rates, trade balances, and development.

## What It Is

Remittances are the money migrants send back to family members or communities in another country. In Principles of Economics, they are treated as a cross-border financial flow, not as trade in goods or services. That means they matter when you look at how money moves between countries, especially in the balance of payments and foreign exchange market.

A simple example is a worker from Mexico who earns wages in the United States and sends part of that income to relatives at home. The recipient household might use the money for food, rent, school fees, medicine, or even small business investment. That spending can raise living standards directly, but it also spreads through the local economy as those dollars are spent again.

Economically, remittances are often a major source of foreign currency for countries that send a lot of workers abroad. When remittances arrive, they add to the supply of foreign exchange available in the recipient country. That can affect the value of the local currency and make it easier for the country to pay for imports or cover other international payments.

This is why remittances show up in discussions of trade balances and balance of payments. Even if a country imports more than it exports, steady remittance inflows can help offset the gap and reduce pressure on external accounts. They are not the same thing as exports, but they still bring money into the country from abroad.

Remittances also connect to immigration and development. When workers move for jobs, they may send money home for years, so the economic effects do not stay inside one labor market. In class, you might see remittances in a graph of currency demand, a balance of payments table, or a case study about how households in developing economies use money from abroad.

## Why It Matters

Remittances matter because they connect household decisions to international economics. A transfer from one worker can affect family income, local spending, exchange rates, and a country's external accounts all at once. That makes them useful for explaining how migration changes more than just labor supply in the destination country.

They are also a common way to compare countries. Some economies rely heavily on remittance inflows, especially when many citizens work abroad. That can support consumption and reduce short-term financial stress, but it can also make a country dependent on income earned elsewhere.

For Principles of Economics, remittances are a clean example of how money flows can stabilize or pressure a country's balance of payments. They also help explain why the foreign exchange market reacts to real-world transfers, not just trade in goods. If you can trace where the money comes from and where it is spent, you can usually explain the economic effect.

## Connections

### Migrant Workers

Remittances usually come from migrant workers earning income abroad and sending part of it home. The migration decision creates the flow, but the remittance itself is the money transfer that shows up in households and international accounts. In many examples, the worker is the starting point and the remittance is the economic outcome.

### Balance of Payments

Remittances are part of the money a country receives from abroad, so they affect the balance of payments. They can help offset trade deficits by bringing in foreign currency even when imports are larger than exports. If you are reading a balance of payments table, remittances are one reason the current account may look stronger than the merchandise trade balance alone.

### Foreign Exchange Market

When remittances enter a country, they increase the supply of foreign currency or create demand for the local currency, depending on how the transfer is handled. That can affect exchange rates. In a market graph, remittance inflows are one of the real-world reasons currency supply shifts.

### [GNI per capita](/principles-econ/key-terms/gni-capita)

Remittances can raise income available to residents, which is why they matter when comparing living standards and development. GNI per capita includes income earned by residents from abroad, so remittances fit more naturally into that measure than GDP does. They do not change domestic production the same way, but they do change national income.

## On the AP Exam

A quiz question may ask you to identify remittances in a scenario about a worker abroad sending money home, then explain the effect on the recipient country's currency or balance of payments. In a graph question, you might trace how remittance inflows increase the supply of foreign exchange or support demand for the local currency. In a short response or discussion prompt, you could be asked to compare remittances with exports, foreign direct investment, or aid. The safest move is to name the transfer, say who sends it, say who receives it, and connect it to one measurable effect such as higher household income, a smaller trade gap, or a change in currency value.

## Remittances vs Foreign Direct Investment

Remittances are money sent by workers to households, while foreign direct investment is money invested to buy or build productive assets in another country. Remittances usually support consumption and family budgets, but FDI is aimed at ownership, expansion, or profit from a business operation. If the scenario says a person sends earnings home, think remittances. If it says a firm or investor is funding a plant, office, or equipment abroad, think FDI.

## Key Takeaways

- Remittances are cross-border money transfers from migrant workers to people in their home country.
- They show up in Principles of Economics as part of international money flows, not as exports of goods or services.
- Remittance inflows can support household spending, local businesses, and national income in the receiving country.
- They can also affect the foreign exchange market and the balance of payments by bringing in foreign currency.
- A good way to spot remittances is to ask who earned the money abroad and who is receiving it back home.

## FAQs

### What is remittances in Principles of Economics?

Remittances are money transfers that migrants send back to their home country. In Principles of Economics, they matter because they move foreign currency across borders and can affect household income, exchange rates, and the balance of payments.

### Are remittances counted as trade?

No. Remittances are not trade in goods or services, so they are not part of the merchandise trade balance. They are a financial transfer, which is why they show up in discussions of the balance of payments and foreign exchange.

### How do remittances affect exchange rates?

When remittances flow into a country, they can increase demand for the local currency or increase the supply of foreign currency in the market. Either way, the inflow can put upward pressure on the local currency compared with a situation with fewer transfers.

### What is the difference between remittances and foreign direct investment?

Remittances are money sent to families or communities, usually for living expenses or small investments. Foreign direct investment is money put into business assets like factories, offices, or equipment. One supports households, the other is aimed at productive ownership.

## Related Study Guides

- [29.2 Demand and Supply Shifts in Foreign Exchange Markets](/principles-econ/unit-29/2-demand-supply-shifts-foreign-exchange-markets/study-guide/2lW35i4q1RHuw8hc)
- [32.1 The Diversity of Countries and Economies across the World](/principles-econ/unit-32/1-diversity-countries-economies-world/study-guide/AzaGuBlZaCr3o8h9)
- [23.1 Measuring Trade Balances](/principles-econ/unit-23/1-measuring-trade-balances/study-guide/ZhTt3c9Z3yDjvrj9)
- [14.6 Immigration](/principles-econ/unit-14/6-immigration/study-guide/oBUrXYllQNRNXywV)

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