Macro

Balance of Payments

Medium

Autonomous and Accommodating Transactions

International economic transactions are called autonomous when transactions are made due to some reason other than to bridge the gap in the balance of payments, that is, when they are independent of the state of BoP. One reason could be to earn profit. These items are called 'above the line' items in the BoP. The balance of payments is said to be in surplus (deficit) if autonomous receipts are greater (less) than autonomous payments.

Accommodating transactions (termed 'below the line' items), on the other hand, are determined by the gap in the balance of payments, that is, whether there is a deficit or surplus in the balance of payments. In other words, they are determined by the net consequences of the autonomous transactions. Since the official reserve transactions are made to bridge the gap in the BoP, they are seen as the accommodating item in the BoP.

Which of the following is not an autonomous transaction of the balance of payments?

External commercial borrowings

Exports

Official reserve transactions

Foreign direct investment

✅ Correct Option: 3

Option 1 -> External commercial borrowings are autonomous transactions undertaken for profit or business expansion purposes.

Option 2 -> Exports are autonomous transactions driven by the motive to earn profit through international trade.

Option 3 -> Official reserve transactions are accommodating transactions, not autonomous, as they are undertaken by central banks to correct BOP imbalances.

Option 4 -> Foreign direct investment is an autonomous transaction motivated by investment returns and business expansion.

Hence, Option 3: official reserve transactions -> Autonomous transactions are independent transactions undertaken due to profit motive, consumption, or investment needs. Accommodating transactions (like official reserve transactions) are undertaken specifically to finance deficits or surpluses in the balance of payments. When there's a BOP deficit or surplus, the central bank uses official reserves to balance it, making these transactions dependent on the BOP position rather than independent economic motives. -> correct

Question 42

Suppose the central bank of an economy records a net increase in the foreign exchange reserves for a given quarter. How will this be reflected in the balance of payments account of this economy?

Question 43

Balance of payments of an economy is in surplus when__________

Question 44

In a situation of Balance of payments deficit, which of the following will be true?

Question 45

Which of the following is incorrect about accommodating transactions of the BoP?

Which of the following is not an autonomous transaction of the balance of payments?

Solution

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