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.

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

Official reserves will increase

Official reserves will fall.

Official reserves will not be affected.

There will be an increase in international lending of the economy.

✅ Correct Option: 2

Option 1 -> In a BOP deficit, payments exceed receipts, so reserves are used up, not increased.

Option 2 -> When BOP is in deficit, the central bank must use official reserves to finance the deficit, causing reserves to fall.

Option 3 -> Official reserves are directly used to settle BOP deficits, so they are affected.

Option 4 -> A BOP deficit means the country needs financing, not that it's lending to others.

Hence, Option 2: Official reserves will fall -> In a Balance of Payments deficit situation, the country's foreign exchange outflows exceed inflows. To bridge this gap and maintain external balance, the central bank must draw down its official foreign exchange reserves. These reserves (including foreign currencies, gold, and SDRs) are used to finance the deficit by making payments for imports, debt servicing, or capital outflows. As these reserves are depleted to cover the shortfall, they naturally decrease. This is the standard mechanism through which BOP deficits are temporarily financed until corrective measures restore balance -> correct

Question 41

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

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 45

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

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

Solution

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