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 incorrect about accommodating transactions of the BoP?

They are termed 'below the line' items.

These are determined by the gap in the balance of payments.

They are independent of the state of BoP.

They are made to bridge the gap in the BoP.

✅ Correct Option: 3

Option 1 -> Accommodating transactions are correctly termed 'below the line' items in BoP accounting.

Option 2 -> Accommodating transactions are indeed determined by the gap that exists in the balance of payments.

Option 3 -> This statement is incorrect because accommodating transactions are DEPENDENT on the state of BoP, not independent. They occur specifically because of the gap in BoP.

Option 4 -> Accommodating transactions are made specifically to bridge the gap in the BoP, which is their primary purpose.

Hence, Option 3 -> Accommodating transactions are entirely dependent on the state of Balance of Payments, not independent. These transactions (like borrowings from IMF, use of foreign exchange reserves) occur only when there is a deficit or surplus in autonomous transactions. They are undertaken by monetary authorities specifically to correct the disequilibrium in BoP. This is opposite to autonomous transactions which are independent of BoP state and are undertaken for business or profit motives -> 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 44

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

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

Solution

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