Question

Define with suitable examples, autonomous transactions and accommodating transactions in the Balance of Payments of an economy.

Hint:

Autonomous transactions are marketdriven, while accommodating transactions are policydriven to balance BoP disequilibrium.

Answer 1

In the Balance of Payments (BoP) of an economy, transactions are categorized into two types: autonomous transactions and accommodating transactions. 
1. Autonomous Transactions: These are transactions that are undertaken for economic reasons such as profit maximization or trade promotion, independent of the BoP situation of a country. They are often called "above the line" transactions and are influenced by market forces. 
Examples: Exports and imports of goods and services. Foreign investments by multinational corporations (FDI). Remittances received from overseas workers. 
2. Accommodating Transactions: These transactions are undertaken to correct imbalances in the BoP, specifically to finance deficits or manage surpluses. They are often called "below the line" transactions and are driven by the BoP position rather than economic motives. 
Examples: Borrowing from the International Monetary Fund (IMF) to finance a BoP deficit. Use of foreign exchange reserves to stabilize the currency. Shortterm government borrowings from foreign institutions. 
Conclusion: While autonomous transactions represent the normal economic dealings of a country, accommodating transactions act as corrective measures to maintain equilibrium in the BoP.