Question

Distinguish between Autonomous transactions and Accommodating transactions.

Hint:

Autonomous transactions reflect normal economic activity, whereas accommodating transactions are corrective measures taken to balance the country's overall balance of payments.

Answer 1

Autonomous transactions and accommodating transactions are two types of transactions that take place in the Balance of Payments. Here's the distinction between them:
1. Autonomous Transactions: Autonomous transactions are those international transactions that are undertaken for business or investment purposes, independent of the balance of payments. These transactions are generally carried out without considering the need to balance the overall BoP. Examples include exports and imports of goods and services, foreign investments, and foreign loans. Autonomous transactions are typically long-term and driven by market forces. They do not arise due to any balancing requirement of the BoP.
2. Accommodating Transactions: Accommodating transactions, on the other hand, are those that occur as a result of the need to balance the overall Balance of Payments. These transactions are usually in the form of changes in the reserve account, like changes in foreign exchange reserves or borrowing from international institutions to cover any deficits. When a country has a deficit in its current account, it can borrow or use foreign exchange reserves to accommodate the imbalance. Accommodating transactions are short-term and are used to correct BoP imbalances.
In summary, autonomous transactions are driven by economic activity, while accommodating transactions are adjustments made to balance the BoP.