Question

Explain how Accommodating Transactions differ from Autonomous Transactions.

Hint:

Autonomous transactions are market-driven, while accommodating transactions are interventions made to balance payments.

Answer 1

Accommodating and Autonomous Transactions are both parts of the Balance of Payments, but they differ in their nature and function:
1. Autonomous Transactions:
Autonomous transactions are transactions that occur independently of any external intervention. They are motivated by economic and financial activities such as trade in goods and services, foreign investments, or remittances. These transactions are largely driven by market forces and contribute to the economic flow between countries. Autonomous transactions include exports, imports, FDI, FPI, and international borrowing/lending.
2. Accommodating Transactions:
Accommodating transactions are adjustments made to balance the capital and current accounts in the Balance of Payments. These transactions do not occur naturally but are undertaken by central banks or governments to offset any imbalances caused by autonomous transactions. For example, if a country faces a deficit in its current account, the central bank may borrow or lend money in the international financial markets to balance the payments. Accommodating transactions help maintain equilibrium in the Balance of Payments.
In summary, autonomous transactions are driven by market forces, while accommodating transactions are government or central bank interventions designed to balance external payments.