Question

Differentiate between autonomous transactions and accommodating transactions in Balance of Payments (BoP).

Hint:

Autonomous transactions are independent of the BoP, have an economic motive and are above the line. Accommodating transactions cover the BoP surplus or deficit, have no economic motive and are below the line.

Answer 1

Step 1: Understanding the Concept:
International transactions in the BoP are of two kinds. Some happen on their own for profit or gain. Others are done only to make up for a gap in the BoP. We study the difference between these two kinds.

Step 2: Meaning of each type:
Autonomous transactions are international economic transactions that are independent of the state of the BoP. They take place whatever the BoP position is.
Accommodating transactions are international economic transactions that are done by the competent authorities (such as the central bank) to cover the surplus or deficit in the BoP.

Step 3: Difference between the two:

Basis	Autonomous transactions	Accommodating transactions
Dependence on BoP	Independent of the state of the BoP	Done to cover the surplus or deficit of the BoP
Motive	Undertaken with an economic motive, such as profit	Not driven by any economic motive
Position in the account	"Above the line" items	"Below the line" items
Who undertakes	Households, firms and the government	Competent authorities such as the central bank

Step 4: Examples:
Export of rice to Japan and import of oil are autonomous transactions.
The RBI paying a deficit by using its foreign exchange reserves is an accommodating transaction.

Final Answer:
Autonomous transactions are independent of the BoP, made for an economic motive and shown above the line. Accommodating transactions are made to cover the BoP surplus or deficit, have no economic motive and are shown below the line.