Question 3:Distinguish between autonomous and accommodating transactions in Balance of Payments Accounts.
The correct answer is – The Balance of Payments (BoP) is a record of all economic transactions that take place between a country and the rest of the world over a specific period. The BoP is divided into two main categories of transactions: autonomous transactions and accommodating transactions.
-
Autonomous Transactions: Autonomous transactions are those transactions that take place on their own without any direct intervention by the government or central bank. They include:
-
Trade in goods and services: These are transactions between residents and non-residents involving the exchange of goods and services. For example, exports and imports of goods and services.
-
Investment income: These are transactions involving the receipt of income from investments made in other countries, such as dividends, interest, and profits.
-
Unilateral transfers: These are transfers of wealth between residents and non-residents that are made without any expectation of a return. For example, foreign aid, grants, and gifts.
-
Accommodating Transactions: Accommodating transactions are those transactions that take place in response to other transactions and are undertaken by the government or central bank to adjust the balance of payments. They include:
-
Official reserves: These are transactions that involve the buying and selling of foreign currencies by the central bank to maintain the stability of the domestic currency.
-
Short-term capital flows: These are transactions that involve the movement of funds in and out of a country for short-term investments or speculation.
-
Banking sector flows: These are transactions that involve the borrowing and lending of funds between domestic and foreign banks.
