Distinguish between autonomous transactions and accommodating transactions in the Balance of Payments of the economy.

Question

Accepted Answer

**Autonomous Transactions:** These are international economic transactions that take place due to economic motives like profit maximisation. They are independent of the state of BOP account and are also known as 'above the line items'. They occur on both current and capital accounts.

*Example:* A foreign company investing in India to earn profit, or merchandise exports/imports.

**Accommodating Transactions:** These are transactions undertaken to cover deficit or surplus in autonomous transactions. They are compensating capital transactions meant to correct disequilibrium and are known as 'below the line items'. They occur only on capital account.

*Example:* Drawing down foreign exchange reserves to finance a current account deficit.