Explain the distinction between autonomous and accommodating transactions in Balance of Payments. Also explain the concept of Balance of Payments deficit in this context.
Autonomous transactions are the transactions between the residents of two countries which take place due to the consideration of profit. Autonomous items are not conditioned by the BoP status of the country, i.e. these are independent. These transactions are not done to establish identity of BoP. These are also known as ‘above the line items’ and take place in both the accounts of BoP, i.e. current and capital account.
Accommodating . transactions are those transactions which are not done due to the consideration of profit but to restore identity of BoP. These are undertaken to maintain balance in the BoP account. These transactions correct the disequilibrium in autonomous items of BoP account. Accommodating transactions are also known as ‘below the line items’ and include foreign exchange reserves and borrowings to meet BoP deficit.
BoP deficit When the payments of a country on account of autonomous transactions exceed the receipts of the country on account of autonomous transactions, this difference is termed as BoP deficit.
BoP Deficit = Receipts on Account of Autonomous Transactions < Payments on Account of Autonomous Transactions