Question

Explain the distinction between autonomous and accommodating transactions in balance of payments. Also explain the concept of balance of payments 'deficit' in this context

Answer 1

An autonomous item in balance of payment refers to international economic transactions when transactions are made independently of the state of the balance of payment, such as profit motive.

An accommodating item in balance of payment refers to international economic transactions when transactions are not made with the profit motive such as government financing. While deficit or surplus in balance of payment occurs because of autonomous items, the accommodating items are meant to restore the balance of payment identity. Balance of payment always balances because of accommodating items.

Deficit in balance of payments is when receipts of the country coming from autonomous transactions are less than the corresponding payments to the rest of the world during the period of an accounting year. It shows net liabilities towards the rest of the world.

There are certain positive and negative impacts of deficit in balance of payment. When deficit occurs on account of capital import which is required for advancing the process of growth and development, it is a positive impact of deficit in balance of payment. Negative impact is that it shows Indian liabilities to the rest of the world. These liabilities strain the GDP by making payments to the rest of the world.