Autonomous and Accommodating Transactions Economics Article shared by: If a country has a deficit or surplus in its balance of current account, there are always some off-setting transactions on the capital account to bring the balance of payments in a state of equilibrium. For instance, if the importers have imported goods worth Rs. This inflow of capital is required by the BOP situation of the country. Suppose a foreign exporter buys an advertising agency in the country at the cost of Rs.
This capital inflow is not connected with the BOP situation. It will have, no doubt, significance for the BOP account of a quite different character.
It is necessary to make a clear distinction between these two types of capital flows: Autonomous transactions or capital flows are those which occur in the current and capital accounts for business or profit motive independently of the BOP considerations. Suppose India borrows million dollars from the World Bank for the construction of a power project, this amount is credited into the Long Term Capital Account of India. Similarly, if a foreign multinational corporation remits million dollars of their profits to the country of origin, this is a capital service debit item or the investment income outflow.
The autonomous transactions are also known as Above the Line Transactions. Those transactions which are necessitated by the disequilibrium in the balance of payments are regarded as the accommodating transactions. Sodersten has defined the accommodating flows in these words. These are the capital flows that take place specifically to equalize the balance of payments in the book-keeping sense. These transactions result from and are needed to balance the international transactions.
If India, a non-gold exporting country, is forced to export gold worth Rs. The accommodating transactions are also termed as Below the Line Transactions. The distinction between autonomous and accommodating transactions can be explained through Table The autonomous payments on account of import of goods, services and capital still exceed the autonomous receipts by Rs. This gap is adjusted through accommodating capital inflow of Rs.
It is now possible to express the balance of payments account of the country as shown in Table Row 5 in Table This necessitates an accommodating capital inflow of Rs. That results in an overall balance of payments equilibrium for the country Row 7. The distinction between autonomous and accommodating transactions can be fully understood on the basis of the following points: The accommodating capital flows are of the nature of residual needed.
These can be regarded as ex-post. Only at the end of a given period, it is possible to determine how much accommodating transaction is required. It is now possible to define the BOP equilibrium which occurs when autonomous payments of the country become equal to the autonomous receipts and there is no accommodating capital movement.