Which of the following statement is true about Autonomous transactions?
BOP is said to be in surplus if autonomous receipts are greater than autonomous payments
Understanding Autonomous Transactions in Balance of Payments
The Balance of Payments (BOP) is a statement that records all economic transactions between residents of a country and the rest of the world during a specific period. These transactions are broadly classified into two main categories: Autonomous transactions and Accommodating transactions.
What are Autonomous Transactions?
Autonomous transactions are international economic transactions that are undertaken for some motive other than to correct the BOP deficit or surplus. These transactions are determined by economic considerations such as profit maximization. They are often called "above the line" items in the BOP statement.
- Examples include exports and imports of goods and services (Current Account) and long-term capital flows like foreign investment (Capital Account).
- The balance of autonomous transactions determines whether there is a surplus or deficit in the BOP.
Analyzing the Given Statements about Autonomous Transactions
Let's examine each statement provided in the options:
Statement 1: These items are done to correct the imbalance of BOP Account
This statement is false. Transactions done to correct the imbalance of the BOP are called Accommodating transactions (or "below the line" items), not Autonomous transactions. Autonomous transactions occur independently of the BOP position.
Statement 2: These are also known as below the line item
This statement is also false. Autonomous transactions are known as "above the line" items because they are the transactions whose balance determines the BOP surplus or deficit. "Below the line" items are Accommodating transactions, which are undertaken to cover the surplus or deficit arising from autonomous transactions.
Statement 3: These only occur in capital A/c of BOP
This statement is false. Autonomous transactions occur in both the Current Account and the Capital Account. Exports and imports of goods and services are autonomous transactions recorded in the Current Account. Foreign direct investment and portfolio investment, motivated by profit, are autonomous capital flows recorded in the Capital Account.
Statement 4: BOP is said to be in surplus if autonomous receipts are greater than autonomous payments
This statement is true. The overall balance of the BOP is determined by the net flow of autonomous transactions. If the total autonomous receipts (money coming into the country from exports, foreign investment, etc.) exceed the total autonomous payments (money leaving the country for imports, investment abroad, etc.), the country has a BOP surplus. Conversely, if autonomous payments exceed autonomous receipts, there is a BOP deficit.
Conclusion
Based on the analysis of the statements, only the fourth statement accurately describes a characteristic related to Autonomous transactions and the Balance of Payments.
| Feature | Autonomous Transactions | Accommodating Transactions |
|---|---|---|
| Motive | Profit, economic advantage (independent of BOP position) | To cover BOP surplus/deficit (dependent on BOP position) |
| Classification | Above the line | Below the line |
| Accounts Involved | Current and Capital Accounts | Official Reserve Account (e.g., changes in foreign exchange reserves) |
| Impact on BOP Balance | Their net balance determines the BOP surplus or deficit | They finance the BOP surplus or deficit |
Revision Table: Key Concepts in Balance of Payments
| Term | Definition | Relevance |
|---|---|---|
| Balance of Payments (BOP) | A record of all economic transactions between a country's residents and the rest of the world. | Provides insight into a country's international economic position. |
| Current Account | Records trade in goods and services, investment income, and transfers. | Reflects a country's net income from abroad. |
| Capital Account | Records capital transfers and acquisition/disposal of non-produced, non-financial assets. (Often combined with Financial Account). | Records changes in foreign ownership of domestic assets and domestic ownership of foreign assets. |
| Financial Account | Records transactions in foreign direct investment, portfolio investment, other investment, and reserve assets. | Shows how the current account balance is financed and changes in a country's net foreign asset position. |
| Autonomous Transactions | Transactions driven by economic motives (profit, etc.), independent of BOP balance. | Determine the overall BOP surplus or deficit. |
| Accommodating Transactions | Transactions undertaken specifically to finance/cover the BOP surplus or deficit. | Balance the BOP account after autonomous transactions. |
| BOP Surplus | Autonomous receipts > Autonomous payments. | Indicates an increase in foreign exchange reserves or decrease in foreign liabilities (in Accommodating transactions). |
| BOP Deficit | Autonomous payments > Autonomous receipts. | Indicates a decrease in foreign exchange reserves or increase in foreign liabilities (in Accommodating transactions). |
Additional Information: BOP Equilibrium and Adjustment
While the BOP identity states that the overall balance (Current Account + Capital Account + Financial Account + Errors & Omissions) must sum to zero when all types of transactions, including changes in reserves, are considered, the terms 'surplus' and 'deficit' in the context of BOP usually refer to the balance of autonomous transactions.
- BOP Equilibrium: This occurs when autonomous receipts equal autonomous payments, resulting in neither a surplus nor a deficit in the autonomous balance.
- BOP Disequilibrium: This happens when there is either a surplus (autonomous receipts > autonomous payments) or a deficit (autonomous payments > autonomous receipts).
- Accommodating transactions, particularly changes in official foreign exchange reserves held by the central bank, are used to finance this disequilibrium. A deficit is met by drawing down reserves or borrowing, while a surplus leads to an accumulation of reserves or lending abroad.
- Understanding the distinction between autonomous and accommodating transactions is crucial for analyzing the causes of BOP imbalances and the policies used to address them. Policies aimed at correcting a BOP deficit often target the components of autonomous transactions (e.g., promoting exports, discouraging imports, attracting foreign investment).
Important Questions from Foreign Exchange Rate and Balance of Payments
One among the following should be added to MPC to find the result 1 (one). Choose the correct answer:
Match List-I with List-II:
List-I List-II (A) Increase in price (I) Will lead to downward movement (B) Decrease in price (II) Will lead to upward movement (C) Increase in price of substitute goods (III) Will lead to leftward shift in demand curve (D) Unfavourable taste & preference (IV) Will lead to rightward shift in demand curve of normal goods Choose the correct answer from the options given below:
Which among the following is not the central problem of an economy?
If the exchange rate is ₹80 for a dollar, what would be the cost of a shirt of ₹800 in US dollars?
Match List-I with List-II:
List-I List-II (A) Wealth Tax (I) Single comprehensive indirect tax (B) Income Tax (II) Indirect Tax (C) Service Tax (III) Paper Tax (D) GST (IV) Direct Tax Choose the correct answer from the options given below:
