Question

Differentiate between autonomous and accommodating transactions.

Short answer

Answer: The key differences between autonomous and accommodating transactions in international trade are: 1. Purpose: Autonomous transactions are carried out for commercial purposes to generate profit, while accommodating transactions are undertaken to balance or support the autonomous transactions, fulfilling financial needs rather than being profit-driven. 2. Market Forces vs. Policy Decisions: Autonomous transactions are determined by market forces and are influenced by factors such as supply, demand, price, and competition. They act independently of any monetary policy decisions. Accommodating transactions, on the contrary, are influenced by policy decisions and are implemented by governments and financial institutions to support the economy and maintain balance. 3. Types of Transactions: Autonomous transactions deal primarily with the exchange of goods and services, such as exports and imports, while accommodating transactions are more focused on financial assistance, like loans and grants to help balance the country's balance of payments.

Step-by-step solution

Define Autonomous Transactions

Autonomous transactions refer to the transactions related to international trade that are determined by the market forces, such as supply and demand. These transactions include exports and imports of goods and services, which are carried out for the purpose of generating profit. Autonomous transactions are also referred to as "above-the-line" transactions.

Define Accommodating Transactions

Accommodating transactions, on the other hand, are transactions that are carried out by economic agents to support or balance the autonomous transactions. These transactions are usually carried out by the government and its financial institutions. Accommodating transactions can include official reserve transactions, loans, and grants. These transactions are undertaken to adjust the balance of payments position and are also known as "below-the-line" transactions.

Compare Purpose

While autonomous transactions are carried out for commercial purposes to generate profit, accommodating transactions are undertaken to balance or support the autonomous transactions, fulfilling financial needs rather than being profit-driven.

Market Forces vs. Policy Decisions

Autonomous transactions are determined by market forces and are influenced by factors such as supply, demand, price, and competition. They act independently of any monetary policy decisions. Accommodating transactions, on the contrary, are influenced by policy decisions and are implemented by governments and financial institutions to support the economy and maintain balance.

Export and Import vs. Loans and Grants

Autonomous transactions deal primarily with the exchange of goods and services, such as exports and imports, while accommodating transactions are more focused on financial assistance, like loans and grants to help balance the country's balance of payments.

Example of Autonomous Transactions

An example of an autonomous transaction would be a company exporting goods and earning foreign currency, or importing materials from another country to manufacture products.

Example of Accommodating Transactions

An example of an accommodating transaction would be a government borrowing from international financial institutions to finance budget deficits or to stabilize the country’s foreign exchange reserves.