Which one of the following statements is correct about the balance of payment (BOP)?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Accommodating transactions are made to bridge the gap between the BOP transactions.
A country’s ordinary dealings with the world, such as trade and investment made for profit, take place for their own sake and often leave the balance of payments in surplus or deficit. That gap has to be bridged, and the transactions made only to bridge it, mainly the central bank’s official reserve transactions, are called accommodating transactions. So the two kinds sit on either side of the line:
Autonomous transactions are made for their own sake, for profit for instance, independent of the state of the balance of payments; they are the ‘above the line’ items.
Accommodating transactions, the ‘below the line’ items, are determined by the gap that the autonomous transactions leave, a deficit or a surplus.
Why the other options are incorrect
Option (1) The Reserve bank buys foreign exchange when there is a deficit. — Incorrect. In a deficit the country needs foreign exchange, so the Reserve Bank sells foreign exchange from its reserves. It buys foreign exchange when there is a surplus.
Option (3) The country can use its gold reserves to balance the surplus in BOP. — Incorrect. Gold and foreign exchange reserves are the country’s store of international money. Reserves are drawn down to meet a deficit, when more foreign exchange goes out than comes in; a surplus adds to the reserves instead.
Option (4) Autonomous transactions are dependent on the state of BOP. — Incorrect. Autonomous transactions are independent of the state of the balance of payments; it is the accommodating transactions that depend on it.
NCERT (2025-26): “Autonomous and Accommodating Transactions … International economic transactions are called autonomous when transactions are made due to some reason other than to bridge the gap in the balance of payments, that is, when they are independent of the state of BoP. One reason could be to earn profit. These items are called ‘above the line’ items in the BoP. The balance of payments is said to be in surplus (deficit) if autonomous receipts are greater (less) than autonomous payments. Accommodating transactions (termed ‘below the line’ items), on the other hand, are determined by the gap in the balance of payments, that is, whether there is a deficit or surplus in the balance of payments. In other words, they are determined by the net consequences of the autonomous transactions. Since the official reserve transactions are made to bridge the gap in the BoP, they are seen as the accommodating item in the BoP (all others being autonomous).” |