Question

“Mr. Spector, a normal resident of XYZ country, took a \[\$\] 1 million loan from an overseas bank to expand his manufacturing business. During the same year, the Government of XYZ country borrowed \[\$\] 5 billion from an international financial institution to cover the Balance of Payments (BoP) deficit prevailing in the country.”

Mishika, an economics student, read the above information and identified both the transactions cited, as autonomous transactions in the BoP account of XYZ country.

Do you agree with Mishka’s identification of the underlying concept? Give valid arguments in support of your answer.

Answer 1

No. The loan taken by Mr Spector can be classified as an autonomous transaction. Such international economic transactions are independent of the state of the Balance of Payments (BoP) and generally take place with an economic motive. However, the loan taken by the government in this case can be classified as an accommodating transaction. Such transactions are those international economic transactions which are undertaken (by competent authorities) to cover the surplus or deficit in BoP and are independent of any economic motive.