(a) Define Accommodating Items under Balance of Payments (BoP). (b) "Economic transactions that are recorded in the current account can be classified in two parts — merchandise and invisibles. Net inflows from both the transactions are referred to as Trade Surplus." Do you agree with the given statement ? Give valid arguments in support of your answer.

Question

Accepted Answer

(a) **Accommodating Items:** These are transactions undertaken to cover deficit or surplus in autonomous transactions. They are compensating capital transactions meant to correct disequilibrium in BOP. They occur only on capital account and are known as 'below the line items'.

*Example:* Drawing foreign exchange reserves to finance current account deficit.

(b) **Current Account Classification:**
Economic transactions recorded in the current account can be classified into:

1. **Merchandise (Visible Items):** Export and import of goods
   - Exports are credit items
   - Imports are debit items
   - Balance is Balance of Trade

2. **Invisibles (Invisible Items):**
   - Non-factor services (shipping, banking, insurance)
   - Factor services (compensation of employees, investment income)
   - Unilateral transfers (gifts, remittances)

Net invisibles = Credit items - Debit items in invisible account