If the balance of payment is a double entry accounting record, then apart from errors and omissions, it must always balance. Obviously, the terms “deficit” or “surplus” cannot refer to the entire BOP but must indicate imbalance on a subset of accounts included in the BOP. The “imbalance” must be interpreted in some sense as an economic disequilibrium.
Since the notion of disequilibrium is usually associated within a situation that calls for policy intervention of some sort, it is important to decide what is the optimal way of grouping the various accounts within the BOIP so that an imbalance in one set of accounts will give the appropriate signals to the policy makers. In the language of an accountant e divide the entire BOP into a set of accounts “above the line” and another set “below the line.” If the net balance (credits-debits) is positive above the line we will say that there is a “balance of payments surplus”; if it is negative e will say there is a “balance of payments deficit.” The net balance below the line should be equal in magnitude and opposite in sign to the net balance above the line. The items below the line can be said to be a “compensatory” nature – they “finance” or “settle” the imbalance above the line.
The critical question is how to make this division so that BOP statistics, in particular the deficit and surplus figures, will be economically meaningful. Suggestions made by economist and incorporated into the IMF guidelines emphasis the purpose or motive a transaction, as a criterion to decide whether a transaction should go above or below the line. The principle distinction between “autonomous” transaction and “accommodating” or compensatory transactions. Transactions are said to Autonomous if their value is determined independently of the BOP. Accommodating capital flows on the other hand are determined by the net consequences of the autonomous items. An autonomous transaction is one undertaken for its own sake in response to the given configuration of prices, exchange rates, interest rates etc, usually in order to realise a profit or reduced costs. It does not take into account the situation elsewhere in the BOP. An accommodating transaction on the other hand is undertaken with the motive of settling the imbalance arising out of other transactions. An alternative nomenclature is that capital flows are ‘above the line’ (autonomous) or ‘below the line’ (accommodating). The terms “balance of payments deficit” and “balance of payments surplus” will then be understood to mean deficit or surplus on all autonomous transactions taken together.
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