2. The balance of international payments is a book-keeping tautology Essay

2. The balance of international payments is a book-keeping tautology which is essentially irrelevant to a market economy. Discuss - Essay Example Conversely, a more vital concept of the balance of payments equilibrium is the basic balance, which is based on the presence of autonomous items in BOP. The autonomous items include items that cannot be influenced easily by the Government and are determined by certain long-term factors. Basic balance regards autonomous, the long-term capital shifts both on Government or private account held in the capital account and excludes items in the current account balance of payments. Conversely, in the capital account short-term movements such as the use of special drawing rights, borrowing from Central Banks or IMF, change in foreign exchange reserves are of accommodating the nature and transitory. Therefore, they are excluded from equilibrium and the concept of basic balance (McConnell & Brue, 2013). An alternative to these accommodating items (compensatory items) has to be made to ensure equality of foreign exchange receipts and payments. A change in the compensatory elements is essential to offset the surplus or deficit in the autonomous items. Autonomous movements cancel out over some suitable period and therefore there lacks the need for compensatory changes and in such a case the balance of payments is said to be in equilibrium (McConnell & Brue,