THE TRADE BALANCE AND EXCHANGE RATES
139
5.2
Other Approaches to the Trade
Balance
The elasticities approach emphasized the price variables as a determinant
of the trade balance. The
ABSORPTION
APPROACH
was developed in the 1950s by
Sidney Alexander, an economist at the IMF. It highlights the fact that changes
in domestic income are important in understanding trade balances. Absorption
(
A
) is nothing but a nation’s total expenditures on final goods and services—
consumption, investment, government expenditure, and imports. Thus,
A
=
C
+
I
+
G
+
M
As you can see, exports are excluded from absorption as they are part ...
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