The absorption approach emphasizes an appreciations or depreciation of the currency will alter the balance of payment accounts via how the:

Question

BlackTom AI · Accepted Answer

Balance of payments under the absorption approach is determined by the difference between national income (Y) and domestic absorption (A). The key identity is B = Y − A, where B is the balance on current account plus capital account adjustments as treated in this framework.

1) Relevant knowledge points and concepts
- Absorption approach (Alexander): B = Y − A. A depreciation or appreciation affects B via its effects on Y (income/output) and A (domestic expenditure or absorption = consumption + investment + government spending + imports).
- Transmission channels: exchange-rate changes alter relative prices, which change net exports and thus output (Y); they also change real wealth, import consumption and cost structures, which affect absorption (A).

2) Step-by-step reasoning
- Start with identity: B = Y − A.
- Differentiate: dB = dY − dA. Thus any currency movement impacts B only insofar as it changes Y or A.
- Consider a depreciation: foreign prices of domestic goods fall, boosting exports and reducing imports — this raises net exports and thus raises Y (dY > 0). But depreciation can also raise domestic prices, erode real balances, or stimulate consumption of domestic goods, so A may also rise (dA > 0).
- The net effect on B depends on magnitudes: if dY > dA then dB > 0 (improvement); if dA increases more than Y then dB < 0 (worsening).

3) Intermediate numeric illustration
- Suppose before depreciation Y = 100, A = 105 → B = −5.
- Depreciation raises Y by 8 (dY = +8) but increases A by 3 (dA = +3).
- New B = (100+8) − (105+3) = 108 − 108 = 0. Change dB = +5 = dY − dA.

4) Why the correct answer is correct
- Because the absorption approach explicitly models B as the gap between income and absorption; currency movements affect B only through changes in income and domestic expenditure. Hence the statement that appreciation/depreciation will alter B via how domestic expenditure and income change is precisely the approach’s core claim.

5) Why other possible choices would be incorrect
- Focusing only on relative prices or trade volumes ignores the role of domestic absorption; focusing only on capital flows ignores the income–absorption identity. The absorption approach requires assessing both Y and A, not just one channel.

Conclusion: Therefore the correct outcome is that appreciation or depreciation alters the balance of payments via how domestic expenditure and income change, which matches the provided answer.

The absorption approach emphasizes an appreciations or depreciation of the currency will alter the balance of payment accounts via how the:Single choice

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