Came someone please explain to me elasticity and/or absorption approaches to explaining rate changes on the trade deficits. I see these questions on the mocks all the time and I don’t ever see them in anything else.
Thanks.
Elasticity - there’s the marsh lerner condition wx*ex+wm*(em-1)>0 when we know depriciation increases => trade deficit decreases. Jcurve effect says in short term this may not work due to inherent inelasticities in trade markets but it does in long term.
Absorption. Unlike elasicity approach that just uses trade flow, we also look at capital flows. X-M=(S-I)-(G-T), so if S+(T-G)>I deficit decreases. ie.National savings (private+govt)>domestic investments