The Absorption approach states that when the economy is operating at less than full employment, currency depreciation makes domestic goods and assets more attractive than foreign goods and assets, and that both income and expenditure will increase, however, the increase in national income will be greater than total expenditure, therefore, improving balance of trade.
It also states that when the economy is operating at full employment, there is increase in domestic spending, leading to increase in domestic prices and reverses price changes from currency depreciation, thereby resulting in deficit of balance of trade. Currency depreciation at full employment capacity decreases value of domestic assets.
My questions:
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when economy is operating at less than full employment capacity, why is there a faster increase in savings (national income) than total expenditure?
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when economy is at full employment, why does currency depreciation decrease value of domestic assets?
Thanks a lot guys