Assume that a country operates at full employment.According to the absorption approach, the only way that currency depreciation can improve the country's trade balance is for the country to reduce domestic spending, thus freeing resources needed to produce additional export goods and import substitutes.

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According to the absorption approach, currency depreciation can improve a country's trade balance by reducing domestic spending, which frees up resources for exporting and importing substitutes. This is because a weaker currency makes exports cheaper and imports more expensive, which encourages consumers to buy domestic products and foreign buyers to purchase more local goods. However, if a country is already operating at full employment, it may not be able to produce additional exports or import substitutes without experiencing inflation or running into capacity constraints. In this case, the benefits of currency depreciation may be limited, and policymakers may need to find other ways to improve the country's trade balance.

Assume That a Country Operates at Full Employment