According to the absorption approach, a currency depreciation best improves a country's balance of trade if the country operates at full employment with no excess production capacity.

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The absorption approach suggests that currency depreciation improves a country's balance of trade if it reduces domestic absorption (i.e., total consumption, investment, and government spending) relative to production. The state of employment or excess production capacity is not the primary focus; rather, it's about how the depreciation affects the balance between absorption and production.

According to the Absorption Approach, a Currency Depreciation Best Improves