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 (absorption),thus freeing resources needed to produce additional export goods and import substitutes.

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The absorption approach states that when a country operates at full employment, currency depreciation can only improve the trade balance if the country reduces domestic spending (absorption) to free up resources for the production of additional export goods and import substitutes. This is because, at full employment, there are no spare resources to increase production without reducing production of other goods and services. Therefore, by reducing domestic spending, the country can redirect resources towards the production of goods that can be sold abroad, thus increasing exports and improving the trade balance.

Assume That a Country Operates at Full Employment