This document discusses two approaches to analyzing the impact of currency depreciation on trade balances: the elasticities approach and absorption approach. The elasticities approach explains that currency depreciation leads to a trade surplus if demand for imports and exports is highly elastic. The absorption approach looks at capital flows from domestic production and consumption, noting that currency depreciation only leads to a trade surplus if the economy is not at full capacity, and otherwise causes a trade deficit by increasing domestic prices.

1. CURRENCY EXCHANGE
RATES (PART 3)
presents
A A R W I N ' S G U I D E T O C F A
W W W . A A R W I N S W O R L D O F F I N A N C E . C O M

2. Elasticities Approach
currency depreciation
leads to a trade surplus if
elasticiites of import and
export goods are high.
In case of goods with less
elastic demand
depreciation in currency
doesn't add much to or
reduce much from the
export earnings and import
expenditure.
In case of goods with
more elastic demand,
currency depreciation
leads to a trade surplus
situation
Absorption Approach
looks at capital flows from
domestic production and domestic
consumption
In case of currency depreciation
income from domestic production
will exceed expenditure from
domestic consumption only if
economy is not operating at full
capacity
If economy is operating at full
capacity currency depreciation will
lead to rise in domestic prices
which will cause a trade deficit.

3. read the whole write up on
http://aarwinsworldoffinance.com/2016/10/currency­exchange­rates­3­cfa­level­1.html
Thank You