Balance of payments absorption method refers to the analysis of how a country's balance of payments appears and how the exchange rate level is determined from the perspective of expenditure (or absorption) and income. It is believed that if a country's real income exceeds its absorption of goods and services, there will be a trade surplus. 1952, james edward meade and S. Alexander proposed to systematically study the macro-equilibrium analysis of the effect of currency depreciation policy from the perspective of national income and total demand.

Core view

This theory is based on Keynesian macroeconomic analysis, and he regards economic activities as an interrelated whole. The most important analysis indicators in this whole are total supply, total demand, national income and total employment.

The form of absorption method: trade balance B= national income Y- total absorption a.

That is, the balance of payments of a country is the difference between national income and domestic absorption. Balance of payments means that total income equals total absorption. The balance of payments surplus means that the total income is greater than the total absorption. Adjusting the balance of payments deficit is to increase income, which is usually called expenditure transfer policy; Or reduce expenditure, usually called expenditure reduction policy, referred to as absorption policy.

The coordinated application of transition policy and absorption policy is the main condition for a country's economy to achieve internal and external balance.

Cash balance effect

This is the most important absorption effect. Assuming a certain money supply, money holders always want to take away some of their actual assets in the form of money. In this way, with the rise of domestic prices, their nominal cash holdings will become more. In this way, on the one hand, their actual expenses can be reduced, on the other hand, they can hold more cash by selling their other assets, thus reducing the prices of other assets. The decline in other assets means that interest rates rise, which in turn affects people's consumption and investment. Therefore, the cash balance effect can directly affect income-expenditure and also affect income-expenditure through interest rate.

money illusion

People who devalue pay attention to the price and ignore the monetary income. Although monetary income may also increase in proportion, people always reduce demand and consumption when prices rise. This is also conducive to improving the trade balance.

income redistribution effect

This effect generally has the following four manifestations: first, the price increase precedes the wage increase, turning the price into the entrepreneur's profit; Second, rising prices transfer income from one group to another; Third, rising prices will convert a larger part of real income into government taxes; Fourth, under the condition that income tends to move from high marginal absorption to low marginal absorption.

Other influences

These influences are various, which may or may not be beneficial to the improvement of the balance of payments. For example, the expectation of rising prices will lead to an increase in absorption in the short term, which is not conducive to the improvement of foreign trade balance.

evaluate

Based on macro and general equilibrium, absorption method is superior to micro and local elasticity analysis, and emphasizes the significance of policy coordination. However, it still has some shortcomings, as follows:

First, two assumptions (depreciation is the only factor of export increase and the transfer mechanism of production factors is smooth) are unrealistic.

Second, the trade items in the balance of payments are obliquely taken as the research object, while ignoring the capital items that are playing an increasingly important role, thus making its theory endless.