Explain the elasticities and absorption approaches to the BOT. What is

Explain the elasticities and absorption approaches to the BOT. What is the most notable shortcoming of these approaches?

What will be an ideal response?

ANSWER

The elasticities approach analyzes the effect of devaluation on the trade balance based on elasticities of supply and demand for foreign exchange and international trade. The absorption approach views the trade balance as the difference between what the economy produces and what it takes for domestic use or absorbs. Neither approach considers capital flows.