The New Palgrave Dictionary of Economics

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| Editors: Matias Vernengo, Esteban Perez Caldentey, Barkley J. Rosser Jr

Absorption Approach to the Balance of Payments

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The absorption approach to the balance of payments states that a country’s balance of trade will only improve if the country’s output of goods and services increases by more than its absorption, where the term ‘absorption’ means expenditure by domestic residents on goods and services. This approach was first put forward by Alexander (1952, 1959).

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