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absorption below production lowers demand for nontradables” Philip R. L. and Gian Maria M-F., 2002, p. 6. Second the declining demand for non-tradables resulting in a fall of relative price of non-tradables to tradables, signals for factors of production movement from domestic good and service production (non-tradables) to export production (tradables). Third the export sector faces, a lower cost of production, or at least a constant cost as labor supply increases since workers would be forced to provide their labor even at cheaper wages in order to compensate for their declining demand.

Mean while during “full employment” [3] of resources devaluation as a tool of improving trade balance deficit in addition requires an expenditure-reduction policies in order to free resources for additional export production. First Johnson, Harry G., (1968) and latter Robert W. Gillespie and Philip J. (1973), termed this analytical frame work as expenditure switching-expenditure reducing. From an open Keynesian macroeconomic model of output, with Y = C + I + G + X – M, for the trade balance of X – M, to improve either the available resources must increase or absorption pattern of the economy must change. In addition, domestic saving is the part of nations output that is not consumed both in private and government sectors, i.e., S = Y – C – G and domestic absorption is A = C + I + G. With the available resources limited, for the trade balance to improve, the second policy option is taken, i.e., changes in the proportion of resource usage or change in absorption pattern. Accordingly Harry G., (1968) and latter Robert W. Gillespie and Philip J. (1973) showed this policy tool as Where, domestic resource available for domestic absorption and. The implication first, here is there is a switch of resources between domestic investment and traded goods production. Second the higher the more the trade balance deficit improves.

Further, the absorption approach to the impact of devaluation on trade balance was illustrated by authors like S. S. Alexander (1954) and Leland B. Yeager (1970). These authors stated that countries may still face trade balance deficit despite the favorable condition of M-L elasticity condition due to excess domestic absorption or spending over production. Accordingly exchange rate devaluation [4] as a tool for trade balance improvement comes through its influence on total domestic absorption that in turn depends on price elasticities. Leland B. Yeager (1970) reconciled absorption and elasticity approach by stating the elasticities that matter for devaluation to work as a policy tool are “Total” [5] unlike M-L condition of partial elasticity approach. Currency overvaluation/devaluation is considered as a subsidy/taxation by importers (i.e., importers exaggerate/understated their real income); and taxation/subsidy by exporters (i.e., exporters understated/exaggerate their real income). As stated by. Leland B. Yeager (1970), “On the import side, upward revaluation of the home currency stimulates purchases and so tends to raise prices paid to foreign suppliers in their currency; but it does so to the smaller extent, the less elastic home import demand and the more elastic the foreign supply. On the export side, upward revaluation raises prices to foreign customers in their currency, and does so to the greater extent, the more inelastic the foreign demand and the more elastic the home export supply.”

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