ABSTRACT
The elasticities, income and absorption approaches to external disequilibrium apply to current account adjustments under fixed exchange rates. Income changes contribute either positively or negatively to the correction of external disequilibrium. Positive changes are used directly to restore external equilibrium, while negative changes must be offset by counteracting positive changes. The elasticities approach is the use of exchange rate realignments to achieve the directional and value changes necessary to restore external equilibrium which, on current account, is equality between import expenditures and export receipts. The absorption approach relates external disequilibrium to discrepancies between national income and expenditure. Expenditures on both domestic imports and foreign imports are determined by the volume and the prices of the goods and services transacted. Exchange rate realignments change the value of domestic currencies relative to foreign currencies and restore external equilibrium by restoring equality between import expenditures and export receipts.
