A Note on Some Mechanics of the Absorption Approach

Author(s): William R. Allen

Source: Weltwirtschaftliches Archiv, Bd. 86 (1961), pp. 69-85
Published by: Springer
Stable URL: http://www.jstor.org/stable/40434796
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A Note on Some
Mechanics of the AbsorptionApproach
By

ProfessorWilliamR. Allen
Los Angeles,Calif.

Contents: I. The Model. - II. AlternativeAdjustmentPatterns.III. The Case of Import Restriction.- IV. Income ChangesFurther
Considered.- V. Balancesin Domesticand ForeignCurrencies.

or "aggregate-spending/'
recentyears,the "absorption/*
approach
considerable
has
attention1.
to balanceofpayments
analysis received
whichonemightgainfromsome
to theimpression
Perhapscontrary
oftheliterature,
relatesto balanceofpayments
theabsorption
approach
to somespecific
either
is
confined
it
not
policyalteranalysisgenerally;
some
or
to
or
severe
as
devaluation
such
inherent,
deflation,
native,
of the
The underlying
mechanism.
automaticadjustment
framework
trade
model
a
income
is
national
foreign
components.
including
approach
'
1
'Exports' and "imports"can thusbe segregated,statingthe trade
Remark:This is a considerableelaborationof editorialmaterialin: ForeignTrade and
Ed. by WilliamR.
EconomicEquilibriumand Adjustment,
Finance:Essays in International
Allenand ClarkLee Allen,New York, 1959,pp. 387sqq., 397sq. I appreciatethe comments
of several persons,includingHarmon Alexanderand the late Ragnar Nurkse.The paper
was completedduringa fellowshipgrantedby the Ford Foundation;the analysisdoes not
necessarily
representtheviewof the Foundation.
1 On an abstractlevel,one may consultSidneyS. Alexander,"Effectsof a Devaluation
on a Trade Balance", InternationalMonetaryFund, StaffPapers,Washington,D.C., April
Spendingin theAnalysis
1952,pp. 23sqq.- FritzMachlup,"Relative Pricesand Aggregate
ofDevaluation",TheAmericanEconomicReview,Vol. XLV, Evanston,111.,1955,pp. 255sqq.
- Franz Gehrels,"Multipliersand Elasticitiesin Foreign-Trade
Adjustments",TheJournal
Vol. LXV, Chicago,111.,
1957,pp. 76sqq. - Hans Brems,"Devaluation,
ofPoliticalEconomy,
A Marriageof the Elasticityand the AbsorptionApproaches",The EconomicJournal,
Vol. LXVII, London,1957,pp. 49sqq. - SidneyS. Alexander,"Effectsof a Devaluation:
A Simplified
Synthesisof Elasticitiesand AbsorptionApproaches",The AmericanEconomic
Review,Vol. XLIX, 1959, pp. 22sqq. - More empiricallyorientedare Ragnar Nurkse,
"The Relation BetweenHome Investmentand External Balance in the Light of British
Vol. XXXVIII, Cambridge,
Experience,1945- 1955", TheReviewofEconomicsand Statistics,
Europeand theMoneyMuddle,FromBilateralism
Mass.,1956,pp. i37sqq. - RobertTriffin,
to Near-Convertibility,
1947- 1956, Yale Studiesin Economics,7, New Haven and London,
1957,Chapter2. - J. Black, "A Savings and InvestmentApproachto Devaluation", The
EconomicJournal,Vol. LXIX, 1959,pp. 267sqq.

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William R. Allen

yo

balancein termsoftheotherincomevariables.A majorobjective

ofthe
to
make
the
connection
between
the
approachis, then,
explicit
foreign
tradebalanceand the domesticvariablesin nationalincome,thereby
and facilitating
presumably
enhancing
appreciation,
analysis,of the
"domestic"conditions
balance1.
of "externar*
On thebasisof an incomemodelpresented
in SectionI, SectionII
reviewsalternative
in eachcase
of
and
yielding
changes exports imports
a givenchangein the tradebalanceand the necessaryconcomitant
of domesticvariables.SectionIII takesup in additional
adjustments
detailthecaseofimproving
thetradebalancesolelybycurtailing
imports.
of constant
Mostof SectionsII and III are based on the assumption
the effects
ofan initial(autononationalincome.SectionIV considers
mous) changeof the tradebalanceon incomeand the subsequent
on the balance.SectionV demonstrates
the relationship
repercussions
in domesticcurrency
betweenchangesin the tradebalanceexpressed
ratehas beenaltered.
andin a foreign
whentheexchange
currency
LettingY =
C=
I =
G=
S=
T=
X=
M=
E =

I. The Model

nationalincome,
on domestic
expenditure
output,
consumption
on
investment
output,
expenditure domestic
on domestic
output,
expenditure
government
saving,
tax collections,
accountcredits,
i.e.,current
exports,
accountdebits,
current
i.e.,
imports,
and foreign
on (absorption
totalexpenditure
of) domestic
a
income
model.
we
set
national
output, may up

1 "Balance of paymentsstatisticsrecorda country'sdeficitin termsof its external

transactions
alone.A currentaccountdeficitthusrepresents
theexcessofa country'simports
of goods and servicesover its exports.In national accountsstatistics,the same deficitis
recordedas an excess of over-allexpenditureabove overallproduction.This
alternatively
necessaryidentityis, ofcourse,obvious: If a countrybuysmoreabroadthanit sellsabroad,
its citizenstaken as a groupmustspend moremoneycurrentlythan theycurrently
earn.
Its meritis to drawattentionto anothercommonplacetruth,sometimesobscuredin learned
balance of paymentsdiscussions:In down-to-earth
terms,a country'sdeficit- like an
individual'sdeficit- can alwaysbe broughtback to its failureto live withinits income."
of a balance of paymentsdeficit
Triffin,
op. cit.tpp. 42sq. This is not to say thatcorrection
must entail an absolutecurtailmentof "over-allexpenditure."Ratherit is requiredthat
therebe a reductionof expenditurerelativeto "over-allproduction."And in Europe,from
the immediatepost-WorldWar II periodinto the 1950's, "the eliminationof the foreign
deficitswas not achievedthrougha curtailmentof consumption,
and imports
investment,
but through the persistentgrowthof productionand
[all of whichrose impressively],
exports"{ibid.,p. 45).

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A Note on Some Mechanicsof theAbsorption

Approach

Jl

(1) Y = C + I + G + X, withrespectto income-creation,

(2) Y = C + S + T + M, withrespectto income-disposal.
Therefore:
(3) I + G + X = S + T + M,
and:
(4) S + T - I - G=X - M.
:
Sinceby definition
=
E
C
+ I + G + M,
(5)
then:
(6) Y=E + X - M,
= X-1P,
(7) Y-E
or:
(8) Y - C - I - G - M=X - M2.
Betweenthem,equations(4) and (8) state X - M in termsof C, S,
T, I, and G. But it wouldbe helpfulto have C, S, and T in one equation,
as we have C, I, and G in equation(8). We couldtherebyexpressthetrade
variablesas well as in
balance in termsof the domesticincome-disposal
variables.
termsofthe domesticincome-creation
Rewritingequation(2) as:
(2') Y - C - S - T - M = O,
1 Not onlymaythetradebalancebe expressedas thedifference
betweennationalincome
betweentotal "leakages" and total
and national absorption,it is equal to the difference
fromequations(2) and (5) forY and E, we have:
"injections."Substituting
C + S + T + M - C - I - G - M = X - M,
S + T - (I + G) = X - M.
ofBalanceas an Instrument
Cf.M. F. W. Hemmingand W. M. Corden,"ImportRestriction
Policy", The EconomicJournal,Vol. LXVIII, 1958,p. 483 n.
of-Payments
2 Some would prefera model based on national income accountingdata, in which
"sources"ofincomeincludenetexports(X - M). C, I, G, and X are then"gross,"inclusive
but
of imports,and thus M must be explicitlysubtracted.If we assume,unrealistically
that all importsare "consumption"imports,i.e., C + M = C, we have the
conveniently,
model:
following
Since:
then:
and:

Y = C' + I + G + X - M,
Y = C + S + T.
E = C + I + G,
Y = E + X - M,

Y - E = X - M.
In eitherthismodelor the one in the text,Y - E = X - M, i.e., the currentaccount
betweenincomeand absorption.However,forpurelyabstract,
balanceequals thedifference
as comparedto empiricalwork, thereis some gain in conceptualclarityin usingthe model
in the text.

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William R. Allen

72

andaddingX - M to bothsides,wehave:
(9) y - C - S - T - 2M + X=X - M.
numerical
values1:
We maynowassumethefollowing

Y=C+I+G+X
160= ioo + 15+ 25+ 20
Y=C+S+T+M

160= 100+10 + 20 + 30
is in termsofequations(8) and(9). Inserting
The following
discussion
wehave:
theforegoing
valuesintheseequations,
Y - C - I- G- M = X- M
160 - 100 - 15 - 25 - 30 = 20 - 30 = - 10

Y - C - S-

T- 2M+X = X - M

160 - 100 - 10 - 20 -

60 + 20 = 20 - 30 = - 10

II. Alternative
Patterns
Adjustment

to increaseX - M to zero,i.e.,
Assumenowthatwe wishsomehow
eliminate
the deficit,
whileholdingmoneynationalincomeunchanged
to
of fullemployment
(on the assumption
initiallyand withinflation
be avoided).We can (a) increaseX to 30, (b) reduceM to 20,or (c) alter
bothX and M so thatthe combined
changeis + 10, whereincreases
areconsidered
in exportsand decreases(increases)
in imports
(decreases)
plus(minus)variables.
(a) Y- C - I - G- M = X - M
160 -

(130)

- 30 = 30 - 30 = o

160 -

(130)

- 60 + 30 = 30 - 30 = o

Y - C - S - T- 2M + X =X - M

ofC + I + G
whenX = 30,theaggregate
WithY andM unchanged,
income
mustfallfrom140to 130: an increase
in exports
withunchanged
and in thiscase
a reduction
of equal value in absorption,
necessitates
the reduction
ofabsorption.
is confined
to the"domestic"
components
If the decreasein C + I + G fallsto any extenton C, to thatdegree
S + T mustrise,forC + S + T remains
constantat 130; if the entire
decreasefallson I and G, thenS and T (as wellas C) remainconstant2.
As in all cases to followin whichincomeis constant,
the total"dis1 In the modelofp.
71, footnote2, we wouldhave:
- M
Y = C' + I+G+X
160 = 130 + 15 + 25 + 20 - 30

Y = C + S+ T

160 = 130 + 10 + 20
Nurkse(op. cit., pp. i44sqq.) offersreasons why "the bruntof adjustmentis likely
to fallon domesticinvestment."

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A Note on Some Mechanicsof theAbsorptionApproach

73

in C + I + G + M, equalstheimprovei.e.,thereduction
absorption,"
mentinthetradebalance.
(b) y- C - I - G- M=X - M
160 -

(140)

- 20 = 20 - 20 = 0

160-

(140)

- 40 + 20 = 20 - 20 = o

Y - C - S - T - 2M + X =X - M

WhenM = 20, withY and X constant,the sum of C -f I + G

at 140. But C + S + T mustincreasefrom130 to
remains
unchanged
in the expenditure
on importsout of a constant
reduction
The
140.
incomemayor maynotbe directed
whollyor in partto consumption.
If someof the increasein C + S + T takesthe formof consumption,
to thatextentI + G mustfall;ifC doesnotrise,S + T mustincrease
by 10.
(C) Y - C - I - G- M = X- M
160 (134) - 26 = 26 - 26 = o
Y - C - S - T- 2M+ X = X- M
160 (134) - 52 + 26 = 26 - 26 = o
The fall in M requiresthat C + S + T rise from130 to 134; the
increasein X requiresthat C + I + G fall from140 to 134. If C is
the changestake place entirelyin S + T and I + G. If C
unaffected,
rises,S + T risesby thatmuchless,and I + G fallsby that muchmore;
if C falls, S + T rises by that much more, and I + G falls by that
much less.
(d) As an elaborationof case (c), we may suppose that M increases,
thus necessitatingan increasein X greaterthan the initialdeficit.
Y - C - I - G- M = X - M
160 (125) - 35 = 35 - 35 = o
Y - C - S - T- 2M+ X = X - M
160 (125) - 70 + 35 = 35 - 35 = o
The rise in M requiresthat C + S + T fall by 5 ; the increasein X
requiresthat C + I + G fall by 15. If C rises,both S + T and I + G
fallby that muchmore; if C falls,S + T and I + G fall by that much
less. In any case, I + G falls by 10 (the amount of the initialdeficit)
morethanthe decreasein S + T.
(e) Finally,as an alternativeelaborationof case (c), assume a fall
in X and thus a fallin M greaterthan the initialdeficit.
Y - C - I - G- M = X- M
160 (145) - 15 = 15 - 15 = o
Y - C - S - T- 2M+ X = X - M
160 (145) - 30 + 15 = 15 - 15 = 0

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William R. Allen

74

Here C + I + G and C + S + T mustrise to 145, withS + T

morethanI + G by 10.
increasing
III. The Case of ImportRestriction

consider
For a moredetailedreviewof the foregoing
relationships,
takesthe
againcase (b), in whichthe entiretradebalanceadjustment
it is to be recalled,is:
The initialsituation,
formof reducedimports.
=
XM
M
YIG
C(i)
160 - 100 -

(ii)

Y -

15 - 25 - 30 = 20 - 30 = - 10.

C - S - T-

160 - 100 - 10 - 20 -

2M+ X = X-

60 + 20 = 20 - 30 = - 10

on
in expenditure
To take onlythe limiting
cases,the reduction
or
in
taxes
drained
o
10
be
saved
(b) spent
and/or
imports
by may
and if consumption
on domesticconsumption;
rises,we may specify
thesame,as assumedinSectionII,
either(a) remains
thatnational
income
or (b) rises.
oftheincome-disposal
In thefirst
alternatives,
equation(ii)becomes:
=
M
XT
Y
S
2M
C
X
+
(')
160 -

100 -

(40) -

40 + 20 = 20 - 20 = 0

Equation(i) is notaffected.
:
In thesecondalternative,
equation(ii)becomes
=
M
TX
S
Y
C
2M
X
+
(ii")
160 - no -

10 - 20 -

40 + 20 = 20 - 20 = o

If nationalincome
But if now C = no, equation(i) also is affected.
theincreasein C mustbe offset
is to be heldconstant,
by an equalfall
in I + G:
(i') y - C - I - G- M = X - M
160 - no -

(30)

- 20 = 20 - 20 = 0

If, however,moneyincomeis allowedto rise,equation(i) could

- witha consumption
ofunity- be:
multiplier
M
C - I- G- M=X(i") Y170 - no - 15 - 25 - 20 = 20 - 20 = o

And,correspondingly,
equation(ii) wouldthenlookas follows:
Y
C
S - T - 2M+ X = X - M
(ii'")
no
170
(40) - 40 + 20 = 20- 20 = o
ofthetradebalance,
Here,witha risein incomeequalto thecorrection
is altered.
is not reduced,althoughits composition
total absorption
is fulfilled
is scarcelya matterof inWhichof thesealternatives
whenM is reduced,
thatY is to be heldconstant
difference.
Assuming

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A Note on Some Mechanicsof the AbsorptionApproach

75

intheformofC + I + G mustnotbe allowed

theremaining
absorption
is savedor taxedaway,
to rise.If themoneynotnowspenton imports
in the model.But if
the fallin importshas no further
repercussions
leads to an increasein consumption,
incomecan be
thecutin imports
in investment
held constantonlyby an equal reduction
plus governthe import' 'belt-tightening/'
mentexpenditure:
regardlessof what
arecurtailed,
in a restriction
wouldeventuate
typesofimports
particular
investment
ofdomestic
spending.
and/or
government
a concomitant
restriction
ofI + G,
We mayallowC to risewithout
Y to rise.If idleresources
butonlyby allowing
exist,thisrisein money
total
incomewilltendto inducea risein realincome,thuspermitting
are restricted.
whileimports
to remainunchanged
But
real absorption
real absorption
of inflation,
is
if the increasein Y is a manifestation
remainsat 170; if real
reduced:withor withoutinflation,
absorption
is deemedto remainconstantin the absenceof inflation
absorption
thefallin M), it fallswhendomestic
prices
(theincreasein C offsetting
whichheretofore
we haveassumedto remain
rise.Furthermore,
exports,
willtendto fall,at leastin volume,as exportable
constant,
production
market.It maybe addedthat,
domestic
towardtheinflating
is shifted
whetheror not inflation
occurs,the reductionin importsmay well
inducedincomeeffects
abroad,i.e., "foreign
exportsthrough
discourage
repercussions."
IV. Income Changes FurtherConsidered

inthetradebalancemaynotbe accompanied
Aninitialimprovement
variablesrequiredto keep Y constant.
in
domestic
by adjustments
case
illustrated
to
the
in
contrast
And,
by equations(i") and (ii'") in
wemayexpectthatinducedchanges
ifY increases,
thepreceding
section,
and probablyalso in exportswillreducethe improvement
in imports
willnoteliminate
it.
in thetradebalance- butpresumably
in
the
level
The equationforthe change
equilibrium of incomeof
of
the
balance
the countrypursuing
paymentspolicy(AYa) can be
is
which
derivedby algebra
conceptually
simplebut a bit cumbersome.
thatan autonomous
inthefollowing
It is assumed
changeinimports
(AM)
a
and
is accompanied
by corresponding oppositechangein consumption
isconstant.
tospendonconsumption
plusimports
(AC),i.e.,thepropensity
are
no
that
there
autonomous
orinduced,
It is assumed,
further,
changes,
or
in
investment.
ingovernment
spending
First,we derivean equationforAYbin termsof AYa and marginal
Withc, s, and m beingthemarginal
to consume,
variables.
propensities
to save, and to importout of disposableincome(AY'); t beingthe

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William R. Allen

76

marginaltax rate; and thus AY' = AY (1- t); and with AC and AX
being the total changes of induced and autonomousconsumptionand
incomemodelforcountryB:
we have the following
exports,respectively;
=
AYb ACb + AXb,
ACb = cbAYb(1- tb)- AMb,
= cbAYb(l-tb)-AXa,
AXb = maAYa(l-ta) + AXb(
= maAYa(l - ta) + AMa.
Therefore
:
AYb = cbAYb(1- tb) + niaAYa(1- ta) + AMa- AXa,
- AXa
_ HlaAYa(1 ta) + AMa
1 - Cb(l - tb)

SimilarlyforcountryA:
AYa = CaAYa (1- ta) + mbAYb(1- th)+ AXa - AMa.
we have:
the equationforAYb and rearranging,
Substituting
a^ =
A^n *v , AYamb(l-tb) ma (1-ta) ~
AYa
CaAYa(l-ta) +
^
(^
- mb(l-tb)(AXa-AMa) +^-^Ma
i-cb(iz;tb).
mb
,.
(1ma(l.
tb)
Av [,
ta)] =
AYa

[1-Ca(l-ta)-

j_^ ^

A ut
- .AY
(AXa-AMa)

1~Cb

(1~tb)

-m"

(1"tb)

i_c^(h_^

'

AXa-AMa
[l-ca (l-ta)] [l-cb (l-tb)] -ma (1- ta) mb (1- tb)
1- Cb(1- tb)- mb(1- tb)
This can be rewritten
:
AXa-AMa
_
AYa =

1-Cad-ta)+ mb
(l-tb)J^-t^J
ai
1- Cb (1- tb) --^|~
mb (1- tb)

or reduced to :
AYa=

AX*-AM*

-_

1-Ca
(1-0 + mb
(l-tb)-Ja4r4
Sb I1- tb) "+ t3
tb

1 We may drop the assumptionthat consumptionrises (falls) autonomouslyby the

fullamountof the autonomousfall (rise) in imports.Suppose that forcountryA the ratio
of autonomousconsumptionchange to autonomousimportchange is designatedf; in
countryB, theratiois g. Then:
- mb (1- tbMgAXa - AMa )
(AXa - fAMa ) [1- cb (1- tb)_]
'
[1 ca (1 tajj [1 cb (1 tb)] ~ mb (f- tb")ma (1- ta)
If f = g = 1,thisequationis thesame as that in the text.

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A Note on Some Mechanicsof theAbsorption

Approach

77

The equation for AYb in analogous termsis the same as for AYa,
withsubscriptsreserved.
Table 1 illustratesthe firstseveralperiodsof the adjustmentprocess
and the finalequilibriumvalues,withthe assumedmarginalpropensities
and marginaltax rates as indicatedand assumingthat countryA has
an autonomousrise in exportsof 6 and an autonomousfall in imports
of4, as in case (c) of SectionII. But here,in contrastto case (c), income
is allowed to change,givingrise to induced changesin importsand in
exportswhich substantiallyreduce, but do not eliminate,the initial
tradebalance. (It willbe notedthat AYa = - AYb. This is not a general
resultand obtainsonlywhen,as in thisillustration,
sa = tband ta = sb.)
Table 1
'
Aut Ind ! Ind ; Ind Ind
;
.
AM
AX
AC
AC I AS
I

Aut : Aut ! Net

AX AM A(X-M)| ^Y
j

CountryA: c = .5; s = .3; m = .2; t = .1

10

-4

-4
4.5 ! 2.7 , 1.8 - .7 i 6
; 6.21 3.7261
6-4
2.484J- .966
6
6.86 4. 116! 2.7441-1.067
-4
6
-4
4
7.258J 4.3551 2.9031-1. 129
.1; t = .3
.8; s = .i;m=
CountryB:c=
-6
:
-46
6
-6
-5.6 |- .7 - .7 ! 1.8
-4
6
-6 I -7.728- .966.966J 2.484^ -4 ,
6
~6 I -8.537 -1.067! -1 .067I 2-744 -4
-6 [-9-032 -1.129j-1.129j 2.903! -4 6
4
4
4

10

Ai

AY

1.38 ; 12.42
13.8
7.5
6.55
15.244 1.524 13.72
6.189: 15.793! 1-579! 14.214
5.968

16.129

1.613

14.516

-10
-10
;- 7
-3
- 7.5 -13.8
-4.14 !- 9-66
- 6.55 -15.244 -4.573 -10.671
- 189! -15.793! -4.738 -11.055
- 5.968 -16.1291-4.8391-11. 290

AX, AM,and AC are herecomposedoftwo elements,one autonomous

and oneinduced.In theschemaofSectionsII and III, thefinalequilibrium
situationof countryA can be presentedthus:
AY - AC - AI - AG + AM = AX - AM
16.129- 11.258- o - o + 1.097 = 4.871 + 1.097 = 5.968
AY - AC - AS - AT + 2AM + AX = AX - AM
16.129- 11.258- 4.355- 1.613+ 2-I94 + 4-871=4-871 + 1.097= 5.968
In termsof the same marginalvariables,we may expressthe "finalbalance ratio" of countryA, i.e., the ratio of the finaltrade balance
whenthe multiplier
processis completed(B2) to the initialtradebalance
determinedby the autonomouschanges in importsand exports (Bj)1.
1 Cf. my "A Note on the Money Income Effectsof Devaluation", Kyklos,Vol. IX,
Basel, 1956,pp. 378sqq.

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WilliamR. Allen

78

Since the finalbalance equals the initialbalance plus inducedexports

and minusinducedimports:
B2 = AX
""" AM + mbAY'b- ma AY'a '
X~-^M
Bi
~

+ mb(l-tb);^^]
AYa[l-ca(l-ta)
AX - AM

- maAYa (l-ta)
mbAYb(l-tb)
"
+ '"~
AX- AM

l-ca (l-ta) -ma (l-ta)

1-0.(1^ + ^(^1^^

In this illustration,the final balance is three-fifths

(.597) of the
initialbalance. Underwhat conditionswould the entireinitialimprovement be eliminatedby induced changes in trade? From the equation
forB^B^ it is apparentthat B2 = 0 if:
l-Ca(l-ta)-ma(l-ta)=O,
1= (l-ta) (ca + ma),
1

ca+ ma=

1- xa

If ta = 0, B2 = 0 if ca + ma = 1. But if ta > 0 (say, .1, as in Table 1),

then it is necessarythat ca + ma > 1 (viz., 1.111) - which impliesa
negative marginal propensityto save (- .111). One would scarcely
that the entireeffectof the autonomoustradechanges
expect,therefore,
would be dissipatedthroughoppositeinduced changesif ta > 0. And
ifca + ma < 1 (e.g.,.7, as in Table 1), in orderthatB2 = 0, it is necessary
to have a negativemarginaltax rate (viz., - .429). A negativet seems
as the slope of
even less likelythan a negatives - if t is interpreted
and
income1.
tax
collections
a given tax schedule relating
However,
we may more reasonablyassume two tax schedules,one pertainingto
the initialequilibriumand one to the new equilibriumafterthe autonomoustrade changes. AY and AT, which previousderivationsallow
us to calculate,wouldthendefinenota movementalongonetax schedule,
but rathera jump fromone schedule to another,with each schedule
presumablyhaving the usual characteristicof a positive slope. When
t = AT/AY may betterbe termedthe marginaltax
thus interpreted,
ratioratherthanthe marginaltax rate.
1 Commentsof S. C. Tsiang werehelpfulon thisgeneralmatter.

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A Note on Some Mechanicsof the Absorption

Approach

79

To indicatethe magnitudeof the tax policywhichwould make B2

equal to zero, we can referto the change in the averagetax rate (t).
InitiallyF0= T/Y; afterthe autonomoustrade changes,we can shift
the tax schedulein such fashionthat
.
T + AT _
Therefore:
AY'
*i=Y+
_

_ t T + AT
At=Y-YTY'
_ TAY YAT*
"~~Y(Y + AY)

and value ofautonomousA(X - M)

themarginalpropensities
Assuming
in Table 1, it followsthat AY = 35 and AT = - 15 (andthust = - .429)
in orderthat B2 = o. With these values, Table 2 is prepared,showing
magnitudesof tx and of At at alternativeinitial income levels when
the initial average tax rate is always .25. The higherthe initial level
of income,ceterisparibus,the smallerthe reductionin t is requiredto
offsetcompletelythe autonomouschanges in trade. However, if t is
not reduced or is reduced less than the criticalamount,in the new
incomeequilibriumthere will remainsome improvementin the trade
balance.
Table 2
Y

AY I

I
5,000 ; 35
1,000 ! 35
!
500
35
60
35
j

i AT I' tp

! 1,250 ;
i 250 I
I 125 I
15
I
j

-15
- 15
- 15
-15

.25
.25
.25
25

tt

At

!
.245 '- .005
I .227 I- .023
.206 -.044
S -.250

We may pose a second problemas follows:what is the necessary

value of ta, given all otherrelevantvalues, which will leave the final
balance equal to the initialbalance? We may set Bg/Bj= 1, in which
case:

ma(t-1) = mb(l-tb)^"Ht

*--

and solveforta:

ma (sb- sbtb+ tb) + mbsa(1- tb)

ma(sb- sbtb+ tb) + mbsa(1- tb) + mb(tb- 1j
Assumingthat tb < 1, it follows that ta > 1. Specifically,if we
assume the same values as were employedin Table 1 forall variables
~
ta =

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William R. Allen

8o

anotherunusualtax schedule
exceptta, thenta = 3.8. This specifies
ift is lookeduponas a marginal
tax rate,and it is preferable
againto
considerit insteadas the marginaltax ratio.In this case, in which
inducedimportsare to be precluded,
the averagetax rate mustrise.
The necessarysize of the increasewill be smaller,the greateris the
initialincomelevel.
V. Balances in Domesticand ForeignCurrencies

The figures
are in termsof the
we have been usingpresumably
domesticcurrency,
But
the
exportand importfigures
say, pounds.
relevantfor balance of payments(in contrastto nationalincome)
money,say, dollars.If the exchange
analysisare in termsof foreign
rateis notaltered,i.e.,thebalanceof payments
policyis implemented
Table3
Case
=
=
=
=
$3=
$2 =
$3 =
$2=
$3 =
$2=
$3=
$2 =
$3=
$2=
$3 =
$2 =
$3=
$2 =
$3=
$2=
$3=
$2=
$3 =
$2=
$3=
$2 =

(a) * 3
$2
(b) $ 3
$2
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(1)
(m)

1
1
1
I
/i
i
1
1
1
1
1
i
i
I
i
i
i
i
i
I
1
I
1
1
1
i

I XrMrB
30-3 =
40-25 =
20- 30 =
30 30 =
20- 30 =
37-32 =
20- 30 =
21-29 =
20-30 =
28-38 =
20-30 =
25-40 =
20- 30 =
23-41 =
30- 20 =
31- 21 =
30 20 =

31-26=
30-20 =
4O-15 =
30-20 =
34-I9 =
20- 30 =
21-34 =
30- 20 =
31-18 =

j X,-M$

90-90 =
15 : 80-50 =
- 10 I 60- 90 =
O 60 60 =
- io , 60- 90 =
5 ! 74- 64 =
- 10 ; 60- 90 =
- 8 i 42-58 =
=
-10
j 60-90
- 76 =
-10
56

-10
I 60-90 =
! 50-80 =
-15
- 10 I 60- 90 =
-18
46-82 =
io
90- 60 =
io
! 62- 42 =
IO I 90 60 =
5 i 62-52=
10 I 90-60 =
25 I 80-30 =
10 I 90-60 =
=
IS
I 68-38
60- 90 =
IO
- T3
42-68 =
10
90- 60 =
62-36 =
13

B$

o
30
- 30
O
- 30
IO
- 30
-16
-30
-20
-30
-30
- 30
-36
30
20
30
10
30
50
30
30
30
-26

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30
26

A Note on Some Mechanicsof theAbsorption

Approach

81

by means otherthan devaluation,the trade balance will changein the

same directionand in the same proportionin termsof both currencies.
But witha policyof devaluation,an improvement
of the trade balance
in dollarvalue1;
expressedin poundsmay or maynotbe an improvement
and even if the balance improvesin both currencies,
it will not improve
in both.
by the same proportion
This is illustratedin Table 3, whichpresentsalternativecases when
the poundis devaluedfrom$ 3 to $ 22.As in case (a), ifX = M in terms
of one currency,
it holds true also in termsof the othercurrency;and
if,throughdevaluation,a surplusis createdin one currency,therewill
be a surplusin the other.As in case (b), a deficitin one currencyis also
a deficitin the other;and if the deficitis completelyeliminatedin one
it will be eliminatedalso in the other.And as in case (c), an
currency,
of a deficitin one currencywill mean the creation
"over-correction"
of a surplusin the other.
The otherten cases, whichare somewhatmorecomplex,in addition
to cases (b) and (c), can be summarizedthus:
(ia) If a deficitis notincreased,the $ deficitfalls (cases b, c, d, e).
on the $ deficitis indeterminate
(ib) If a deficitis increased,theeffect
(cases f,g, I)8.
(2a) If a $ deficitis notreduced,the deficitrises(cases f,g).
(2b) If a $ deficitis reduced,the effecton the deficitis indeterminate
(cases b, c, d, e, 1).
(3a) If a surplusis notincreased,the $ surplusfalls (cases h, i).
(3b) If a surplusis increased,the effecton the %surplusis indeterminate(cases j, k, m).
(4a) If a $ surplusis notreduced,the surplusrises(cases j, k).
theeffect
on the surplusis indeterminate
(4b) If a $ surplusis reduced,
(cases h, i, m).
stateOf the fourdeterminatecases, (ia) and (2a) are contrapositive
ments,as are (3a) and (4a).
1 Cf. Machlup,op, cit.,p. 270, wherethe issue is raised but onlybrieflydiscussed.
1 An aspectincidentalto our discussionis thatthe figuresare chosenso that at the new
exchangerate thedollarvalue ofimportsis smallerthanat theoriginalrate,and thepound
value of exportsis greater.The changesin the dollar value of exportsand in the pound
value of importsare indeterminate.
These are the resultsto be expectedfromthe direct
of devaluation.See G. Haberler,"The MarketforForeignExchange and the
priceeffects
Stability of the Balance of Payments,A TheoreticalAnalysis", Kyklos,Vol. Ill, 1949,
pp. I97sqq.
The devaluationlowersthe dollar price of the pound by 50 per cent. If the pound
deficitincreasesby 50 per cent, the net effecton the initialdollar deficitis zero (case f);
if the pound deficitincreasesmore than 50 per cent, the dollar deficitrises (case g); and
if the pound deficitincreasesless than 50 per cent,the dollardeficitfalls(case 1).
Bd.LXXXVI.
Weltwirtschaftliches
Archiv

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William R.Allen

82

These relationshipscan be easily noted algebraically.Let B^ and

dollar balances,B1
B|2 be the initialand the new (post-devaluation)
and B2 the pound balances, and {$l)i and ($/)2the exchangerates
(dollarpricesofthe pound). It followsthat:
Bf,($/)! =B$1,
=
B2($/)2 B$2.
Thus:
B^__B? ($/)2
or:

B$1 ~B~

~(%)i

B$2 _B2
""
B
B

($/)2(/$)i*

Since

.
<i, if----< i, then- - < i (summarystatementsia'
W)l
B!
B$!
B2

B*2

- - > 1, then _- ^ 1
(statementsib, 3b), dependingon
3a). But if
Bi
Bh
the relative proportionatechanges of the pound balance and the exchangerate1.
Similarly:
B_,

Bl

B^

($/)x

B$1 (%j),'

> I an(^ tnus tf :B~^ >" I tnen T^ > I (statements2a, 4a).

/TTrV"
(*/)2
-Dix
^
Bl2

B^2

B*i

Bi

But if--- < 1, then - - ^ 1 (statements2b, 4b).

der AbZusammenfassung: Bemerkungenzu einigen Zusammenhngen

- Der Versuch,die Zahlungsbilanzdurch eine Absorptionssorptionstheorie.
etrachtung(absorption
approach) zu erklren,grndetsich auf ein Volksdas auch Auenhandelskomponenten
enthlt.Wenn man die
einkommensmodell,
1See p. (81), footnote
3. For example,if rrryr < -

(statement
Ib,case1),then

B2

B*2
B2
B$2
- = -($l)2(/$h,then_~ < 1.
Br- (I/2(/Dl < 1.Since

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A NoteonSomeMechanics
oftheAbsorption
Approach

83

es
durchBegriffe
deranderenEinkommensvariablen
erklrt,
empfiehlt
Zahlungsbilanz
zu analysieren.
der Auen-bilanz
sich, die inlndischen
Bedingungen
Volkseinkommen
Es kannleichtgezeigtwerden,da dann,wenndas inlndische
konstantgehaltenwird,die Ausschaltungeines laufendenZahlungsbilanzdefizits
d. h. eineVerringerung
einequivalenteNichtauf
erfordert,
saugung(disabsorption)
des Verbrauchs
Jedoch
plus Einfuhren.
plus Regierungsausgaben
plus Investitionen
werdendie Konsumausgaben
steigen,wenndas DefizitdurchKrzungder Einfuhrenbeseitigtwird,sofernnichteine Erhhungder Ersparnisseund der Steuern
die den gleichenUmfanghat wie der Rckgangder Importe.Wenndas
eintritt,
unverndert
Einkommen
gehaltenwerdensoll, mu ein Ansteigendes Verbrauchs
undderRegierungsausgaben
derInvestitionen
durcheineVerringerung
wettgemacht
werden.Wenn man das Geldeinkommen
steigenlt, wirddie realeAbsorption
auch die Preisesteigen.Fernerwirdeine Ausweitung
wenngleichzeitig
verringert,
des Geldeinkommens
dazu fhren,da Einfuhrsteigerungen
ausgelstwerden,wowiederverringert
durchdie Zahlungsbilanzverbesserung
wird,die manaufGrundder
hatte.Der durchschnittliche
erwartet
Einfuhrdrosselungen
(autonomen)
anfnglichen
vollSteuersatzmu auf ein bestimmtesNiveau fallen,um die Verbesserung
beizustndigauszuschalten,er mu erhhtwerden,um die ganze Verbesserung
behalten.
Wechselkurse
inlndischer
Die vorstehende
AnalysewirdunterZugrundelegung
betrieben
mitHilfeeinerAbwertung
Wenndie Zahlungsbilanzpolitik
durchgefhrt.
oder eine Beibehaltungder beder Zahlungsbilanz
wird,wirdeine Verbesserung
aufGrundderinlndischen
berechnet
stehenden
Whrung,
Zahlungsbilanzsituation,
fhren.
in auslndischer
derSituation,ausgedrckt
zu einerVerbesserung
Whrung,
Ein Anwachsendes Defizitsin heimischer
Whrungmag odermag nichteineVerDies hngtdavon ab, ob das Defizitan
besserungder Devisenbilanzherbeifhren.
zunimmtals der
mehroder wenigerproportional
auslndischenZahlungsmitteln
GradderAbwertung.
*
Rsum: Au sujet de certainsmcanismesde la thoriede l'absorption.L'ide d'expliquerla balance des paiementsen l'approchantdu ct absorption
de commerce
descomposants
se base surunmodledu revenunational,qui comprend
extrieur.Si l'on exprimela balance des paiementspar les autresvariablesdu
revenu,il sera utile d'analyserles conditionsnationalesde la balance extrieure.
resteconstant,
dmontrer
On peutfacilement
que, si le revenunationalmontaire
on ne sauraitliminerun dficitcourantqu'au moyend'une non-absorption
(displus
absorption) quivalente,c'est dire, d'une rductionde consommation
investissements
Toutefois,si le
plus importations.
plus dpensesdu gouvernement
les dpensesde consommation
dficitest liminpar la rductiondes importations,
aux pargneset impts.
s'il n'y a pas d'augmentation
monteront,
correspondante
doit
de la consommation
Si l'on veutgarderle revenuinchang,touteaugmentation
desinvestissements
trebalanceparunediminution
plusdpensesdu gouvernement.
Si l'on permetau revenumontairede monter,l'absorptionrelleest rduiteau
cas que les prix montenteux aussi. En plus, l'expansiondu revenudclenchera
de la
ce qui diminuerade nouveaul'amlioration
des importations,
l'augmentation
initial
balance des paiements,qu'on pouvait esprer la suite du retranchement
Le taux moyend'impositiondevraittomber un
(autonome)des importations.
soitcompltement
certainniveau,pourque l'amlioration
limine;il devraitmonter,
soitprserveintacte.
pourque l'amlioration
6*

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84

William R. Allen

Cetteanalyseest faitesurla base des coursde changesnationaux.Si la politique

de la balancedes paiementscomprendune dvaluation,et qu'on arrive amliorer
la balancedespaiements,
ou bien la garderinchange,
calculeenmonnaienationale,
ceciamneraune amlioration
de la situation,calculeen monnaietrangre.
L'augmentationdu dficiten monnaienationalpourra,ou ne pourrapas entraner
une
amlioration
de la balance en monnaietrangre.
Ceci dpendrade l'augmentation
du dficiten monnaienationaleproportionnellement
plus ou moinsgrandeque
celle du degrde dvaluation.

Resumen: Notas sobrealgunosmecanismosde la teorade absorcin.- La

de absorcin
(ab
pruebade explicarla balanza de pagos por una consideracin
Sorption
approach)se basa en un modelode la rentanacionalincluyendocomponentesde comercioexterior.Si se explicala balanza de pagos por conceptosde las
dems variablesde la renta,ser convenienteanalizarlas condicionesinteriores
de la balanza exterior.
Puede fcilmentemostrarseque, si la renta nacional interiores mantenida
la eliminacin
de un dficitcorriente
de la balanza de pagosrequiereuna
constante,
no-absorcin
equivalente,es deciruna reduccindel consumoms
(disabsorption)
de inversionesms de gastos gubernamentales
Pero los
ms de importaciones.
a no ser que ahorrose impuestoselevadosigualen
gastosde consumoaumentarn,
las importaciones
reducidas.Si se quiere,que la rentasea mantenidasincambiar,un
aumentodel consumodebesercompensadoporuna disminucin
de las inversiones
y
de los gastosgubernamentales.
Si se hace subirla rentamonetaria,es reducidala
absorcinreal,si los preciosaumentanal mismotiempo.Ademsuna expansin
de la rentamonetariacausarun aumentode las importaciones
y de tal maneraes
reducidoel mejoramiento
de la balanza de pagos,esperadoa base de la reduccin
inicial (autnoma)de las importaciones.
El tipo mediode impuestodebe bajar a
ciertonivelparaeliminar
el mejoramiento
completamente
y debesubirparapreservar
el mejoramiento
entero.
El anlisisprecedente
es ejecutadoa base de los cambiosinteriores.
Si la poltica
de la balanza de pagos espracticadamedianteunadevaluacin,de un mejoramiento
de la balanza de pagoso de un mantenimiento
de la situacinde la balanza,calcolada
a base de los cambiosinteriores,
resultarun mejoramiento
de la situacinexpresada
en monedaextranjera.Un aumentodel dficiten monedainterior
puedeo no puede
un mejoramiento
de la balanza de las divisas.Esto dependede la circunsignificar
aumentams o menosproporciostancia,si el dficitde mediosde pago extranjeros
nalmenteque el gradode la devaluacin.
*

- II
Riassunto: Note su alcuni meccanismidella teoriadell'assorbimento.
tentativodi esplicarela bilanciadei pagamentimedianteuna considerazione
deassorbimento
(absorption
approach)si basa su un modellodel redditonazionaleche
rinchiudeanche componentidi commercioestero.Se la bilanciadei pagamenti
di analizzare
esplicataperconcettidellealtrevariabilidi reddito,sarraccomandabile
le condizioniinterne
dellabilanciaestera.
Pu facilmente
esseremostratoche,se il redditonazionaleinterno mantenuto
di un dficitcorrentedella bilanciadeipagamentirichiede
costante,l'eliminazione
un non-assorbimento
(disabsorption)
equivalente,cio una riduzionedel consumo

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A NoteonSomeMechanics
oftheAbsorption
Approach

85

pi di spese di governopi d' importazioni.Per le spese di

pi d'investimenti
a menoche risparmied imposteelevati non adeguinole
consumoaumenteranno
ridotte.Se si vuolecheil redditosia mantenuto
un aumento
inalterato,
importazioni
del consumodev'esserecompensatoper mezzo d'una diminuzionedegli investimentie dellespesedi governo.Se si fa crescereil redditomonetario,
l'assorbimento
del
reale ridotto,se i prezziaumentanoallo stessotempo.Di pi un'espansione
redditomonetariocauser un aumentodelle importazionie con ci ridottoil
della bilanciadei pagamenti,aspettatoin base alla riduzioneiniziale
miglioramento
Il tasso mediodell'impostadeve caderea un certo
(autonoma)delleimportazioni.
il miglioramento,
e deve crescereonde prelivelloonde eliminarecompletamente
servarel'intieromiglioramento.
Se la politicadella
La precedenteanalisi eseguitain base ai cambiintcriori.
da un miglioramento
bilanciadei pagamenti fattaper mezzod'una devalutazione,
della situazionedella bilancia,
della bilanciadei pagamentio da un mantenimento
della situazione
calcolata in base ai cambi intcriori,risultarun miglioramento
pu o nonpu
espressain monetaestera.Un aumentodel deficitin monetainteriore
un miglioramento
della bilanciadelle divise.Questo dipendedalla cirsignificare
dei mezzidi pagamentoaumentapio menoproporzionalmente
costanza,se il deficit
cheil gradodelladevalutazione.

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