Question

How can domestic absorption fall automatically as a result of the depreciation?

Answer 1

Absorption means consumption. Domestic consumption means the money spent by the residents of a country on the consumption of goods and services. More consumption means the residents of the country are consuming more by buying more goods and services that are either imported from other countries or are produced by the domestic producers. Less consumption means that residents of the country aren't buying any goods either because of the low income or because the prices are sky high that is, there's a situation of inflation in the country.

When the prices of the goods and services have reached all time high in a country, to the situation where people can't afford to spend on goods and services - it's called inflation. Now what depreciation will do is that it will make it difficult for the businessmen in the country to import goods. Why? Because the prices of goods and services are high. And even if they still choose to make it happen, if they still import goods, it won't be beneficial to the businessmen and the general public. It won't create much profits for the businessmen because the people can't afford to absorb more by spending on the goods and services.

At the same time, exports will rise. Since the prices have risen and even though domestic consumers can't consume more, the residents of foreign countries may find the prices of products in the domestic country affordable.

This is how domestic consumption falls if there's depreciation in the country. However, more exports can increase the number of employment opportunities in the country. At a time like this, the government of the respective country may provide the subsidies (financial help) to the domestic producers in order to help exporting more goods and services to other countries.