The AbsorptionApproach

Trade balance = S_p + S_g – I

Trade balance is also equal to the difference between income (GDP) and domestic expenditure, or absorption.

In order to move the trade balance toward surplus, a devaluation/depreciation of the domestic currency must increase income relative to expenditure or, equivalently, increase national saving relative to investment in physical capital.

Wealth effect: A weaker currency reduces the purchasing power of domestic-currency-denominated assets. Households respond by reducing expenditure and increasing saving in order to rebuild their wealth. – a temporary improvement in the trade balance

Lasting correction of the imbalance requires more fundamental changes in expenditure/saving behavior.

Currency depreciation cannot improve the trade balance unless it also induces a corresponding change in the capital account.