Link to this post 13 Oct 12

Domestic absorption refers to domestic consumptions together with the domestic investment made in the economy. Consumptions include the private and public consumptions. Domestic income is the aggregate of the value added produced from different sectors of the economy. Value added is the difference between the value of the gross output and the value of inputs used in each sector. Domestic income is the incomes derived from the activities within each sector. It excludes imported earnings like factor payments and transfer payments. Domestic income can be used within a country or exported.
Parts of domestic income when used for private and public consumption together with investments make the domestic absorption of the economy of a country. Another part of domestic income makes the export of a country. That means; domestic absorption is the resources that are domestically used from the domestic income. If domestic absorption is greater than the domestic income implies part of domestic absorption cannot be met domestically rather depends on imports. If that case happens, a trade gap emerge (that is what is being imported is more than what is being exported). Furthermore the scenario implies most of domestic investment of the economy depends on foreign aid (loans and grants).
Thus, if there is an existence of a trade gap means most of domestic income make the private and public consumptions with in the economy, leaving no or narrow domestic saving for investment. Hence most of investments are therefore financed by the net inflow of foreign aid. The larger the size of the trade gap implies most of the country investments depend on foreign aid and the inefficiency of the domestic income to facilitate the domestic absorption.
The relationship between the country domestic incomes to its domestic absorption is that; domestic income is the basic source of the country to facilitate the latter and their relationship has potential to influencing the country investment and growth. If the domestic income fails to contain its domestic absorption, investment and economic growth is always in question. Thus, the relationship of the two has larger implication on investment and growth.
If domestic income cannot meet its domestic absorption, then the trade gap is met by increased import (GDP + Export = domestic absorption + import). With the increased trade gap means, most of domestic income will be used for private and public consumptions leaving investment dependence to foreign aid (loans and grants) hence slow growth.
Raise of domestic income relatively to domestic absorption may lead to zero or negative trade gap and that will mean country independence in investment and if there are excess of domestic income will improve country exports, and finally the country growth is positively influenced.



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