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Prepared by Erik Lueth (APD).
Domestic demand or absorption is the sum of domestic (private and public) consumption and investment.
The mechanism that brings this about is usually a devaluation of the currency, which reduces the purchasing power of households and discourages imports by making them more expensive. Steep devaluations can also negatively affect GDP.
This is derived from the balance of payments equation CA+ KA = ∆R, where CA = EX – IM + NI + NT is the current account balance.
Borrowing in this context means a falling net investment position and includes FDI inflows, portfolio inflows, and the running down of reserves.
The national accounts data are taken from the CEIC database and the balance of payments (BOP) data stem from the IMF Balance of Payments Statistics Yearbook. BOP data was converted into taka using the nominal exchange rate. Nominal data were converted into real data using the GDP deflator.
It is worth noting that ODA is more procyclical than remittances with a correlation coefficient of 45 percent. Since the capital account as a whole is less procyclical errors and omissions, the other major line item under the capital account, must be counter-cyclical.
The notions that remittances are motivated by rate of return considerations and fuel consumption are no contradiction, since the rate of return can be understood broadly to also include services rendered by the extended family in return for remittances.