Make absolute positioned div expand parent div height

There is a quite simple way to solve this.

You just have to duplicate the content of child1 and child2 in relative divs with display:none in parent div. Say child1_1 and child2_2. Put child2_2 on top and child1_1 at the bottom.

When your jquery (or whatever) calls the absolute div, just set the according relative div (child1_1 or child2_2) with display:block AND visibility:hidden. The relative child will still be invisible but will make parent's div higher.

Although stretching to elements with position: absolute is not possible, there are often solutions where you can avoid the absolute positioning while obtaining the same effect. Look at this fiddle that solves the problem in your particular case http://jsfiddle.net/gS9q7/

The trick is to reverse element order by floating both elements, the first to the right, the second to the left, so the second appears first.

.child1 {
    width: calc(100% - 160px);
    float: right;
}
.child2 {
    width: 145px;
    float: left;
}

Finally, add a clearfix to the parent and you're done (see the fiddle for the complete solution).

Generally, as long as the element with absolute position is positioned at the top of the parent element, chances are good that you find a workaround by floating the element.

Feeela is right but you can get a parent div contracting or expanding to a child element if you reverse your div positioning like this:

.parent {
    position: absolute;
    /* position it in the browser using the `left`, `top` and `margin` 
       attributes */
}

.child {
    position: relative;
    height: 100%;
    width: 100%;

    overflow: hidden;
    /* to pad or move it around using `left` and `top` inside the parent */
}

This should work for you.

You answered the question by yourself: "I know that absolute positioned elements are removed from the flow, thus ignored by other elements." So you can't set the parents height according to an absolutely positioned element.

You either use fixed heights or you need to involve JS.