Overview of the Marshall-Lerner Condition
The Marshall-Lerner Condition, named after two economists, Alfred Marshall and Abba Lerner, is an economic concept used to determine the success of a currency devaluation. This condition states that the sum of the elasticities of exports and imports relative to changes in the exchange rate must be greater than one for the devaluation to be successful. It is often used in international trade to assess and predict the effects of a devaluation on a country’s current account.
What is Devaluation
Devaluation is the intentional reduction of the value of a currency in relation to other currencies. This is done in order to make a country’s exports more competitive in the international market, leading to increased foreign currency flows and reduced current account deficits.
Elasticity of Demand
The Marshall-Lerner Condition relies on the concept of elasticity of demand. This is the measure of how much the quantity of a good or service demanded changes in response to a certain percentage change in price. If the elasticity is greater than one, then a decrease in price will lead to an increase in demand, and vice versa.
The Marshall-Lerner Condition
The Marshall-Lerner Condition states that for a devaluation to be successful, the sum of the elasticities of exports and imports must be greater than one. This means that a decrease in the exchange rate must lead to an increase in the quantity of exports and a decrease in the quantity of imports. If this condition is not satisfied, then the devaluation will not lead to an improvement in the current account balance.
- What is the Marshall-Lerner Condition?
- How does devaluation affect a country’s current account balance?
- What is the elasticity of demand?
- What factors determine the success of a devaluation?
- What is the difference between devaluation and depreciation?
- What is the J-Curve effect?
- What are the effects of currency devaluation?
- What is the impact of devaluation on international trade?
- What strategies can countries use to improve their current account balance?
- What is the difference between the Marshall-Lerner Condition and the Mundell-Fleming Model?