Question

The Marshall-Lerner Condition explains the requirement for a currency devaluation to successfully improve a country's trade balance in the long run. According to this rule, the trade balance will improve only if the sum of the price elasticities of demand for exports (Ex) and imports (Em) is _____

Q: Answer-The Marshall-Lerner Condition explains the requirement for a currency devaluation to successfully im...

The Marshall-Lerner condition explains why devaluing a currency does not always fix a trade deficit. It states that a currency depreciation or devaluation will improve a countrys balance of trade only if the sum of the absolute values of the price elasticities of demand for its exports and imports is greater than one. This means that trade volumes must be sufficiently responsive to price changes to outweigh the initial higher costs of imports.