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      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 _____
      A Equal to zero (Ex + Em = 0) Correct Answer Incorrect Answer
      B Less than one (Ex + Em <1) Correct Answer Incorrect Answer
      C Exactly equal to one (Ex + Em = 1) Correct Answer Incorrect Answer
      D Greater than one (Ex + Em > 1) Correct Answer Incorrect Answer
      E Greater than the country's GDP growth rate (Ex + Em > GDP rate) Correct Answer Incorrect Answer

      Solution

      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 country's 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.

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