Why is Marshall Lerner important?

Why is Marshall Lerner important?

The M‐L condition states that these elasticities (in absolute value) must sum to greater than one for a devaluation to be effective in improving a country's trade balance. Because of this necessary condition, accurately measuring trade elasticities became extremely important for the assessment of trade policy.

What does the Marshall-Lerner condition represent?

Marshall Lerner condition : This refers to the proposition that the devaluation of a country's currency will lead to an improvement in its balance of trade with the rest of the world only if the sum of the price elasticities of its exports and imports is greater than one.

What happens if the Marshall-Lerner condition is not satisfied?

However, if the sum of the price elasticities of demand for exports and imports is less than one, which means that the Marshall-Lerner condition does not hold, the increase in import expenditure will be greater than the increase in export revenue which will worsen the balance of trade resulting in a deterioration in ...

Is the Marshall-Lerner condition true?

The Marshall-Lerner condition is a precise statement of this requirement: given an initial position of balance trade, a depreciation will improve the trade balance if the export and import elasticities of demand sum to more than unity.

Does Marshall-Lerner condition apply to appreciation?

When the M-L Condition Holds What we are really interested in is the impact to the trade balance, and therefore the balance of payment, which is a key economic performance metric. If for example, an appreciation of the exchange rate occurs: Export prices will increase and import prices will decrease.

Is the main assumption of elasticity approach of Marshall Lerner?

The Marshall-Lerner condition assumes perfectly elastic supplies of exports and imports. But this assumption is unrealistic because the country may not be in a position to increase the supply of its exports when they become cheap with devaluation of its currency.

Do you think the Marshall-Lerner condition is more likely to hold in the short run or the long run why?

Evidence around the world suggests that the Marshall-Lerner condition does not hold in the short run, but does in the medium to long run. This is because in the short run, there will be few extra exports sold when prices fall - people overseas do not react immediately and so export demand will take time to change.

Is the main assumption of elasticity approach of Marshall-Lerner?

The Marshall-Lerner condition assumes perfectly elastic supplies of exports and imports. But this assumption is unrealistic because the country may not be in a position to increase the supply of its exports when they become cheap with devaluation of its currency.

Is appreciation good or bad?

Is an appreciation good or bad? An appreciation can help improve living standards – it enables consumers to buy cheaper imports. If the appreciation is a result of improved competitiveness, then the appreciation is sustainable, and it shouldn't cause lower growth.

What is elasticity approach to devaluation?

The elasticity approach tries to predict the outcome policy changes will have on the balance of payments. For example, this approach illustrates how exchange rates will affect the balance. Further, the elasticity approach assumes that if the BOP is in equilibrium, devaluation can improve the balance of payments.