The Marshall- Lerner condition is less likely to hold when:

Question

Quizplus · Accepted Answer

The Marshall-Lerner condition states that for a currency depreciation to lead to an improvement in the trade balance, the sum of the price elasticities of exports and imports must be greater than one. However, if the value effect of a depreciation (i.e. the increase in the domestic currency cost of imported goods due to the weaker exchange rate) is larger than the volume effect (i.e. the increase in quantity demanded of exports due to their lower foreign currency price), then the condition may not hold. Therefore, option B is the correct answer.

The Marshall- Lerner Condition Is Less Likely to Hold When