The simple Marshall-Lerner condition would suggest that one of the following cases would produce a worsening of the trade balance if the country's currency depreciated. Which one? (The negative sign on elasticities is being ignored; also, assume that trade is initially balanced.)

Question

Quizplus · Accepted Answer

The Marshall-Lerner condition states that the sum of the absolute values of the elasticities of demand for exports and imports must be greater than one for a depreciation to improve the trade balance. In case D, the sum of the absolute values of the elasticities is 0.8 + 0.1 = 0.9, which is less than one. Therefore, a depreciation would worsen the trade balance in this case.

The Simple Marshall-Lerner Condition Would Suggest That One of the Following