According to the Marshall-Lerner condition, a currency depreciation is least likely to lead to an improvement in the home country's trade balance when
A) home demand for imports is inelastic and foreign export demand is inelastic.
B) home demand for imports is elastic and foreign export demand is inelastic.
C) home demand for imports is inelastic and foreign export demand is elastic.
D) home demand for imports is elastic and foreign export demand is elastic.

Question

Quizplus · Accepted Answer

The Marshall-Lerner condition states that a currency depreciation will lead to an improvement in the home country's trade balance if the sum of price elasticities of demand for home country's imports and exports is greater than 1. In option A, both home demand for imports and foreign export demand are inelastic, which means that a currency depreciation will not lead to a significant increase in the quantity of exports sold to foreign countries or a significant decrease in the quantity of imports bought from foreign countries. Therefore, the condition for a currency depreciation to improve the home country's trade balance is not met.

According to the Marshall-Lerner Condition, a Currency Depreciation Is Least