The Marshall-Lerner condition suggests that depreciation of the Swiss franc leads to a worsening of Switzerland's trade balance if the
A) elasticity of demand for Swiss exports is 0.4 while the Swiss elasticity of demand for imports is 0.2.
B) elasticity of demand for Swiss exports is 0.6 while the Swiss elasticity of demand for imports is 0.4.
C) elasticity of demand for Swiss exports is 0.5 while the Swiss elasticity of demand for imports is 0.7.
D) elasticity of demand for Swiss exports is 0.6 while the Swiss elasticity of demand for imports is 0.7.

Question

Quizplus · Accepted Answer

The Marshall-Lerner condition states that a depreciation of a country's currency will only improve its trade balance if the sum of the price elasticities of demand for exports and imports is greater than one. In choice A, the sum of the elasticities (0.4 + 0.2 = 0.6) is less than one, suggesting a worsening of the trade balance.

The Marshall-Lerner Condition Suggests That Depreciation of the Swiss Franc