The Marshall-Lerner condition illustrates
A) The price effects of a nation's currency depreciation on its trade deficit
B) The price effects of a nation's currency appreciation on its trade deficit
C) The effect of fixed exchange rate systems on the trade balance
D) None of the above

Question

Quizplus · Accepted Answer

The Marshall-Lerner condition analyzes the impact of a change in currency value, either appreciation or depreciation, on a country's trade balance. It states that for a currency depreciation or appreciation to improve the trade balance, the sum of the price elasticities of exports and imports must be greater than one. This means that the gain in quantity sold due to the lower price of exports or the higher price of imports must be large enough to offset the loss due to the change in prices. Therefore, option A is the correct answer.

The Marshall-Lerner Condition Illustrates