According to the Marshall-Lerner condition,a currency devaluation will be successful in improving a country's balance of trade (exports minus imports) if the
A) sum of the elasticities of supply is more than 1
B) sum of the elasticities of supply is less than 1
C) sum of the elasticities of demand is more than 1
D) sum of the elasticities of demand is less than 1

Question

Quizplus · Accepted Answer

The Marshall-Lerner condition states that a currency devaluation will improve a country's balance of trade if the sum of the elasticities of demand (for exports and imports) is greater than 1. This means that the demand for a country's exports and imports must be relatively elastic, meaning that changes in price will lead to a significant change in the quantity demanded. A sum less than 1 suggests that demand is relatively inelastic and will not significantly change with a change in price. Therefore, the best choice is C – sum of the elasticities of demand is more than 1.

According to the Marshall-Lerner Condition,a Currency Devaluation Will Be Successful