can someone please tell me if this answer is correct? thequestionis worth 20 marks.... thank you!
MARSHALL LERNER CONDITION
The condition states that, for a currency devaluation tohave apositive effect on trade balances, the sum of priceelasticity ofincome ( in absolute value ) must be greater thanone.
The M-L Condition and the J curve show the relationship betweentheexchange rate of a nationâs currency and the countryâsbalance oftrade.
If a countryâs currency depreciates relative to othercurrencies,then this should lead to an improvement in thecountryâs balance oftrade. The weaker dollar now means thatforeigners will now have tospend less of their dollars in order togain one dollarâs worth oflocal currency. Since the localdollar is now worth less, localswill now have to pay more forimports; hence reducing the level ofimports.
What matters is not whether a country imports less andexportsmore, rather, whether the increase in income form exportsexceedsthe decrease in expenditure from imports for a particularcountry.M-L condition examines the price elasticises of demand forexportsand imports for a particular country.
E.g. country A experiences a devaluation of its currency
If foreigners demand for exports from country A isrelativelyelastic, then a slightly weaker dollar will cause adramaticincrease in the demand for Aâs output, causing exportincomefor A to increase dramatically. On the other hand, ifAâsdemand for imports is highly price elastic, then aslightly weakerdollar will cause Aâs demand for imports todecrease drastically,causing a reduction in Aâs expenditurefrom imports.
MARSHALL LERNER CONDITION
The condition states that, for a currency devaluation tohave apositive effect on trade balances, the sum of priceelasticity ofincome ( in absolute value ) must be greater thanone.
The M-L Condition and the J curve show the relationship betweentheexchange rate of a nationâs currency and the countryâsbalance oftrade.
If a countryâs currency depreciates relative to othercurrencies,then this should lead to an improvement in thecountryâs balance oftrade. The weaker dollar now means thatforeigners will now have tospend less of their dollars in order togain one dollarâs worth oflocal currency. Since the localdollar is now worth less, localswill now have to pay more forimports; hence reducing the level ofimports.
What matters is not whether a country imports less andexportsmore, rather, whether the increase in income form exportsexceedsthe decrease in expenditure from imports for a particularcountry.M-L condition examines the price elasticises of demand forexportsand imports for a particular country.
E.g. country A experiences a devaluation of its currency
If foreigners demand for exports from country A isrelativelyelastic, then a slightly weaker dollar will cause adramaticincrease in the demand for Aâs output, causing exportincomefor A to increase dramatically. On the other hand, ifAâsdemand for imports is highly price elastic, then aslightly weakerdollar will cause Aâs demand for imports todecrease drastically,causing a reduction in Aâs expenditurefrom imports.
