Marshall-Lerner condition

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Marshall-Lerner Condition

In international trade, a theory stating that if the sum of price elasticity of a country's exports and the price elasticity of its imports is greater than one, a devaluation of that country's currency will improve its balance of trade. Devaluation does not improve the balance of trade if the sum is any lower.

Marshall-Lerner condition

the PRICE ELASTICITY OF DEMAND for IMPORTS and EXPORTS condition that must be satisfied if an EXCHANGE-RATE alteration (DEVALUATION or REVALUATION) is to be successful in removing a balance of payments deficit or surplus.

Specifically, the elasticity values for a successful devaluation, for example, are: demand for imports is price-elastic

demand for exports is price-elastic

How successful the devaluation is thus depends critically on the reaction of import and export volumes to the change in prices implied by the devaluation. If trade volumes are relatively elastic to price changes, the devaluation will be successful; that is, an increase in import prices results in a more than proportionate fall in import volume, reducing the total amount of foreign currency required to finance the import bill, while the decrease in export prices results in a more than proportionate increase in export volume, bringing about an increase in total foreign currency earnings on exports.

By contrast, if trade volumes are relatively inelastic to price changes, the devaluation will not succeed, that is, an increase in import prices results in a less than proportionate fall in import volume, increasing the total amount of foreign currency required to finance the import bill, while the decrease in export prices results in a less than proportionate increase in export volume, bringing about a fall in total foreign currency earnings on exports.

There are, however, a number of other factors that influence the eventual outcome of a devaluation, in particular the extent to which domestic resources are sufficiently mobile to be switched into export-producing and import-substitution industries. See DEVALUATION, BALANCE-OF-PAYMENTS EQUILIBRIUM, PRICE-ELASTICITY OF SUPPLY.

References in periodicals archive ?
Results show that there is a clear J-curve effect and also Marshall-Lerner condition holds.
The ratio can be interpreted as nominal or real trade balance (Bahmani-Oskooee, 1991) and also the ratio in a logarithmic model gives the Marshall-Lerner condition exactly rather than as an approximation (Boyd et al.
There are three distinct methods of investigating the link between trade balance and real exchange rate or terms of trade, which includes testing the Marshall-Lerner condition, the J-curve, and the S-curve.
The Marshall-Lerner condition is an indirect method of assessing the effectiveness of devaluation in improving trade balance.
The effects of devaluation or depreciation on the trade balance of a country are usually examined by the Marshall-Lerner [ML] condition, which states that if the sum of the absolute values of imports and exports demand price elasticities is greater than one, devaluation is expected to improve the trade balance of a country.
Arize (1986) reported that the Marshall-Lerner condition for devaluation was satisfied for a majority of countries in his sample that included nine African countries for the period 1960-1982.
In theory, exchange rate depreciations would reduce imports and increase exports thereby contracting a country's trade deficit provided the well-known Marshall-Lerner condition that the sum of the export and import demand elasticities are at least equal to unity holds (for details, see Kulkarni, 1994).
The traditional theoretically expected result may not be guaranteed because the Marshall-Lerner condition or some of its underlying conditions (such as infinite supply elasticity) may not hold.
In this paper we use Johansen's cointegration methodology to re-investigate the long-run trade elasticities and existence of the Marshall-Lerner condition.
In this paper we investigate if the Marshall-Lerner (ML) condition holds true for Pakistan in the long run.
The Marshall-Lerner (ML) condition has been proposed as a theory to examine the links between devaluation and the trade balance.
The Marshall-Lerner conditions have been tested and found to satisfy the conditions for a devaluation that would be successful in improving the trade balance.