The Marshall-Lerner Condition addresses the question of manipulating exchange rates to alter the value of exports from a given country.

The Marshall-Lerner ConditionEdit

It is not necessarily true that a devaluation of domestic currency will improve a country's balance of payments/current account balance. What is important to consider in the process of purposefully devaluing currency is the elasticity of the goods being exported and the elasticity of the goods being imported.

The process that the Marshall-Lerner Condition explains begins with a country devaluing it's currency. This will consequently reduces the price of that country's exports to other nations, causing the quantity demanded for these goods to increase. Additionally, the price of imports will increase relative to the period before the forced devaluation, causing quantity demanded to decrease.

Ultimately, if the goods being exported are elastic, the quantity demanded will increase relatively more than the decrease in price of those goods which would improve the country's balance of payments. If the goods being imported are also elastic, the total expenditures on those goods will decrease, also benefitting the balance of payments. However, in the short run, it has been empirically proven that goods are inelastic due to entrenched consuming patterns and an information lag, so the Marshall-Lerner condition says that a devaluation of currency will worsen a country's balance of payments in the short run. It is not until the absolute value of the sum of price elasticities of imports and exports is greater than 1.

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