Marshall-Lerner Condition

Statement

The Marshall-Lerner condition states that a depreciation of a country’s currency will improve its balance of trade if the sum of the price elasticity of demand for exports and the price elasticity of demand for imports is greater than one: $PED_X + PED_M > 1$.

Notes

At this level the requirement is to know and apply the condition, not to derive it. The intuition behind why elasticity matters — that a depreciation raises export revenue but its effect on import expenditure depends on how responsively the quantity of imports demanded falls — is set out in the Marshall-Lerner concept. The condition is the elasticity test that sits beneath any claim that a currency depreciation boosts net exports.