8) marshall lerner curve

Question 1

What is the marshall Lerner condition?

Answer 1

It states that a depreciation in the exchange rate will only lead to an improvements in the balance of payments current account deficit in the long run as long as the long run elasticities of imports and exports are more than 1

Question 2

What does the J curve look like/show?

Answer 2

That in the short run a depreciation in the exchange rate will lead to a worsening of the deficit, and then an improvement in the long run

Question 3

Why does the J curve look how it does?

Answer 3

• short run- depreciation in the exchange rate makes imports more expensive, but imports are inelastic in the short run so people continue to import at a higher price, worsening the deficit
• long run- in the long run imports fall and exports increase as people in the domestic country look for cheaper domestic products and foreign people find the cheaper exports available