International macroeconomics

Question 1

Marshall-Lerner condition

Answer 1

• The Marshall-Lerner condition states that the sum of the elasticities of exports (𝑋) and imports (𝑍) with respect to the real exchange rate (𝑞) must be greater than 1.
• This condition ensures that a higher 𝑞 leads to an increase in net exports

Question 2

ppp theory

Answer 2

exchange rate will reflect any differences in prices