Marshall Lerner Condition

Question 1

Volume of Exports function

Answer 1

X = σ (Q) y*
σ: home country share of world trade.
Q: price competitiveness
y*: foreign GDP

Question 2

Volume of Imports function

Answer 2

m(Q)y
m: marginal propensity to import
Q: relative price of imports
y: home GDP.

Question 3

Balance of trade function

Answer 3

σ(Q)y*- Qm(Q)y

If there is a depreciation, then σ(Q)y* rises and Qm(Q)y falls through the volume effect and if the Marshall Lerner condition holds.

Question 4

Marshall Lerner Condition

Answer 4

If the sum of the price elasticity of exports and imports exceeds one, a depreciation will improve the balance of trade.