Define the Marshall-Lerner condition. What are the likely effects of devaluation during a recession when supply...
Define the Marshall-Lerner condition. What are the likely effects of devaluation during a recession when supply elasticities are high?
Homework Answers
Marshall - Lerner condition has been developed to assess if policy of devaluation would be successful in dealing with trade deficit or not.
Devaluation would be successful if sum of export elasticity and import elasticity is larger than one.
Condition:
( Export (elasticity) + import elasticity ) >1
During the recession demand is low, hence when there is devaluation of currency , the supply is enough elastic , thus there will be improvement in BOP. There would be a pick up in the aggregate demand and it would be effective in dealing with recession.
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