The Marshall-Lerner Condition states that, all else equal
A) nominal appreciation improves the current account if export and import volumes are sufficiently elastic with respect to the real exchange rate.
B) real depreciation improves the current account if export and import volumes are sufficiently inelastic with respect to the real exchange rate.
C) real appreciation improves the current account if export and import volumes are sufficiently elastic with respect to the real exchange rate.
D) real depreciation improves the current account if export and import volumes are sufficiently elastic with respect to the real exchange rate.
E) the sum of import and export elasticities must be equal to one in order for depreciation to occur.

Question

Quizplus · Accepted Answer

The Marshall-Lerner Condition states that a real depreciation (i.e. a decrease in the value of a country's currency) will improve the current account if the sum of the price elasticities of exports and imports is greater than one (i.e. if they are sufficiently elastic). This means that a decrease in the exchange rate will lead to a greater percentage increase in the quantity of exports and/or decrease in the quantity of imports, which will improve the balance of trade and the current account.

The Marshall-Lerner Condition States That, All Else Equal