Could someone please try explain this concept to me? Struggling.
Cheers,
Could someone please try explain this concept to me? Struggling.
Cheers,
Your Macro Econ text says the as we depreciate our currency our balance of trade improves. Marshall - Lerner incorporates elasticity in this concept.
Suppose the weight of exports is “We” and the weight of imports is “Wi”.
Now according to the concept …
We*Ee + Wi(Ei-1) > 0
if this condition satisfies then you can say that depreciating our currency will have a positive effect on the balance of trades.
The balance of payment will improve with currency devaluation since exports value will increase and the net effect will be positive . This is called Marshall Lerner condition . Also the demand elasticity has to be greater than one.
I hope It is clear…
Thank you Chaps.