# Marshall–Lerner - do we have to be able to solve a practical problem

Hi everyone,

In these hard times, I am trying to save as much memory in my head as possible and I was wondering about the LOS regarding the Marshall-Lerner effect.

I know that we should be able to understand this theory but do we have to be able to solve a practical problem?

I am asking because when I read the LOS, I don’t see anything about a practical use of this effect. However, there is one example (no EOC though) about this theory and I saw one question in a CFA mock exam.

I was wondering if these CFA mocks exams are still up to date regarding the LOS.

I have been though a few mock exams and not come across it once. Everytime the flash card with this equation comes up I ask myself if it is worth it too!

I haven’t seen it in any mocks that I’ve done

Hi guys,

Ok, it seems that I am among the few that saw this question on a CFAI mock exam (I didn’t see it on schweser mocks). I was so disapointed when I saw it… but as far as I am concerned, these CFAI mock exams aren’t “brand new”, so I was wondering if it was a Los a couple of years ago.

If anyone has more information about this Los, that would be really appreciated. Because when I read the los from the chapter 21, in which this effect is explained, it isn’t written that we have to interpret result of this effect or something like that, but I’m not 100% sure about it…

I just want to avoid a bad surprise at the exam

This chapter is the last in Economics session so I dedicated to it unnecessarily the least attention. Yes, I can confirm that I had this question encountered somewhere in Mock or Topic test and cannot find the reason why not expected to appear on the exam. However, IMO, it is important to remember fundamental equation:

WX ϵx + WMM - 1) > 0

x = export, m=import, ϵ = elasticity

Elasticitiy approach can be interpreted by improving the trade balance if demand for imported good is elastic (> 1).

Hi Flashback!

Thank you for your insight. I will remember this formula and even the example… just in case. After all it’s only one more question. However, I am currently trying to put away what’s not necessary but as you said: there is no evidence that it won’t appear on the exam,

Flashback (and the others), did you also find that the econ questions in the CFAI mock exams were harder than expected?

They are by first instance. After taking more practicing you may find that most samples are within only algebra domain, supposed you understand at least minimum of Economic theory (ex.law of demand and supply, why interest rate changes, dependance of consumption and disposable income, etc).

Swiss

If you haven’t done it yet, I would recommend pass throught diffcult chapters and doubtful questions in Curriculum. It is more detailed explained there than in Kaplan.

Well most times that you have to use the ML model, you have to calculate the trade balance, and yes, the forumula depicted by Flashback above is correct, but that is not the end of it, as you still have to Multiply the outcome with the Depreciation and total trade.

I.e., Say ML = 0.5, Currency Devaluation = 0.2 and Import = 6500, export = 3500, and

Total Trade (import + export) = 10,000

Then we say 0.5*0.2*10,000 = 1,000

Thus, Trade Balance = 6,500 - 3,500 + 1,000 = 2,000.

Hi,

Yes, indeed, you have to go further.

But I reread the chapter 21 yesterday, and especially the part about the Marshall-Effect. They have an example in the reading, but they don’t go so far (i.e. calculate exactly by how much the trade balance will be affected). That’s why I am a bit confused

Well, I have seen where with an example in the CFA official corriculum, cant remember precisely under which sub-topic i saw it.

But try to understand it and know how to calculate trade balance, because you just cant tell which part will be tested in the exam.

Good luck.