Question

Let elasticity of demand for exports for a certain country be $e_x$ and elasticity of demand for imports be $e_m$. Assume that the country devalues its currency. Its balance of payment will almost certainly show an improvement
if :

• A. $e_x+e_m>1$
• B. $e_x=e_m=1$
• C. $e_x+e_m=1$
• D. $e_x+e_m<1$

Answer 1

The correct option is A $e_x+e_m>1$

The Marshall-Lerner condition is the situation where exchange rate devaluation or depreciation will only cause a balance of trade improvement if the absolute sum of the long-term export and import demand elasticities is greater than one. If the domestic currency devalues, imports become more expensive and exports become cheaper due to the change in relative price.