Marshall-Lerner condition
July 2018, Paper-II
Question
Let the elasticity of demand for exports for a certain country be ‘ex’ and elasticity of demand for imports be ‘em’. Assume that the country devalues its currency. Its balance of payments will almost certainly show improvement if:
a) ex+em>1
b) ex+em<1
c) ex+em=1
d) ex=em=1
Answer A
The Marshall-Lerner condition, which states that a currency devaluation will only lead to an improvement in the balance of payments if the sum of demand elasticity for imports and exports is greater than one, is named after English economist Alfred Marshall and the Romanian born economist Abba Lerner. I.e. ex+em>1
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