Question:
According to the Marshall-Lerner condition, in which of the following situations the current account of the Balance of Payments will improve following a depreciation of exchange rate?
(1) Price elasticity of imports = 0.6 and price elasticity of exports = 0.4
(2) Price elasticity of imports = 0.8 and price elasticity of exports = 0.7
(3) Price elasticity of imports = 0.3 and price elasticity of exports = 0.5
(4) Price elasticity of imports = 0.4 and price elasticity of exports = 0.2
(5) Price elasticity of imports = 0.6 and price elasticity of exports = 0.3
Correct Answer:
(2)
Answer Explanation:
The Marshall-Lerner condition states that a currency depreciation will only improve the trade balance if the sum of the price elasticities of demand for exports and imports is strictly greater than 1 ($
Topic: Exchange Rates Year: 2021
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