Question:
Which of the following scenarios will satisfy the Marshall-Lerner condition?
(1) PEDx = 0.5, PEDm = 0.3
(2) PEDx = 0.8, PEDm = 0.6
(3) PEDx = 0.2, PEDm = 0.4
(4) PEDx = 0.7, PEDm = 0.2
(5) PEDx = 0.8, PEDm = 0.2
Correct Answer:
(2)
Answer Explanation:
The Marshall-Lerner condition states that a currency depreciation will only improve a country’s balance of trade if the sum of the Price Elasticities of Demand for its exports and its imports is strictly greater than 1 ($PED_x + PED_m > 1$). Only Option 2 satisfies this: $0.8 + 0.6 = 1.4$.
Topic: Exchange Rates Year: 2024
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