Marshall-Lerner Condition
The Marshall-Lerner condition states that depreciation improves the trade balance if (PED of exports + PED of imports) > 1. If satisfied, volume increases outweigh price decreases.
Real World
After the pound depreciated 15% following Brexit in 2016, the UK trade deficit initially widened before narrowing — a classic J-curve effect caused by low short-run elasticities failing to satisfy the Marshall-Lerner condition immediately.
Exam Focus
State the condition explicitly (PED_x + PED_m > 1), then evaluate whether it is likely met in the short run versus long run.
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