The Marshall-Lerner Condition and the J-Curve Effect (HL)

You are expected to explain/analyze (AO2) the Marshall-Lerner condition and the J-curve effect (HL), and draw (AO4) the J-curve (HL)

<-- Back to Global

<- Back to 4.6

Definitions

Components & Interdependence

Current/Financial Accounts vs Exchange Rate

Implications of Deficit/Surplus

Corrections

Marshall-Lerner & J-Curve

As mentioned, a devaluation of a currency will help in creating a current account surplus.

This is because due to your currency being worth less compared to others, your goods look cheaper abroad. This means more of your goods will be demanded abroad, helping create an account surplus.

But does this work for every good and service? And does it happen immediately?

The Marshall-Lerner Condition (AO2) (HL)

The Marshall-Lerner condition states that a devaluation or depreciation of a currency will help reduce a current account deficit, if the sum of the price elasticity of demand (PED) for exports and imports is greater than 1 (price elastic).

This makes sense, because if your goods are price inelastic, then a price difference does not really change demand. Hence, neither will a devaluation.

The J-Curve Effect (AO2, AO4) (HL)

The J-curve effect is a diagram that explains the effect devaluation has on a country's current account.

It shows that when a country devalues its currency, trade balance gets worse before it gets better. This is explained by the following diagram and annotations:

Google Sites

Report abuse