Marshall Lerner Condition + J Curve

• Current account deficit


  A situation where a country's imports exceed its exports
• Currency depreciation

  A decrease in the value of a country's currency relative to other currencies
• Currency depreciation


  Can help rectify a current account deficit
• Martial Lerner condition

  • States that a currency depreciation will only correct a current account deficit if the price elasticity of demand for exports plus the price elasticity of demand for imports sum to greater than one
• Elastic only irritates skin


  Relationship between demand elasticity and total revenue: Elastic - opposite, Inelastic - same
• Inelastic demand for exports

  Total revenue from exports will decrease with a currency depreciation
• Inelastic demand for imports

  Total expenditure on imports will increase with a currency depreciation
• Inelastic net export demand

  Total revenue from net exports will decrease with a currency depreciation, worsening the current account deficit
• Jacob effect

  • In the short-term, demand for net exports tends to be inelastic, so a currency depreciation will initially worsen the current account deficit before improving it
• It takes time for importers and exporters to adjust to changes in the exchange rate