Marshall Lerner Condition and J curve Effect

Question 1

What is the Marshall-Lerner Condition (MLC)?

Answer 1

It states that a currency depreciation will only improve the current account if:

PEDx + PEDm > 1

Where:

PEDx = Price elasticity of demand for exports

PEDm = Price elasticity of demand for imports

Question 2

Why does the MLC matter?

Answer 2

If demand for exports and imports is inelastic (PEDx + PEDm < 1), depreciation makes the trade balance worse (import value rises more than export value increases).

Question 3

What is the J-Curve effect?

Answer 3

The J-Curve shows how after depreciation:

In the short run, the current account worsens (due to inelastic demand).

In the long run, the current account improves (as demand becomes more elastic).

Looks like a “J” shape on a graph.