Marshall–Lerner condition

The Marshall - Lerner condition is developed by Abba P. Lerner and Alfred Marshall economic theoretical concept that explains the operation of an exchange rate change on the current account balance with supply and demand elasticities. If the Marshall - Lerner condition is satisfied, the current account improves by a devaluation of the domestic currency on their start- balance out (ie positive law ). This effect is called the normal reaction of the current account. The approach used here is referred to as elasticity approach.

With the Marshall - Lerner condition associated concepts

If, after a devaluation initially declined the current account ( negate ), and only after a delay to its improvement, is spoken by a J- curve effect. This process has the price and the volume effect of the devaluation can be distinguished. In the J-curve effect of the volume effect occurs for various reasons (for example, information gap, long-term contracts) later.

Published in 1937 Joan Robinson the more general condition: the Robinson condition. It relates to the same facts as the Marshall - Lerner condition, but is working with fewer assumptions.

Theoretical derivation

In applying the Marshall - Lerner condition following requirements must be met: The external balance must be in the starting situation and the zero run supply elasticities in both markets to infinity. If the total amount taken to the demand elasticities under these conditions is greater than one, it comes at a depreciation of the domestic currency in an increase in net exports (= normal reaction of the current account ).

Starting point of the Marshall - Lerner condition is the Robinson condition:

Here are and the elasticity of demand for Ex or import and supply elasticities and the Ex or import.

If the left term and the right term to to expanded so the result is:

Under the assumptions of an infinite export supply elasticity and an infinite import supply elasticity results in: or

Interpretation

Thus, at sufficiently large demand elasticities, there is a normal reaction, that is, a devaluation leads to an improvement in the current account. The domestic goods become cheaper for foreigners and are thus more in demand; it is a revival of exports while reducing the - Imports ( foreign goods have become more expensive for residents) instead.

An appreciation leads to the deterioration of the current account. It comes to a decrease in the surplus or an increase in the deficit, as domestic goods become more expensive for foreigners and foreign goods cheaper for residents.

Thus, the two conditions are met for the supply elasticities, the examined country a major economy must be in principle; for only when it is large enough, it may on the exports market completely react flexibly and thus (indicated mathematically by ) provide additional export goods without price increases.

On the other hand, the economic strength of the country must also be small enough to meet the world market price not being able to influence yourself - otherwise the assumption of a perfectly price-elastic import supply () would not be applicable.