According to the Marshall-Lerner condition, when will a depreciation of a country's currency lead to a deterioration in its trade balance?

Show Answers

Export demand elasticity is 0.9 and import demand elasticity is 0.4Export demand elasticity is 0.7 and import demand elasticity is 0.3Export demand elasticity is 0.5 and import demand elasticity is 0.7Export demand elasticity is 0.3 and import demand elasticity is 0.6Export demand elasticity is 1.2 and import demand elasticity is 0.8

Explanation

According to the Marshall-Lerner condition, a currency depreciation improves the trade balance only if the sum of the absolute elasticities of demand for exports and imports exceeds one. If the combined elasticities are less than one, as in option D where export elasticity is 0.3 and import elasticity is 0.6 (sum = 0.9), the trade balance will worsen following a depreciation.