Re: marshall lerner's condition doubt

Posted by dhruv on Jun 17, 2015; 9:32am
URL: http://discussion-forum.276.s1.nabble.com/marshall-lerner-s-condition-doubt-tp7597863p7597871.html

If, E = domestic currency in terms of foreign currency, and
    e = real exchange rate(domestic good in terms of foreign good)
then, [e = Ep/p*, where p is domestic price level and p* is foreign price level]

NX = X - IM/e

IM/e as imports have to be valued in terms of domestic good.

If we depreciate the currency, assuming constant price levels, that implies depreciation of e, then X increases and IM decreases but the value of import increases. What Marshal-Lerner condition specifies is the increase in NX with real depreciation, i.e.,

dNX/de < 0.

Also, empirically it is found that Marshall-Lerner condition is satisfied most of the times.

I hope this answers your question.