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WHO'S AFRAID OF THE MARSHALL‐LERNER CONDITION?
Author(s) -
Menzies Gordon D.
Publication year - 2005
Publication title -
economic papers: a journal of applied economics and policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.245
H-Index - 19
eISSN - 1759-3441
pISSN - 0812-0439
DOI - 10.1111/j.1759-3441.2005.tb01005.x
Subject(s) - economics , price elasticity of demand , balance of trade , exchange rate , depreciation (economics) , elasticity (physics) , keynesian economics , monetary economics , international economics , microeconomics , thermodynamics , profit (economics) , physics , capital formation , financial capital
The Marshall‐Lerner condition—that the sum of the elasticities of import and export demand exceeds unity—has been put forward as a condition that is required for a depreciation to make the trade balance more positive. Based on recently estimated trade equations, the more appropriate condition for Australia is that the sum of the import elasticity of demand and the elasticity of the export price with respect to the exchange rate exceeds unity. I call this the Small Economy Marshall—Lerner (SEML) condition. In recent history, this condition was fulfilled in 1999–2001, when the (unstable) relationship between the terms of trade and the exchange rate broke down.