Marshall Lerner Condition and J Curve Effect
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- Опубліковано 8 лют 2025
- Marshall Lerner Condition and J Curve Effect - An in depth look at the Marshall Lerner condition and J curve effect in determining whether a fall in the exchange will improve a country's current account position
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+Jeffrey Li It wasn't that bad, Marshall Lerner condition didn't come up tho xD
@@AvrilSk8erboi27 got my exam tomm. I just hope this comes up for me :D
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If the PED of imports was 0.6 and PED of exports was 0.6 then that adds to more than 1 so the devaluation should work but both are inelastic so surely the deficit would worsen?
No it wont but the rate at which it improves is slower.In the mean time unemployment and inflationary pressure would worsen the countrys situation
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last minute exchange rate revision?
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My problem with this theory is that if PED(x) and PED(m) are, say, 0.6 (i.e both inelastic), total elasticity in that equation is greater than 1. What happens in this case?
the sum of two elasticities has to be greater than 1 if so the elasticity of net elasticity of demand will be elastic and TR will increase.
So if independently both elasticities are less than one but add up to be more than one, then the next elasticity of exports and imports, i.e. X-M, is going to be elastic.
To show the J curve for the UK the curve should always be below the time axis. Think like an economist! ;)
Because we are always in a deficit😉
A question. How to derive the Marshall Lerner condition for improving the trade balance through devaluation?
legend
Hannah El Sabbagh o
how does the price go down in net exports?
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Nice
Any chance of you doing some labour economics stuff?
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Is this equation ignoring the negative sign of PEDx and PEDm?
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I'd like to understand how the depreciation of the domestic currency can cause total revenue to fall. While its easy for me to understand that with inelastic demand a falling price results in falling revenue, when that falling price is the result of a depreciating currency, how does that effect the revenue received by the domestic producer? They are still asking the same price in their currency, are they not? Just a little unclear
+Brian Gibson The price charged will remain the same yes but if foreign currency is collected which then needs to be converted, less will be earned in terms of revenue. This is very common in the real world
+EconplusDal Thanks for responding. I was under the impression that the foreign party that is purchasing the goods is actually converting their currency to our currency then purchases it for the quoted price in the domestic currency. I thought this would actually increase revenue because the price to foreign firms falls increasing their demand, while my price is unchanged in my currency. My train of thought is summarized by saying if I sell a product for 5 dollars and collect 10 units of foreign currency which equals 5 dollars, I've still made 5 dollars. Then the dollar weakens and I sell the same product for 5 dollars, collect 8 units of foreign currency (which now now equals $5) I have still made 5 dollars. Sorry for the length of this.reply. Where am I going wrong? Do you have any videos that might address this?
+Brian Gibson In your example, if the $ weakens and you continue to charge $5 in a foreign currency, the relative price of your good will decrease. Therefore, you may sell a greater quantity of your good (as a fall in price leads to an extension in demand) and increase your revenue.
thank you Brian that's what i was bloody thinking it was confusing the hell out of me
The depreciating domestic currency cause a reduction in the net price of a domestic product in the foreign market. However due to inelastic net exports, the net reduction in price leads to a reduction in revenue earned in export markets.
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Economics rizz effect??
what if the elasticity of net exports is unitly elastic?
No effect on current account deficit
what's WIDEC ?
Weak Currency, Imports, Dear, Exports, Cheap
Weaker (Currency). Imports Dearer (more expensive). Exports Cheaper
Isn't it unrealistic for the J curve to come through the x-axis and go into surplus in that period of time? Surely a weaker currency alone would not be enough to cure the problem of a current account deficit regardless of how long it takes?
Ardi Janjeva Depends on the country and how important the exchange rate is in determining its trade position. Sure there are lots of other factors that could also do it, but for some countries a weaker currency on its own can well rectify a current account deficit particularly if it was a strong currency that led to it in the first place
***** I see. Are there any countries that you could use as examples to prove that this can be the case, where the economy is heavily reliant on exchange rates determining the structure of the economy as a whole?
Ardi Janjeva Japan is a very good example, China too. Japan has experienced the J curve effect in recent times - the best recent example I can give you
holy legend
Hopefully you can get back to me, You mention the SUM of exports and imports and then go on to say NET EXPORTS - that is the subtraction of import expenditure from export revenue. That is a contradiction, I'm slightly confused on that.
I would really appreciate an explanation of this. Thanks
Joshua Klinger It is the sum of the elasticities that determines the final effect on net exports. This may clear it up
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J is inside the narrow chin with a horizontal thin line block over it
The condition isn't an equation, it's an inequality...
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Surely if ped for exports < 1 and ped for imports < 1, the deficit will widen, even if the sum is greater than 1. Export revenues will fall as the % increase in volumes is lower than % fall in price. likewise import expenditure will increase as the rise in price is greater than the fall in volumes. Do the maths. What am I missing?
export revenue never falls. as the money is converted back into the currency, export revenue will always rise. The condition holds if the export revenue grows higher than the increase in import expenditure. Sorry for such a late reply, I'm sure you've mastered it over the last 3 years!
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It was long. It could be explained within 3 minutes