Comments on: Testing Marshall Lerner Condition http://www.economicshelp.org/blog/trade/testing-marshall-lerner-condition/ Economics Blog - current events and economics essays Mon, 15 Mar 2010 10:06:19 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: Exchange Rate and Current Account | Economics Blog http://www.economicshelp.org/blog/trade/testing-marshall-lerner-condition/comment-page-1/#comment-5459 Exchange Rate and Current Account | Economics Blog Mon, 08 Feb 2010 07:47:02 +0000 http://www.economicshelp.org/blog/trade/testing-marshall-lerner-condition/#comment-5459 [...] Elasticity of Demand. The impact of a depreciation depends on the elasticity of demand. The Marshall Lerner condition states that a depreciation in the exchange rate will only improve current account – [...] [...] Elasticity of Demand. The impact of a depreciation depends on the elasticity of demand. The Marshall Lerner condition states that a depreciation in the exchange rate will only improve current account – [...]

]]> By: ck http://www.economicshelp.org/blog/trade/testing-marshall-lerner-condition/comment-page-1/#comment-4589 ck Fri, 09 Oct 2009 07:36:39 +0000 http://www.economicshelp.org/blog/trade/testing-marshall-lerner-condition/#comment-4589 this informations are realy helpful thank this informations are realy helpful thank

]]> By: Jane M. http://www.economicshelp.org/blog/trade/testing-marshall-lerner-condition/comment-page-1/#comment-3251 Jane M. Tue, 21 Apr 2009 01:57:05 +0000 http://www.economicshelp.org/blog/trade/testing-marshall-lerner-condition/#comment-3251 Hello, please, could you explain me, how to calculate Marshall-Lerner condition for a country? Could you give me the exact formula? I am not sure, how to do it, which data to use - if I calculate ML in a year, do I use average exchange rate? etc. I would really appreciate any help. Thank you and than you once again! Hello,

please, could you explain me, how to calculate Marshall-Lerner condition for a country? Could you give me the exact formula? I am not sure, how to do it, which data to use – if I calculate ML in a year, do I use average exchange rate? etc.

I would really appreciate any help. Thank you and than you once again!

]]> By: tejvan http://www.economicshelp.org/blog/trade/testing-marshall-lerner-condition/comment-page-1/#comment-1661 tejvan Thu, 16 Oct 2008 17:50:59 +0000 http://www.economicshelp.org/blog/trade/testing-marshall-lerner-condition/#comment-1661 Thanks Paul Thanks Paul

]]> By: Russell http://www.economicshelp.org/blog/trade/testing-marshall-lerner-condition/comment-page-1/#comment-1659 Russell Thu, 16 Oct 2008 14:40:18 +0000 http://www.economicshelp.org/blog/trade/testing-marshall-lerner-condition/#comment-1659 Thank you for giving this explanation. There's an small error in the calculation: 6% of 500 is 30, not 20 as shown. Thank you for giving this explanation. There’s an small error in the calculation: 6% of 500 is 30, not 20 as shown.

]]> By: Paul Clark http://www.economicshelp.org/blog/trade/testing-marshall-lerner-condition/comment-page-1/#comment-1652 Paul Clark Wed, 15 Oct 2008 18:47:15 +0000 http://www.economicshelp.org/blog/trade/testing-marshall-lerner-condition/#comment-1652 This section keeps being omitted: 1. M-L condition NOT satisfied PED (X) + PED (M) < 1 0.4 + 0.5 = 0.9 After depreciation: Exports Price Demand Revenue £100 520 £52 000 Imports Price Demand Revenue £55 950 £52 250 Trade balance = (£250) As the M-L condition is not satisfied, a depreciation of the currency leads to a worsening of the trade balance. This section keeps being omitted:

1. M-L condition NOT satisfied

PED (X) + PED (M) < 1
0.4 + 0.5 = 0.9

After depreciation:

Exports

Price Demand Revenue

£100 520 £52 000

Imports

Price Demand Revenue

£55 950 £52 250

Trade balance = (£250)

As the M-L condition is not satisfied, a depreciation of the currency leads to a worsening of the trade balance.

]]> By: Paul Clark http://www.economicshelp.org/blog/trade/testing-marshall-lerner-condition/comment-page-1/#comment-1651 Paul Clark Wed, 15 Oct 2008 18:45:50 +0000 http://www.economicshelp.org/blog/trade/testing-marshall-lerner-condition/#comment-1651 Ny first post lost some information in the middle - is this a space issue? There are two common errors which make ML calculations incorrect: 1. The ML condition assumes that we start with a balanced trade position, i.e. that the value of imports equals the value of exports. 2. It is sometimes assumed that following a depreciation, the price received by the exporter falls. This is erroneous. If the exchange rate is £1 = $2, then an exporter who sells a product for £1 will receive £1, but the American purchaser will pay $2. If the exchange rate falls to £1 = £1.80, a 10% depreciation, an exporter selling a product for £1 will STILL receive £1, but the American purchase will now only have to pay $1.80. As the price appears to the American to be lower, they should be persuaded to increase their demand, depending on their sensitivity to a change in price. WORKED EXAMPLE Exchange Rate £1 = $2 Exports Price Demand Revenue £100 500 £50 000 Imports Price Demand Revenue £50 1000 £50 000 Trade balance = £0 After Depreciation Exchange rate £1 = $1.80 – a depreciation of 10% 1. M-L condition NOT satisfied PED (X) + PED (M) 1 0.6 + 0.8 = 1.4 After depreciation: Exports Price Demand Revenue £100 520 £53 000 Imports Price Demand Revenue £55 920 £50 600 Trade balance = £2 400 As the M-L condition IS satisfied, a depreciation of the currency leads to an improvement in the trade balance. Ny first post lost some information in the middle – is this a space issue?

There are two common errors which make ML calculations incorrect:

1. The ML condition assumes that we start with a balanced trade position, i.e. that the value of imports equals the value of exports.

2. It is sometimes assumed that following a depreciation, the price received by the exporter falls. This is erroneous. If the exchange rate is £1 = $2, then an exporter who sells a product for £1 will receive £1, but the American purchaser will pay $2. If the exchange rate falls to £1 = £1.80, a 10% depreciation, an exporter selling a product for £1 will STILL receive £1, but the American purchase will now only have to pay $1.80. As the price appears to the American to be lower, they should be persuaded to increase their demand, depending on their sensitivity to a change in price.

WORKED EXAMPLE

Exchange Rate £1 = $2

Exports

Price Demand Revenue

£100 500 £50 000

Imports

Price Demand Revenue

£50 1000 £50 000

Trade balance = £0

After Depreciation

Exchange rate £1 = $1.80 – a depreciation of 10%

1. M-L condition NOT satisfied

PED (X) + PED (M) 1
0.6 + 0.8 = 1.4

After depreciation:

Exports

Price Demand Revenue

£100 520 £53 000

Imports

Price Demand Revenue

£55 920 £50 600

Trade balance = £2 400

As the M-L condition IS satisfied, a depreciation of the currency leads to an improvement in the trade balance.

]]> By: Paul Clark http://www.economicshelp.org/blog/trade/testing-marshall-lerner-condition/comment-page-1/#comment-1650 Paul Clark Wed, 15 Oct 2008 18:28:19 +0000 http://www.economicshelp.org/blog/trade/testing-marshall-lerner-condition/#comment-1650 There are two common errors which make ML calculations incorrect: 1. The ML condition assumes that we start with a balanced trade position, i.e. that the value of imports equals the value of exports. 2. It is sometimes assumed that following a depreciation, the price received by the exporter falls. This is erroneous. If the exchange rate is £1 = $2, then an exporter who sells a product for £1 will receive £1, but the American purchaser will pay $2. If the exchange rate falls to £1 = £1.80, a 10% depreciation, an exporter selling a product for £1 will STILL receive £1, but the American purchase will now only have to pay $1.80. As the price appears to the American to be lower, they should be persuaded to increase their demand, depending on their sensitivity to a change in price. WORKED EXAMPLE Exchange Rate £1 = $2 Exports Price Demand Revenue £100 500 £50 000 Imports Price Demand Revenue £50 1000 £50 000 Trade balance = £0 After Depreciation Exchange rate £1 = $1.80 – a depreciation of 10% 1. M-L condition NOT satisfied PED (X) + PED (M) 1 0.6 + 0.8 = 1.4 After depreciation: Exports Price Demand Revenue £100 520 £53 000 Imports Price Demand Revenue £55 920 £50 600 Trade balance = £2 400 As the M-L condition IS satisfied, a depreciation of the currency leads to an improvement in the trade balance. There are two common errors which make ML calculations incorrect:

1. The ML condition assumes that we start with a balanced trade position, i.e. that the value of imports equals the value of exports.
2. It is sometimes assumed that following a depreciation, the price received by the exporter falls. This is erroneous. If the exchange rate is £1 = $2, then an exporter who sells a product for £1 will receive £1, but the American purchaser will pay $2. If the exchange rate falls to £1 = £1.80, a 10% depreciation, an exporter selling a product for £1 will STILL receive £1, but the American purchase will now only have to pay $1.80. As the price appears to the American to be lower, they should be persuaded to increase their demand, depending on their sensitivity to a change in price.

WORKED EXAMPLE

Exchange Rate £1 = $2

Exports

Price Demand Revenue

£100 500 £50 000

Imports

Price Demand Revenue

£50 1000 £50 000

Trade balance = £0

After Depreciation

Exchange rate £1 = $1.80 – a depreciation of 10%

1. M-L condition NOT satisfied

PED (X) + PED (M) 1
0.6 + 0.8 = 1.4

After depreciation:

Exports

Price Demand Revenue

£100 520 £53 000

Imports

Price Demand Revenue

£55 920 £50 600

Trade balance = £2 400

As the M-L condition IS satisfied, a depreciation of the currency leads to an improvement in the trade balance.

]]> By: C.Y. http://www.economicshelp.org/blog/trade/testing-marshall-lerner-condition/comment-page-1/#comment-958 C.Y. Wed, 07 May 2008 10:27:29 +0000 http://www.economicshelp.org/blog/trade/testing-marshall-lerner-condition/#comment-958 can you please show the working with the numbers?otherwise i'm not sure about where exactly went wrong..anyway,just thought of an important assumption that the trade balance STARTED even,i.e.M(expenditure)=p(international price)*X(export volume). can you please show the working with the numbers?otherwise i’m not sure about where exactly went wrong..anyway,just thought of an important assumption that the trade balance STARTED even,i.e.M(expenditure)=p(international price)*X(export volume).

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