Marshall-Lerner Condition

The Marshall-Lerner condition explains when a country's currency depreciation will improve its trade balance. Specifically, if the sum of the price elasticities of demand for exports and imports is greater than one, then a weaker currency makes exports more competitive abroad and imports more expensive domestically, leading to an overall improvement in trade balance. Conversely, if the sum is less than one, currency depreciation may not help or could worsen the trade balance. This condition helps policymakers understand the potential effects of exchange rate changes on international trade.