Marshall–Lerner condition

The country's imports become more expensive and exports become cheaper due to the change in relative prices, and the Marshall-Lerner condition implies that the indirect effect on the quantity of trade will exceed the direct effect of the country having to pay a higher price for its imports and receive a lower price for its exports.

[2] In the long run, consumers react more to changed prices: demand is more elastic the longer the time frame.

This pattern of a short run worsening of the trade balance after depreciation or devaluation of the currency (because the short-run elasticities add up to less than one) and long run improvement (because the long-run elasticities add up to more than one) is known as the J-curve effect.

[3] Essentially, the Marshall–Lerner condition is an extension of Marshall's theory of the price elasticity of demand to foreign trade, the analog to the idea that if demand facing seller is elastic he can increase his revenue by reducing his price.

Subtract and add eM to the numerator of the first term to get If the value of exports minus imports equals zero so the trade surplus is X - eM = 0, the last equation simplifies to so the trade surplus rises if the absolute values of the two elasticities add to more than 1, which is the Marshall-Lerner condition.

If the initial trade surplus is positive so X - eM > 0, the sum of the magnitudes of the elasticities can be less than 1 and the depreciation can still improve the balance of trade, resulting in an even bigger surplus than initially.

will still result in a big effect on the value of X; the smaller percentage increase from

Similarly, if the economy starts out with a trade deficit and X - eM < 0, the elasticities have to add up to more than 1 for depreciation to improve the balance of trade, because the initial harmful price effect is bigger, so the quantity responses have to be bigger to compensate.

For domestic consumers, when the exchange rate rises, imports are more expensive, so they buy less and we see a negative elasticity, the usual result.