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12 Oct 2018

explain the J curve associated with currency devaluation and the balance of the trade focus on elasticity issues

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Tod Thiel
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13 Oct 2018

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Related questions

Explain the concept of devaluation, and explain the effect devaluation has on the price of a country's imports.

What are some effects on the industry? Buying and selling countries? Give an example that supports your claims.

can someone please tell me if this answer is correct? thequestionis worth 20 marks.... thank you!


MARSHALL LERNER CONDITION

The condition states that, for a currency devaluation tohave apositive effect on trade balances, the sum of priceelasticity ofincome ( in absolute value ) must be greater thanone.


The M-L Condition and the J curve show the relationship betweentheexchange rate of a nation’s currency and the country’sbalance oftrade.

If a country’s currency depreciates relative to othercurrencies,then this should lead to an improvement in thecountry’s balance oftrade. The weaker dollar now means thatforeigners will now have tospend less of their dollars in order togain one dollar’s worth oflocal currency. Since the localdollar is now worth less, localswill now have to pay more forimports; hence reducing the level ofimports.

What matters is not whether a country imports less andexportsmore, rather, whether the increase in income form exportsexceedsthe decrease in expenditure from imports for a particularcountry.M-L condition examines the price elasticises of demand forexportsand imports for a particular country.

E.g. country A experiences a devaluation of its currency

If foreigners demand for exports from country A isrelativelyelastic, then a slightly weaker dollar will cause adramaticincrease in the demand for A’s output, causing exportincomefor A to increase dramatically. On the other hand, ifA’sdemand for imports is highly price elastic, then aslightly weakerdollar will cause A’s demand for imports todecrease drastically,causing a reduction in A’s expenditurefrom imports.

A country that attempts to keep its exchange rate fixed will have devaluation of its currency (or exchange rate) if the persistent balance of payments ________ cause it to ________ foreign exchange reserves.

1) deficits, amass dangerous amounts of
2) surpluses, amass dangerous amounts of
3) surpluses, run dangerously short of
4) deficits, run dangerously short of

Please explain why.

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