Marshall-Lerner Condition for Trade Balance Improvement

Steps:

• Currency depreciation makes exports cheaper and imports more expensive in domestic terms.
• For the current account to improve, export volume must rise more than import volume falls.
• This requires elasticities of demand for exports and imports to be sufficiently responsive to price changes.
• The condition holds when the sum of absolute elasticities exceeds one: |ε_x| + |ε_m| > 1.

Why C is correct:

• The Marshall-Lerner condition states that depreciation improves the trade balance if the sum of the absolute values of export and import price elasticities exceeds one, ensuring net export gains outweigh volume losses.

Why the others are wrong:

• A: Requires both elasticities >1 individually, but the condition is about their sum, not each separately.
• B: Elasticities <1 mean inelastic demand, leading to a worsening balance (J-curve effect).
• D: Sum <1 implies insufficient responsiveness, causing trade balance deterioration post-depreciation.

Final answer: C