Marshall-Lerner Condition for Trade Balance Improvement

Steps:

• Devaluation lowers export prices and raises import prices in foreign currency.
• Volume of exports rises if demand elasticity for exports exceeds 0; import volume falls if elasticity for imports exceeds 0.
• Trade balance improves if percentage increase in export value exceeds percentage decrease in import value.
• This requires sum of absolute price elasticities of demand for exports and imports >1 (Marshall-Lerner condition), effective in long run as elasticities rise.

Why C is correct:

• Elasticities >0.5 and >1 sum to >1.5, satisfying Marshall-Lerner condition for net export gain post-devaluation.

Why the others are wrong:

• A: Sum <1.5 but elasticities too low to guarantee >1, so deficit may not reduce.
• B: Sum <0.5 <1, violating condition; imports unresponsive.
• D: Sum <1, violating condition; exports unresponsive.

Final answer: C