Marshall-Lerner Condition for Trade Balance Improvement

Steps:

• Currency depreciation lowers export prices in foreign currency, raising export quantity demanded if elastic.
• It raises import prices in domestic currency, lowering import quantity if elastic.
• Net trade balance improves if export revenue gain exceeds import spending loss.
• This occurs when absolute sum of export and import demand elasticities exceeds 1.

Why C is correct:

• The Marshall-Lerner condition defines that depreciation improves the current account if |ε_x| + |ε_m| > 1, ensuring volume responses outweigh price effects.

Why the others are wrong:

• A: Both elasticities >1 is sufficient but not necessary; sum >1 holds even if one <1 as long as total exceeds 1.
• B: Both <1 implies sum <2 but likely <1, causing balance to worsen due to inelastic responses.
• D: Sum <1 means inelastic demands, so price changes lead to trade balance deterioration (J-curve effect).

Final answer: C