Marshall-Lerner Condition and J-Curve Effect (HL only)
Balance of Payments
AO2·AO4·Diagram required·HL
Syllabus requirement
Understanding the delayed response of the trade balance to currency depreciation and the role of PED in the effectiveness of devaluation.
Assessment objectives
AO2 Application and AnalysisAO4 Use of Appropriate Skills
Higher LevelThis topic is assessed at HL.
Summary
This topic explains how a currency devaluation or depreciation can affect a country's current account and when it will improve or worsen the trade balance. It presents the Marshall-Lerner condition, which gives the elasticity requirement for a devaluation to correct a deficit, and the J-curve effect, which shows the short-run worsening then long-run improvement of the trade balance because of time lags in adjustment. These ideas matter for policy choices about exchange-rate changes and for understanding short-run vs long-run outcomes in the balance of payments.