Marshall-Lerner Condition
The Marshall-Lerner condition states that a currency depreciation improves the trade balance only if the combined price elasticities of export and import demand exceed 1.
A weaker currency makes exports cheaper and imports more expensive, but whether the trade balance improves depends on how responsive trade volumes are to those price changes. If the sum of the absolute price elasticities of demand for exports and imports is greater than one, volume changes outweigh the worsening price effect and the trade balance improves; if less than one, it deteriorates. Because elasticities are low immediately after depreciation but rise over time, the condition explains the J-curve's delayed improvement. It is central to debates over whether devaluation can fix a trade deficit.