- Marshall-Lerner condition
- The Marshall-Lerner condition says a depreciation improves the current account only if the price elasticities of demand for exports and imports add up to more than one.
- J-curve
- The J-curve is the path the current account often follows after a depreciation, worsening at first and improving later as trade volumes respond.
Why trade volumes respond slowly
Can you name three reasons buyers do not react at once to a change in the exchange rate?
Each keeps demand for exports and imports price inelastic in the months after a depreciation.
Orders for exports and imports are often agreed months ahead at fixed quantities, so volumes cannot change until the contracts run out.
Can you think of an example?
A UK car maker has agreed to buy German engines for the next year, so it keeps importing them even though each one now costs more in pounds.
Buyers take time to learn that a rival is now cheaper, test its product and switch, so orders move slowly.
Can you think of an example?
A French retailer notices British jumpers are cheaper after the pound falls, but it takes a season to find a UK supplier and check its quality.
Exporters may be unable to produce more straight away, because new workers, machines and premises take time to arrange.
Can you think of an example?
Foreign orders for a Sheffield toolmaker rise, but it needs months to hire and train staff before it can make and ship more.