**4.4. THE MARSHALL LERNER CONDITION**

The Marshall Lerner condition looks at what happens to a country’s balance of payments when a country’s exchange rate changes. It uses the price elasticity demand for exports and the price elasticity demand for imports. The rule looks at the addition of price elasticity of demand for both import and exports and it adds the modulus of both of these values. Modulus means that the value of a number will always be positive; if we wanted to find the modulus of 5, it will be 5; if we wanted to find the modulus of -6 then it will be 6. Modulus is denoted by having two bars beside the numbers; |-0.3| = 0.3. Essentially changes/ makes sure that a number will always be positive.

For example if PED for exports was -0.2 and PED for imports was -0.6, then our modulus addition of these two values will be 0.8; |-0.2| + |-0.6| = 0.8.

We have 3 values of interest for the Marshall Lerner condition:

· A ML value < 1. If we have a value less than 1 a fall in the exchange rate of a country (a depreciation) will make the balance of payments worse. If the exchange rate appreciated, the balance of payments would improve (an increase of a surplus or a decrease of a deficit).

· A ML value > 1. A ML value above 1 indicates that a depreciation in a countries exchange rate results in a balance of paymens improvement. The balance of payment situation will worsen if the currency of a country appreciated.

· A ML value = 1. If the ML is 1, then a change of the exchange rate (either an appreciation or depreciation) will have no effect on the balance of payments.

For example if PED for exports was -0.2 and PED for imports was -0.6, then our modulus addition of these two values will be 0.8; |-0.2| + |-0.6| = 0.8.

We have 3 values of interest for the Marshall Lerner condition:

· A ML value < 1. If we have a value less than 1 a fall in the exchange rate of a country (a depreciation) will make the balance of payments worse. If the exchange rate appreciated, the balance of payments would improve (an increase of a surplus or a decrease of a deficit).

· A ML value > 1. A ML value above 1 indicates that a depreciation in a countries exchange rate results in a balance of paymens improvement. The balance of payment situation will worsen if the currency of a country appreciated.

· A ML value = 1. If the ML is 1, then a change of the exchange rate (either an appreciation or depreciation) will have no effect on the balance of payments.