The Effects Of Changing Exchange Rates On The External Economy Using Marshall Lerner And J Curve Analysis
Economics notes
The Effects Of Changing Exchange Rates On The External Economy Using Marshall Lerner And J Curve Analysis
➡️ Marshall Lerner Condition: This condition states that a change in the exchange rate will have a greater impact on the balance of payments if the sum of the price elasticities of exports and imports is greater than one.
➡️ J Curve Analysis: This analysis suggests that when the exchange rate changes, the balance of payments initially worsens before it improves. This is because the prices of imports increase faster than the prices of exports, leading to an increase in the trade deficit.
➡️ Overall, changes in exchange rates can have a significant impact on the external economy, depending on the elasticity of demand for exports and imports. The Marshall Lerner Condition and J Curve Analysis can be used to assess the effects of changing exchange rates on the external economy.
How does a changing exchange rate affect the external economy?
A changing exchange rate can have both positive and negative effects on the external economy. The Marshall Lerner Condition states that a depreciation of the exchange rate will lead to an increase in net exports, while an appreciation of the exchange rate will lead to a decrease in net exports. The J-curve analysis suggests that the effects of a changing exchange rate on the external economy may be delayed, with a depreciation leading to an initial decrease in net exports followed by an increase in net exports over time.
What is the Marshall Lerner Condition?
The Marshall Lerner Condition is an economic theory that states that a depreciation of the exchange rate will lead to an increase in net exports, while an appreciation of the exchange rate will lead to a decrease in net exports. This theory is based on the idea that a depreciation of the exchange rate will make exports cheaper for foreign buyers, while an appreciation of the exchange rate will make imports cheaper for domestic buyers.
What is J-curve analysis?
J-curve analysis is an economic theory that suggests that the effects of a changing exchange rate on the external economy may be delayed. This theory suggests that a depreciation of the exchange rate will lead to an initial decrease in net exports followed by an increase in net exports over time. This is due to the fact that it takes time for the effects of a changing exchange rate to be felt in the external economy.