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MENTAL MODEL · M5943

Marshall-Lerner Condition

Marshall-Lerner Condition
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Version 1.0.0 · Updated 2026-07-30

CORE DEFINITION

For a currency devaluation to improve the trade balance, a condition must be met: the sum of the price elasticities of demand for exports and imports must be greater than one. If elasticities are low (inelastic demand), devaluation can actually worsen the trade balance (J-curve effect).

SCAFFOLDING EFFECT

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Reduce cognitive load

The boundary of price reduction strategies. Lowering prices (devaluation) does not always lead to increased revenue. If your product is inelastic (consumers buy the same amount regardless of price, or must buy it even if it's expensive), lowering prices is self-defeating. Price reductions are only effective for price-sensitive products.

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The Marshall-Lerner condition specifies the prerequisite for a currency devaluation to improve the trade balance: the absolute value of the sum of the price elasticities of demand for exports and imports must be greater than one. If elasticities are insufficient, devaluation initially worsens the trade balance (J-curve effect).

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Source support: Explicit

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    en.wikipedia.orghttps://en.wikipedia.org/wiki/Marshall%E2%80%93Lerner_conditionZH · Explicit
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