11.2.5—Marshall-Lerner and J-curve

The Marshall–Lerner condition says a depreciation improves the trade balance in the long run when the sum of the absolute export and import demand elasticities exceeds one, subject to the model’s assumptions.

The J-curve explains why the balance may worsen first: contracts, quantities and substitution adjust slowly while import prices rise immediately. The condition is about elasticities and the later response, not a guarantee for every economy.

If export-demand elasticity is 0.7 and import-demand elasticity is 0.6, their sum is 1.3, so the long-run condition is met in the simple model; the first months may still show a deficit.

The condition is not a short-run rule, and a depreciation does not improve the trade balance if contracts, supply capacity or pass-through invalidate the assumptions.