4.6.7 (HL)—Marshall-Lerner condition and J-curve

After a depreciation, import prices rise immediately while quantities adjust more slowly, so the trade balance may worsen before it improves—the J-curve. The balance improves in the longer run only if the absolute price elasticities of export and import demand sum to more than one (the Marshall–Lerner condition).

Capacity, contracts and the composition of trade determine whether the condition is plausible; never infer it from the exchange-rate movement alone.

Draw the J-curve with time horizontally and the current-account balance vertically, crossing a zero-balance line. Immediately after depreciation, contracted quantities adjust slowly while import prices rise, so the balance can fall; later, export volumes rise and import volumes fall. Long-run improvement requires $|PED_x|+|PED_m|>1$. The condition concerns demand elasticities, not the size of depreciation, and the curve's depth and timing depend on contracts, capacity and substitution.