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Marshall-Lerner Condition

The Marshall-Lerner condition is a criterion that determines whether a country's balance of trade will improve or worsen in response to a change in the exchange rate. It is based on the idea that a depreciation of the currency (a decrease in the exchange rate) will lead to an improvement in the balance of trade if the sum of the price elasticities of demand for the country's exports and imports is greater than one. In other words, if the demand for a country's exports and imports is more sensitive to changes in price than the supply of these goods, the balance of trade will improve after the currency depreciates.

This condition is named after the economists Alfred Marshall and Abba Lerner, who developed it in the early 20th century.

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