The Marshall-Lerner condition says that a depreciation of a currency is likely to improve a country’s trade balance if the sum of the price elasticities of demand for its exports and imports is greater than one:

∣PEDexports∣+∣PEDimports∣>1|PED_{\text{exports}}|+|PED_{\text{imports}}|>1

Price elasticity of demand (PED) measures how strongly the quantity demanded responds to a price change. The vertical bars mean absolute values: use the size of each elasticity, regardless of its sign. This is an A Level Economics application of changing exchange rates, covered under Exchange rates at syllabus point $11.2.5$ . It builds on the AS Level study of international economic issues.

Why does it matter?

A depreciation makes exports cheaper for overseas buyers and imports more expensive for domestic buyers. Export sales may rise, while the quantity of imports bought may fall. But each import now costs more in domestic currency. For the trade balance to improve, the changes in quantities must be strong enough to outweigh that higher import cost. The Marshall-Lerner condition describes when that is likely, assuming a suitable starting position, such as an initially balanced trade account.

For example, if the absolute PED for exports is $0.7$ and for imports is $0.6$ , their sum is $1.3$ . Because $1.3 > 1$ , a depreciation is expected to improve the trade balance once buyers have had time to adjust. If the sum is less than one, the trade balance may worsen instead. The trade balance measures the value of exports minus the value of imports, not the number of items traded. An improvement does not necessarily mean that a trade deficit has disappeared.

Exam mistake to avoid: do not say depreciation immediately improves the trade balance. Existing contracts and slow changes in buying habits can make it worsen at first, before improving later. That possible time pattern is called the J curve. This is why the time period matters when applying the condition.