Marshall-Lerner condition

Lerner improved a formula of Alfred Marshall, which is known since as the Marshall-Lerner condition.

See Marshall-Lerner condition and Singer-Prebisch thesis.

Essentially, the Marshall-Lerner condition is an extension of Marshall's theory of the price elasticity of demand to foreign trade.

This tends to encourage more domestic production, which raises employment and gross domestic product (GDP) - though the effect may not be immediate due to the Marshall-Lerner condition.

The Marshall-Lerner condition (after Alfred Marshall and Abba P. Lerner) has been cited as a technical reason why a reduction in value of a nation's currency need not immediately improve its balance of trade.

These inelastic import components have led to Sri Lanka's Export goods price elasticity + Import goods price elasticity totaling less than 1, resulting in the country not complying with the Marshall-Lerner condition.

Whether the net effect on the trade balance is positive or negative depends on whether or not the quantity effect outweighs the cost effect; if the quantity effect is greater, then we say that the Marshall-Lerner condition is met.

Conversely a downward shift in the value of a nation's currency makes it more expensive for its citizens to buy imports and increases the competitiveness of their exports, thus helping to correct a deficit (though the solution often doesn't have a positive impact immediately due to the Marshall-Lerner condition).

In the recent past, the Sri Lankan Government has identified some key focal areas to address the external imbalances of the economy, especially with regard to reducing its high trade deficit ( 15% of GDP for 2012) in order to make the economy comply with the Marshall-Lerner condition.