Hope might be insight for the UK: The Marsahll-Lerner Condition and the J-Curve

The UK was in a current account deficit in the beginning of this year. The pound depreciated and it is currently weak. What economists in the UK are hoping is that the change in value of the currency would increase the demand for imports to lessen their deficit. The Marshall-Lerner condition shows the impact depreciation has on the balance of payments.

 

At the moment, it seems like the UK has a condition presented in the diagram on the right. In this graph, a change in price is causing a small response in a change in demand. The depreciation of the pound has caused only a minor increase in its demand. What the UK and all other countries want is to have a high elasticity of demand for their currency, which is represented in the diagram on the left. In this diagram, a small change in price creates a huge change in demand. In terms of currency, if a country’s currency depreciates, they would want other countries to respond with a greater demand of their currency.

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