Marshall Lerner

Marshall Lerner - The sum of the two PEDs is 1.4 Because...

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Gaith Kalai Page 388 – 1 3 1. Why are the PEDs for imports and exports important in determining what will happen to a country’s trade balance following a devaluation of depreciation of the domestic currency? If the sum of the PEDs for imports and exports is <1 then devaluation or deprecation will improve the trade balance and decrease the defecit. The value of PED matters because what is important is not changes in the quantity of imports and exports but their changes in the value. 2. A country has a defecit and devalues its currency. What would happen to trade balance if a. Its PED for imports: 0.2 and PED for exports 0.5 The sum of the two PEDs is 0.7 which is less than one, meaning that the trade of balance will be wider and defecit will be bigger b. PED imports 0.7 and PED for exports is 0.3 The sum of the two PED’s is one which means that this will leave the balance of trade unchanged c. PED imports 0.8 and PED exports 0.6
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Unformatted text preview: The sum of the two PEDs is 1.4 Because the sum of the price elasticities for imports and exports is greater than 1, then the balance of payments will improve. 3. State the condition of Marshal Lerner The condition states that, for a currency devaluation to have a positive impact on trade balance, the sum of price elasticity of exports and imports must be greater than 1. So fore a currency devaluation to lead to an improvement in the balance of trade, the sum of price elasticity of exports and imports (in absolute value) must be greater than 1. Inversely, for a currency devaluation to lead to an setback (widening) in the balance of trade, the sum of price elasticity of exports and imports (in absolute value) must be less than 1. If the sum of price elasticity of exports and imports is equal to one, then this has no effect on balance of trade....
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