An explicit partial-equilibrium model to justify the Generalized Marshall-Lerner condition (GML)

摘要

Robinson's derivation of the Marshall-Lerner condition (ML) is more general in that she considers a situation where initially the trade balance is not in equilibrium with the incorporation of the supply curves of exporters. This paper examines a partial equilibrium analysis of a country's imports and exports markets within a theoretical model which considers both the demand and supply sides in these two internationally traded-goods markets. The aim here is to show explicitly how the Generalized Marshall-Lerner condition (GML) of Robinson can be obtained. We examined the two effects of the nominal depreciation of the domestic currency on the trade balance: thevolumeeffect and thevalueeffect and how they counterbalance each other. We found that the standard Marshall-Lerner condition (ML) wasnot sufficientwhen the trade balance was initially in deficit and it was alsonot necessaryif the trade balance showed an initial surplus. Moreover, this study provides a new interpretation for Robinson' sufficiency condition where the trade balance must improve following a nominal depreciation of domestic currency when the elasticity of foreign demand exceeds the ratio of imports to exports. This paper also examines the situation of a small open economy which could not influence the world prices where the foreign demand for exports and the foreign supply of exports are infinitely large. Finally, there is a discussion on two policy implications for exchange rate regulation: the amount of devaluation that is necessary to improve a given trade imbalance as a governments intervention and additional support for the slow improvement of the trade balance in the short run after a devaluation policy known as the J-Curve effect.