In international economics, it has been well-known that when a nation’s currency appreciates (depreciates) the international trade balance decreases (increases), provided that import and export price-elasticities satisfy the so-called Marshall-Lerner (M-L) condition. This paper analyses the case in a more general setting and derives a “generalized M-L condition”, and shows that it includes the conventional M-L condition as a special case, as shown in Table 1 (on page 8, which appeared originally in Okabe 1986). The analysis also reveals that home country’s (Japanese) trade balance needs to be expressed not in foreign currency (dollar) but in home currency (yen) to effectively capture the external adjustment process. After this requirement was officially recognized, the authorities began in 1987 to publish the statistics of Japanese international trade and finance in both dollar and yen, and after 1996 only in yen.
Exchange Rate Changes and the Trade Balance：Derivation of Generalized Marshall-Lerner Condition
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