What does the Marshall Lerner Condition state regarding currency devaluation?

The Marshall Lerner Condition is crucial for understanding the effects of currency devaluation on a country’s current account balance. It states that for a currency devaluation to lead to an improvement in the current account, the price elasticity of demand (PED) for exports and imports collectively must be greater than one when assessed together.

When a currency devalues, the prices of a country's exports become cheaper for foreign buyers, potentially increasing demand for those exports. At the same time, the prices of imports become more expensive for domestic consumers, which can reduce the quantity demanded for imported goods. The key element is that the total responsiveness of demand (the sum of the elasticity for exports and imports) must indicate that the overall increase in export revenue outweighs the increase in the cost of imports due to the lower currency value.

If the combined elasticity is greater than one, it implies that the percentage change in the quantity demanded for exports plus the percentage change in the quantity demanded for imports exceeds the percentage change in price resulting from the currency devaluation. This condition is critical for the current account balance to improve following a devaluation.

Other options either misinterpret relationships between elasticity and trade effects or incorrectly assert the permanence of gains from devaluation. Hence, the understanding of the Marshall Ler