What does the Marshall Lerner Condition refer to?

The Marshall-Lerner Condition refers to the criteria that must be met for a currency devaluation or depreciation to lead to an improvement in a country's trade balance. Specifically, this condition states that if the sum of the price elasticity of demand for a country's exports and the price elasticity of demand for its imports is greater than one, then a decrease in the value of the currency will improve the trade balance.

When a country's currency is devalued, its exports become cheaper for foreign buyers, while imports become more expensive for domestic consumers. If the demand for exports is sufficiently elastic, an increase in the quantity of exports sold can offset the lower price. Similarly, if the demand for imports is elastic, a price increase can lead to a decrease in the quantity of imports purchased. Therefore, meeting the Marshall-Lerner Condition signifies that the adjustments in trade flows will more than compensate for the initial changes in price, leading to an overall improvement in trade balance.

The other options do not accurately describe this condition. The relationship between income and demand is generally captured by concepts such as the income elasticity of demand rather than the specific conditions for currency changes in trade. The elasticity of demand for imports alone does not cover the full scope of the Marshall-Lerner Condition,