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Data ML Condition

The impact of a depreciation of the peso on the current account deficit hinges on whether the Marshall-Lerner Condition is satisfied, which depends on the price elasticities of demand for exports and imports. If the combined elasticities exceed 1, a weaker peso will improve the current account, but if they are below 1, it will worsen the deficit. Additionally, the time frame is crucial, as short-term inelastic demand may initially exacerbate the deficit before it potentially improves in the long run.

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12 views1 page

Data ML Condition

The impact of a depreciation of the peso on the current account deficit hinges on whether the Marshall-Lerner Condition is satisfied, which depends on the price elasticities of demand for exports and imports. If the combined elasticities exceed 1, a weaker peso will improve the current account, but if they are below 1, it will worsen the deficit. Additionally, the time frame is crucial, as short-term inelastic demand may initially exacerbate the deficit before it potentially improves in the long run.

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Joycee
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Whether a fall the value of peso will reduce the current account deficit will depend on whether

the Marshall-Lerner Condition is met. It is often expected that a lower exchange rate will reduce a
current account deficit. This, however, is not always the case. The outcome will depend on the
price elasticities of demand for both exports and imports. If the combined price elasticities of
demand for exports and imports are grater than 1, a depreciation or devaluation will improve the
current account position which is known as the Marshall-Lerner condition. If the PED is less than
1, a fall in value of the peso will worsen the current account deficit.

Time period under consideration is another factor that will determine whether the fall in the
value of the peso will reduce the current account deficit. In some cases, a fall in the exchange
rate will actually worsen the current account position before it starts to improve it. This is
because, in the short term, demand for imports and exports may e relatively inelastic. It takes
time to recognise that prices have changed and then to search for alternative products. In the
longer term, demand becomes more elastic and current account deficit may be reduced.

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