Appendix 17.1
Stable
Foreign-Exchange
Markets and the
Marshall–Lerner
Condition
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FIGURE A17.1 The Effect of Devaluation on
Domestic Imports with a Perfectly Elastic
Supply
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17.1-2
Effect of $ Devaluation on U.S.
Imports, given Perfectly Elastic
Supply of Imports
• Refer to Figure A17.1 above.
• A perfectly elastic supply curve of imports
means that the U.S. can buy all it wants of
good X from the U.K. at the U.K. pound price
(i.e., the supply curve is horizontal).
• The $ devaluation shifts the U.S. demand
curve for U.K. imports to the left.
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17.1-3
FIGURE A17.2 The Effect of Devaluation on
Domestic Exports with a Perfectly Elastic
Supply
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17.1-4
Effect of $ Devaluation on U.S.
Exports, given Perfectly Elastic
Supply of Exports
• Refer to Figure A17.2 above.
• A perfectly elastic supply of exports means
that the U.S. is willing to sell to the U.K. all
it wants to buy at the U.K. pound price.
• The $ devaluation shifts the horizontal
supply curve downward.
• What happens to U.S. export revenues if the
U.K.’s demand for U.S. exports is inelastic?
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17.1-5
FIGURE A17.3 Foreign-Exchange Supply
and Demand When Trade Elasticities Are Low
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17.1-6
Foreign Exchange Supply and
Demand Curves When Trade
Elasticities are Low
• Refer to Figure A17.3 above.
• The more inelastic the U.K. demand for U.S.
exports, the more likely the foreign
exchange supply curve will be negative.
• The more inelastic the U.S. demand for U.K.
exports, the more likely the slope of the
demand curve will be steeper.
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17.1-7
Marshall-Lerner Condition
• The Marshall-Lerner Condition states that
a $ devaluation will improve the U.S. trade
balance and provide a stable foreign
exchange market if the sum of the elasticity
of demand for U.S. imports and the elasticity
of demand for U.S. exports is greater than
one.
• Refer to Figure A17.4 below.
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17.1-8
FIGURE A17.4 Foreign-Exchange Supply
and Demand When the Marshall–Lerner
Condition Is Met
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17.1-9