The Marshall–Lerner condition (after Alfred Marshall and Abba P. Lerner) refers to the condition that an exchange rate devaluation or depreciation will only cause a balance of trade improvement if the absolute sum of the long-term export and import demand elasticities is greater than unity.[1] If the domestic currency devalues, imports become more expensive and exports become cheaper due the change in relative prices.
Initially, there will be a deterioration of the trade balance which can be attributed to lags in recognition of the changed situation, lags in the decision to change real variables, lags in delivery time, lags in replacement of inventories and materials and lags in production.[2] These lags ensure that the demand for exports remains inelastic in the short term. In the long-term though, when the prices become flexible, there will be a positive quantity effect on the balance of trade because domestic consumers will buy fewer imports and foreign consumers will buy more of our exports; but offsetting this is a negative cost effect on the balance of trade, since the relative cost of imports will be higher. Whether the net effect on the trade balance is positive or negative depends on whether or not the quantity effect outweighs the cost effect; if the quantity effect is greater, then it is said that the Marshall–Lerner condition is met. Essentially, the Marshall–Lerner condition is an extension of Marshall's theory of the price elasticity of demand to foreign trade.
Kaynak: www.en.wikipedia.org
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