Hope might be in sight for the UK: The Marshall-Lerner Condition and the J-Curve

Britain’s trade gap is widening more than expected in March as imports shot up five times faster than exports, this has caused the British government to begin doubting its hopes that the country will experience an export driven economic recovery. The United Kingdom’s deficit on trade in goods rose from 1.2 billion pounds to roughly 7.5 billion pounds in the span of a few months. Businesses have been saying that the orders have been improving but, the weak British pound is raising costs for importers but not providing any significant boost for the export of goods or services coming from the United Kingdom. Analysts also predict that their situation will be made tougher by the financial troubles the eurozone is experiencing, this will have a negative effect on demand for exports from the UK.

All is not lost for the United Kingdom fortunately, the Marshall-Lerner Condition and the J-Curve is providing some hope for the economically struggling power. The Marshall-Lerner Condition the condition states that the current account will improve after a depreciation if the sum of the price elasticities of demand for imports and exports is greater than 1. The further above 1 the sum of the elasticities is, the greater the improvement in the current account will be. The condition does not hold in the short run though, the UK is most probably at the low point of the J-Curve which accompanies the Marshall-Lerner Condition, but, in the middle to long run, things will perk up. People simply need time to adjust to the increase in import prices and the decrease in locally produced goods.