<p>My reading of the <a href="https://en.wikipedia.org/wiki/Marshall%E2%80%93Lerner_condition" rel="nofollow noreferrer">Marshall-Lerner condition</a> is that it assumes the price of exports is constant in the domestic currency and the price of imports is constant in the foreign currency.  Analysis is conventionally done in the domestic currency</p>

<p>But, initially after devaluation, volumes are assumed to stay the same (short-term inelasticity) and measured in the domestic currency the values of exports stays the same while the value of imports rises, leading to a deterioration in the measured trade balance; this is the immediate <em>cost effect</em> of devaluation. If you were to measure in the foreign currency, the short-term value of exports would fall while the short-term value of imports would stay the same, again leading to a deterioration in the measured trade balance </p>

CC BY-SA 4.0
2018-05-02T14:25:41.477Z
Would the same logic apply to terms of trade ? That we conventionally deal in the domestic currency but picking either won't effect result?
Sal_99
CC BY-SA 4.0
2018-05-02T21:13:15.767Z
The terms of trade are measured in the domestic currency, typically dividing an export price index by an import price index.  It would not change if you converted both indices by the same exchange rate, or by the same trade-weighted effective exchange rate to take account of multiple trading partners
Henry
CC BY-SA 4.0
2018-05-05T03:10:39.060Z
That clears it all up
Sal_99
CC BY-SA 4.0
2018-05-02T01:13:41.837Z
2018-05-02T01:13:41.837Z
Henry
<p>The Marshall Lerner condition and the J curve made sense until one day I noticed that to make sense of all of this , we considered two different currencies. I was told for e.g. in the short run, export revenue would deteriorate since demand would be inelastic. But prices for exports only fell for the foreign buyer, not for domestic firms. If quantity being sold rose even by little, won't revenue earned by local producers have increased? Similarly, we considered effect on imports but this time considering domestic currency. My question is that when we look at trade balance , which currency do we use for analysis.</p>

<international-trade>
Which currency do we consider when talking about trade balance ?
Sal_99
# Which currency do we consider when talking about trade balance ?

(Asked by: username_0 on 2018-04-30)

The Marshall Lerner condition and the J curve made sense until one day I noticed that to make sense of all of this , we considered two different currencies. I was told for e.g. in the short run, export revenue would deteriorate since demand would be inelastic. But prices for exports only fell for the foreign buyer, not for domestic firms. If quantity being sold rose even by little, won't revenue earned by local producers have increased? Similarly, we considered effect on imports but this time considering domestic currency. My question is that when we look at trade balance , which currency do we use for analysis.

**Tags:** international-trade


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## 1 answers

### Answer by username_1 on 2018-05-02. Score: 1 | Accepted answer

My reading of the [Marshall-Lerner condition](https://en.wikipedia.org/wiki/Marshall%E2%80%93Lerner_condition) is that it assumes the price of exports is constant in the domestic currency and the price of imports is constant in the foreign currency. Analysis is conventionally done in the domestic currency

But, initially after devaluation, volumes are assumed to stay the same (short-term inelasticity) and measured in the domestic currency the values of exports stays the same while the value of imports rises, leading to a deterioration in the measured trade balance; this is the immediate *cost effect* of devaluation. If you were to measure in the foreign currency, the short-term value of exports would fall while the short-term value of imports would stay the same, again leading to a deterioration in the measured trade balance

> **Comments:**
> **username_0**: Would the same logic apply to terms of trade ? That we conventionally deal in the domestic currency but picking either won't effect result?  
> **username_1**: The terms of trade are measured in the domestic currency, typically dividing an export price index by an import price index.  It would not change if you converted both indices by the same exchange rate, or by the same trade-weighted effective exchange rate to take account of multiple trading partners  
> **username_0**: That clears it all up  

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