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UK Widening Trade Gap. CTFO. December 6, 2010

Posted by Avu in Section 4.
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Though the United Kingdom is experiencing far worse deficits than previously expected due to increased imports and decreased exports, the Marshall-Lerner condition suggests that the issue will resolve itself, at least to a degree over the course of time. As the British pound depreciates and is devalued, the price of British exports will decrease. However, at this point in time, the demand for British exports remains, at least in the short term, quite inelastic. Therefore, the drop in price will, unfortunately, not result in a major increase in quantity demanded. In this case, within the short term, there has not been a correction in the account deficit.

However, naturally according to the Marshall-Lerner condition, should the price elasticity of demand be elastic for British exports, the price change will render a large increase in quantity demanded. This would result in an eventual correction of the deficit. Since the majority of goods are relatively elastic, at least in the long run, there will be a large change in quantity demanded with just a relatively small change in price, and this will eventually allow the account deficit to fix itself, ceteris paribus.

Furthermore, many of the imports, according to the article, are one time purchases in order to increase production within domestic UK industries. Therefore, the import levels are far higher than they will be in coming years, and do not accurately reflect changes.

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Comments»

1. Peter Anthony - December 13, 2010

Avu, you have only explained half of the story, exports, what does the ML condition say about imports. What about the J-curve? What about your definitions and diagrams — can you edit this.


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