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Marshall-Lerner condition and economic globalization |
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| Authors: | Paul J J Welfens |
| Institution: | 1. European Institute for International Economic Relations, Jean Monnet Chair for European Economic Integration and Chair of Macroeconomics, University of Wuppertal, Wuppertal, Germany 2. Non-Resident Senior Fellow at AICGS/Johns Hopkins University, Washington, DC, USA 3. Research Fellow, IZA, Bonn, Germany 4. Rainer-Gruenter-Str. 21, 42119, Wuppertal, Germany |
| Abstract: | The analysis considers the impact of FDI inflows and FDI outflows and shows that the presence of (cumulated) FDI requires higher import elasticities in absolute terms than stated in the standard Marshall Lerner condition. One may derive a range for the elasticity of the ratio of exports to imports with respect to the real exchange rate, namely that the sum of the absolute import elasticities at home and abroad must exceed unity plus an additional parameter??for standard special cases the sum of both elasticities must exceed 2 if a real depreciation is to improve the real current account. Not only can one determine a modified Marshall Lerner condition for a world economy with economic globalization, rather one also can get new insights from considering a broader macroeconomic perspective. The insights obtained are highly relevant for the discussion about high current account deficits of the US and high surplus positions of countries such as Japan, China and Germany??adjustment could be more complex than suggested by traditional models. |
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