Validity of Marshal Lerner Hypothesis: An Empirical Study on Malaysia-United States Trade Balance
Asian Research Journal of Business Management Issue 3 (Vol. 1) 2014
9 Pages Posted: 9 Mar 2015
Date Written: March 7, 2015
Abstract
The Marshall-Lerner theorem claimed that when a currency is depreciated or devalued, trade balance will improve if sum of price elasticity of exports and imports in absolute term is more than one. The study aims to investigate the validity of the Marshall-Lerner theorem between Malaysia and the United States (US) based on the following three specific objectives: (i) to investigate the relationship of domestic Gross Domestic Product (GDP), foreign (US) GDP and trade balance between Malaysia and the United States; (ii) to study the relationship between trade and exchange rate whether there is a positive or negative relationship between the two variables, hence validating the existence of the Marshall-Lerner condition in Malaysia. The results of the study showed an insignificant relationship between RER and TB. This implies the Marshall-Lerner condition does not hold in Malaysia. The study also revealed that domestic GDP (Y) is a significant variable with its expected negative relationship with trade balance. This indicates a significant relationship between domestic income and TB in Malaysia.
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