I was taught that in school, but my teacher said that since we can’t seem to get it right in the tests, we should drop them altogether from our answers.
Ok, disclaimer – I am not a teacher with MOE, so my following words should not be taken as the gospel truth. But consider this: Without the binding assumption of the Marshall-Lerner condition, much of the analysis for net exports in GDP accounting will become less assured.
I had previously written a detailed explanation on the mechanics behind the Marshall-Lerner Condition, and why its condition is critical in ensuring the net export outcomes for the given foreign/domestic relative price movements. You can check it out here.
Without explicitly mentioning the Marshall-Lerner Condition in the exams, you will not be able to convince the reader/examiner that your analysis is robust and rigorous.
This is especially true when analysing the impact of macro-economic policies or changes to the economic environment that have led to relative price movements of exports and imports.
For example, we can expect that due to lags in the behaviours of consumers and suppliers, the Marshall-Lerner Condition may not hold in the short-term, and the outcomes to net exports will therefore run contrary to “traditional” analyses.
Therefore taking your query at face value, I would disagree with your teacher’s stand that the Marshall-Lerner Condition should not be mentioned explicitly in your exams.
Instead, a better approach would be to have a consultation session with your teacher to understand why he/she is not comfortable with how you may have applied the Marshall-Lerner Condition in your answers.
How to apply the Marshall-Lerner Condition in exam
Use it in cases where the impact to net exports is being examined for a given relative price change in exports and imports. Relative price change here means:
- Price change to imports/exports; and/or
- Exchange rate change.
When applying the Marshall-Lerner Condition to your explanation, it will suffice to write “assuming the Marshall-Lerner Condition holds”, and state the relevant (expected) outcome to net exports. There is no particular need to define/explain what it is and how it works exactly.
Again, you check with your teacher to confirm the expectations with regards to your answers in the exams. Personally though, I would be extremely surprised if it is different from the above approach I teach my students.