Examining how exchange rate fluctuation effects trade balances: emprirically establishing the correlation between exchange rate and balance of trade, the marshall-lerner condition and J effect

Abstract

This paper will examine the effects on an economy’s overall balance of trade due to fluctuations in its exchange rate, followed by how the Marshall-Lerner and J- curve come into effect in influencing a country’s current account. Econometric analyses using regression have been carried out to show the relationship between exchange rate effects and the trade balance for certain countries, showing which countries’ trade balance situation prove the Marshall-Lerner assumption to be valid and which countries’ trade balances show signs of the J curve effect, to be elaborated further. We will also examine whether some of these countries have both the Marshall-Lerner and J-effect showing up in their trade balance trends in recent years, either of the two, or if any other factors apart from their exchange rate patterns are more active in influencing certain countries’ balance of trade positions.