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import exceeding 1 (Krugman, 2006). The M-L analysis is a partial equilibrium analysis of the response of tradables to relative price changes. Further modified version of M-L incorporating elasticity of tradables, assumes infinite supply elasticity of exports and imports, i.e., exports and imports face constant costs (Albert O. Hirschman, 1949).

To elaborate more on aftermath devaluation of the M-L condition, two extreme cases are discussed below by assuming an initial domestic currency unit denominated trade balance. In the first extreme case of perfectly inelastic import demand [1] , the value of import denominated in domestic currency increases by the same percentage of real devaluation. In this situation, for the trade balance to improve, the value of export denominated in domestic currency has to increase by more than the percentage of real devaluation. In the second extreme case of perfectly inelastic export demand [2] , the value of export denominated in domestic currency is left unchanged. At such circumstance, a fall in the value of import is required for the trade balance to improve.

Due to time lag response of trade balance towards currency devaluation, M-L condition describes two effects of devaluation on trade balance: the value effect or price effect and the volume effect or quantity effect (Krugman, P., 2006, p.p. 444). The value effect refers to the immediate post devaluation deteriorating trade balance. This is because in spite of reduced import demand in real or quantity amount, the nominal value is exaggerated due devaluation. On the other hand; the volume effect refers to the long run improvement of trade balance as a result export in real quantity increases. Therefore, in the early stage of devaluation, the value effect outweighs the volume effect. This impact of devaluation is referred as “J curve” impact.

Krueger, 1990, further discussed theoretical impact of exchange rate devaluation on demand side of an economy. If there is idle resources in an economy, taking trade balance as net export from the Keynesian aggregate demand model devaluation can depict two impacts. First, as the domestic currency prices of imports increase devaluation increases the value of foreign currency measured in units of domestic currency, a switch in the expenditure behavior of domestic consumers from imports to import substituting domestically produced goods occur. Mean while as the relative price of tradables to non-tradables rises; producers are encouraged to shift resources from non-tradables sectors like service and domestically produced goods and to increase export supply. Further the international demand for exports will increase as foreigners find the trading much cheaper. Such impact of devaluation on both production and consumption through altering relative prices of tradables and non-tradables Commodities; is known as expenditure-switching.

Philip R. L. and Gian Maria M-F., 2002, also highlighted that the relative price of non-traded goods was the important channel that links trade balance and the real exchange rate in their investigation. A weak or devalued real exchange rate was at the center of the authors’ discussion, for a country to run a trade surplus. According to these researchers among many factors the three reasons were as follows. First due to devaluation the purchasing power of the domestic currency lowers that “…the negative wealth effect of maintaining