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t form of MLR condition, if the sum of elasticities of the demand for imports and exports with respect to the real exchange rate is greater than one, the real devaluation of the currency will improve the trade balance. We will try to explain the whole concept of the MLR condition using home currency as the anchor point. If we suppose that the demand for imports is perfectly inelastic, the value of imports in home currency will go up by the full percentage of the real devaluation. However, for the term trades to improve, the value of exports in home currency has to increase by more than the full percentage of the real devaluation, obviously if export elasticity is greater than one.

 

On the other hand, if we assume that the elasticity of demand for exports is zero, after a real devaluation, the value of exports in home currency will remain the same. After the real devaluation, for the balance of trade to improve, the value of the imports in home currency has to decrease, if elasticity of demand for imports is greater than one. “So what the MLR condition states is that, in the event of a real devaluation, if each elasticity is less than one, but the sum is greater than one, then the increase in imports (measured in home currency) will be more than offset by the increase in exports (also measured in home currency) and the trade balance will improve. This condition is based on two assumptions. The first is that we start from a situation of balanced trade. The second is that supply elasticities are infinite.

 

Because the benefits from devaluation usually take some time to have an effect and the costs may almost be immediate, it may explain why governments are so reluctant to devalue, because the whole procedure may take more than two years to materialize. Even for small dependent economies the positive effects of devaluation on the current account of the balance of payments .

 

The Politics of Delayed Devaluation

 

Throughout history, there was a tendency among economists to approach different issues in terms of political factors; if for some reason a phenomenon couldn’t be explained by economic principles, then it was assumed to be attached to politics. However, these political factors remain undefined and thus limiting the headway for full consideration. As such, there is a growing recognition that a bottom-line understanding of government decisions and policies lays on adopting a political economy approach that focuses on measuring the interaction of economic and political considerations.

 

Even though, these channels of interaction are of high relevance, we couldn’t encounter a single paper that succeeded in adequately capturing the whole picture. Be as it may, Bird and Willett in their paper have considered the following cases: distributional factors, timing, perceptions and uncertainty, and political strength.

 

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