Abstract
The Marshall‐Lerner condition—that the sum of the elasticities of import and export demand exceeds unity—has been put forward as a condition that is required for a depreciation to make the trade balance more positive. Based on recently estimated trade equations, the more appropriate condition for Australia is that the sum of the import elasticity of demand and the elasticity of the export price with respect to the exchange rate exceeds unity. I call this the Small Economy Marshall—Lerner (SEML) condition. In recent history, this condition was fulfilled in 1999–2001, when the (unstable) relationship between the terms of trade and the exchange rate broke down.
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