Testing the Marshall Lerner Condition Bilateral Trade Balance between Iran and China

Abstract

This research investigates the Marshall-Lerner condition in bilateral trade balance between Iran and China and effective factors on the trade balance. Given that Marshall Condition states if total elasticity absolute of import and export values is more than 1 compared to exchange rate, trade balance will improve with Devaluation of the currency (increase the exchange rate). In this study, Marshall-Lerner condition is assessed in bilateral trade balance between Iran and China by using a suitable pattern and ARDL model. The actual nominal rate, gross domestic product and consumer price index of both countries are considered as independent variables and trade balance as dependent variable and time period is based on studied annual time series data since 1992 to 2013. The results from assessing Marshall-Lerner condition by time series model confirms the establishment of Marshal Lerner condition between Iran and China in long- and short- term.