In the aftermath of the financial crisis where global aggregate demand is struggling, countries occasionally get accused of weakening their currency to gain competitiveness. The method of weakening the currency to gain competitiveness is explained by the Marshall-Lerner condition, which states that a devaluation in the long-term will strengthen the balance of trade. But is this policy always rational? And if not, which economies should avoid it? This study investigates whether the structure of the export industry can explain the varying response in the balance of trade from a devaluation. The Johansen Procedure with a Vector Error Correction Model is used to estimate long-run price elasticities of demand for exports and imports. The countries chosen are among the 30 countries with the lowest rank of economic complexity based on its output, listed by the Observatory of Economic Complexity. The exports of these countries are consisting of a single or a few goods, which enables for investigating how individual industries respond to a devaluation. The hypothesis is that there are differences between labour- and capital-intensive economies and that the former should respond more positive to a devaluation than the latter. The results indicate that there is a pattern, to the opposite of the hypothesis, where the capital-intensive economies respond more positive to a devaluation than the labour-intensive economies. This could be misleading due to underlying factors that should be controlled for to be able to produce reliable estimates. The Marshall-Lerner condition is fulfilled for two countries, Gabon and Niger, out of nine in the final sample.

This thesis examines the relationship between the real exchange rate and trade balance in eight countries with different level of development for the period 1991- 2012. Using merely exchange rate to improve the trade balance refers to price- competitiveness and relies on the satisfaction of Marshall-Lerner condition. Additionally, we articulate the influence of other underlying factors, defined as "non- price competitiveness", proxied with capital stock variable. A Vector Error Correction Model, based on Johansen's Methodology was implemented in our two econometric specifications. The key findings of the classical trade model indicate that M-L condition is met in five countries and devaluation of domestic currency would improve their trade balance in long run. VECM results from second model, which extended the traditional imperfect substitutes framework to include non-price competitiveness factor, shows pronounced influence of product quality on trade balance, capital stock variable being significant in most of the cases. The results show that trade balance reacts to both changes in relative prices and product differentiation, thus non-price competitiveness factors must not be neglected by policy makers. Our findings also indicate the existence of J-curve pattern, as reflected by short-run...

The main objective of this thesis is to analyze and evaluate the effect of the Czech National Bank´s foreign exchange intervention on the trade balance of the Czech Republic. For this purpose a hypothesis was set, that in the short-term the devaluation of the Czech currency causes deterioration of the trade balance and only after some time has passed the trade balance starts to grow. In theory this effect is known as the J-curve hypothesis. The first chapter summarizes theoretical knowledge about monetary policy and exchange rate theory. The second chapter analyzes the development of commodity and territorial structure of the Czech trade balance from 2000 to 2013. The third chapter focuses on the foreign exchange intervention itself and provides arguments for and against this measure taken by the Czech National Bank. The fourth chapter is the most important one for acceptance or rejection of the hypothesis set. It uses the Vector Error Correction Model to estimate the impact of devaluation on the trade balance of Czech Republic with Germany. Subsequently outcomes of this model are compared to the real statistical data of Czech trade.