J curve

A J curve is any of a variety of J-shaped diagrams where a curve initially falls, then steeply rises above the starting point. A J curve is any of a variety of J-shaped diagrams where a curve initially falls, then steeply rises above the starting point. In economics, the 'J curve' is the time path of a country’s trade balance following a devaluation or depreciation of its currency, under a certain set of assumptions. A devalued currency means imports are more expensive, and on the assumption that the volumes of imports and exports change little at first, this causes a fall in the current account (a bigger deficit or smaller surplus). After some time, though, the volume of exports may start to rise because of their lower and hence more competitive prices to foreign buyers, and domestic consumers may buy fewer of the costlier imports. Eventually, if this happens, the trade balance should move to a smaller deficit or larger surplus compared to what it was before the devaluation. Likewise, if there is a currency revaluation or appreciation the same reasoning may be applied and will lead to an inverted J curve. Immediately following the depreciation or devaluation of the currency, the total value of imports will increase and exports remain largely unchanged due in part to pre-existing trade contracts that have to be honored. This is because in the short run, prices of imports rise due to the depreciation and also in the short run there is a lag in changing consumption of imports, therefore there is an immediate jump followed by a lag until the long run prevails and consumers stop importing as many expensive goods and along with the rise in exports cause the current account to increase (a smaller defect or a bigger surplus). Moreover, in the short run, demand for the more expensive imports (and demand for exports, which are cheaper to foreign buyers using foreign currencies) remain price inelastic. This is due to time lags in the consumer's search for acceptable, cheaper alternatives (which might not exist).