page_title: J curve
section_title: Balance of trade model
hierarchical_section_title: J curve / Balance of trade model
caption_attribution_description: English: The J curve, a file created in Python 3 with jcurve.py.
context_page_description: A J curve is any of a variety of J-shaped diagrams where a curve initially falls, then steeply rises above the starting point.
context_section_description: 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  starts to rise because of their lower   price  to foreign buyers, and domestic consumers buy fewer imports, which have become more expensive for them. Eventually the trade balance  moves 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. In Figure 1, trade starts in perfect balance, but depreciation at time 0 causes an immediate trade deficit of 50 million dollars. The balance of trade improves over time as consumers react, returning to balance at month 3 and rising to a surplus of 150 million at month 4. 
  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 deficit 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).
  Over the longer term a depreciation in the exchange rate can usually be expected to improve the current account balance. Domestic consumers switch to domestic products and away from the now more expensive imported goods and services. Equally, many foreign consumers may switch to purchasing the products being exported into their country, which are now cheaper in the foreign currency, instead of their own domestically produced goods and services.
  Empirical investigations of the J curve have sometimes focused on the effect of exchange rate changes on the trade ratio, i.e. exports divided by imports, rather than the trade balance, exports minus imports. Unlike the trade balance, the trade ratio can be logarithmically transformed regardless of whether a trade deficit or trade surplus exists.
caption: Figure 1: The J Curve
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