J curve effect

Question 1

What does the J curve effect show?

Answer 1

Shows how the trend in a country’s balance of payments in trade following a depreciation in the exchange rate

Question 2

What is shown at the beginning of the J curve graph?

Answer 2

Economy begins a balanced current account
Exchange rate depreciates
Initially the volume of imports remains steady
Export demand is also inelastic in SR

Question 3

Why does the initial volume of imports remain steady?

Answer 3

Because importers have to see out their contracts

Question 4

What happens in the middle (downturn) of the J curve graph?

Answer 4

Depreciation in exchange rate raises price of imports causing total spending on imports to rise
Earnings from exports are insufficient to compensate for higher spending on imports
Current account deficit will worsen for some months

Question 5

What happens in the middle (upturn) of the J curve graph?

Answer 5

Assuming Marshall Lerner condition prevails and PED for imports and exports are greater than 1
The trade balance will improve over time

Question 6

What happens at the end (positive upturn) of the J curve graph?

Answer 6

Demand for exports will increase
Imports will fall
Overall balance of payments starts to imporve
Eventually move to a budget surplus

Question 7

Why will demand for exports start to increase on the J curve?

Answer 7

Because of lower price (depreciation)

Question 8

Why will imports start to fall on the J curve?

Answer 8

Domestic consumers start to alter spending patterns

Question 9

What happens in the inverse J curve effect in the short term?

Answer 9

Appreciation in exchange rate can lead to short term improvement in balance of trade

Question 10

What happens to exports and imports in the inverse J curve effect?

Answer 10

Imports are cheaper

Exports become more expensive

Question 11

What happens assuming PED for imports and exports is quite low in the inverse J curve effect?

Answer 11

PED is quite low, leads to initial improvement in trade balanced