Trade & Open Economy · intro
What moves on the J-Curve (Trade Balance after Depreciation) diagram
Prices adjust before quantities: a depreciationdepreciationThe wearing out of capital over time, or, for currencies, a fall in value against others. initially raises the import bill (worsening the balance), and only improves it once export and import volumes respond, tracing a J shape over time.
The currency drops sharply. Import bills reprice overnight; export volumes cannot.
The trade balance gets WORSE first: same import volumes, higher prices, the dip of the J.
Months pass. Foreign buyers respond to cheaper exports, households swap away from dear imports.
Volumes finally dominate prices and the balance climbs through zero: the long tail of the J.
Examiners ask this as: depreciation, currency falls, aud drops, devaluation, weak dollar.
Other scenarios on J-Curve (Trade Balance after Depreciation)