What is the J curve?

A simple explanation of the J curve:
  • The J curve is an economic theory that states that a country's trade deficit will initially worsen after the depreciation of its currency.
  • This is because the price of imports will increase in the short term, while the price of exports will take longer to adjust.
  • As a result, the total value of imports will increase more than the total value of exports, leading to a worsening trade deficit.
  • However, in the long term, the price of exports will adjust and the trade deficit will eventually improve.
  • The J curve effect is named after the wide letter "J" that the trade deficit curve often forms when plotted over time.
  • The theory behind the J Curve is closely linked to the Marshall-Lerner Condition.

J Curve Diagram

The diagram shows a J curve which illustrates the relationship between a depreciation and the current account on the balance of paymetns. The J curve is the shape of a wide letter J. The relationship is that the current account is initially worse before improving into a surplus over time.
The J Curve