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J Curve Effect

The “J Curve effect” shows the possible time lags between a falling currency and an improved trade balance. Initially, a country’s external trade deficit (X-M) might increase following a currency depreciation.

The effect of currency depreciation on the trade deficit depends on price elasticity of demand for exports & imports. The J Curve effect says a trade deficit can worsen after depreciation, but improve if the Marshall-Lerner condition holds.

The J-curve effect refers to the phenomenon in which a country's balance of trade initially worsens after it devalues its currency or otherwise reduces its trade barriers. This occurs because the lower exchange rate makes imports more expensive, while exports become cheaper and more competitive in the global market. As a result, demand for the country's exports may increase, leading to an improvement in the balance of trade over time. The improvement in the balance of trade is represented by the upward slope of the "J" shape, hence the name "J-curve effect."

The J-curve effect is often used to describe the expected outcomes of trade policy changes, but it is not a universally observed phenomenon and may not occur in all cases.

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