Balance of Trade Model
In economics, the 'J curve' refers to the trend of a country’s trade balance following a devaluation or depreciation under a certain set of assumptions. A devalued currency means imports are more expensive, and on the assumption that the volume of imports and exports change little immediately, this causes a depreciation of the current account (a bigger deficit or smaller surplus). After some time, though, the volume of exports may start to rise because of their lower more competitive prices to foreign buyers, and domestic consumers may buy fewer of the costlier imports. Eventually, if this happens, the trade balance may improve on what it was before the devaluation. If there is a currency revaluation or appreciation the same reasoning leads to an inverted J-curve.
Immediately following the depreciation or devaluation of the currency, the volume of imports and exports may remain largely unchanged due in part to pre-existing trade contracts that have to be honoured. 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 have the desired effect of improving the current account balance. Domestic consumers might switch their expenditure to domestic products and away from expensive imported goods and services, assuming equivalent domestic alternatives exist. 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 logged regardless of whether a trade deficit or trade surplus exists.
Read more about this topic: J Curve
Famous quotes containing the words balance of, balance, trade and/or model:
“As the House is designed to provide a reflection of the mood of the moment, the Senate is meant to reflect the continuity of the past—to preserve the delicate balance of justice between the majority’s whims and the minority’s rights.”
—Lyndon Baines Johnson (1908–1973)
“The most perfect political community must be amongst those who are in the middle rank, and those states are best instituted wherein these are a larger and more respectable part, if possible, than both the other; or, if that cannot be, at least than either of them separate, so that being thrown into the balance it may prevent either scale from preponderating.”
—Aristotle (384–322 B.C.)
“The profession of magician, is one of the most perilous and arduous specialisations of the imagination. On the one hand there is the hostility of God and the police to be guarded against; on the other it is as difficult as music, as deep as poetry, as ingenious as stage-craft, as nervous as the manufacture of high explosives, and as delicate as the trade in narcotics.”
—William Bolitho (1890–1930)
“I’d like to be the first model who becomes a woman.”
—Lauren Hutton (b. 1944)