Question

Explain the derivation of the J curve. What features of the a complex real world economy are likely responsible for a J curve?

Answer 1

In economic J Curve refers to a theory that states after the depreciation of a currency, the current account balance will first decline for a period of time (i.e. initially the trade deficit will worsen) before beginning to increase as expected normally and eventually surpasses its previous performance. The reason for the J curve derivation is that demand is inelastic in the short-term; however becomes more price elastic in the long-term thus the current account begins to improve. The complex real world economy features that causes for J-cure is an assumption that the depreciation of the currency had an immediate negative impact due to the inevitable lag in satisfying greater demand for the products of the country. Many exporters and importers in the economy can be locked into binding agreements which might be forcing to sell or buy or sell specific number of products despite the unfavourable currency ‘exchange rate