J-Curve Effect vs Marshall-Lerner Condition

The J-curve effect is the pattern where a currency depreciation first worsens the trade balance before improving it as trade volumes adjust over time.

Right after a depreciation, import and export volumes are slow to change because contracts and orders are already in place, so dearer imports worsen the trade balance, the falling part of the 'J'. Over time, demand becomes more price-elastic: exports rise and imports fall, and the trade balance improves above its starting point, the rising part of the 'J'. The eventual improvement requires the Marshall-Lerner condition to hold. The curve illustrates why exchange-rate policy affects trade with a lag.

The Marshall-Lerner condition states that a currency depreciation improves the trade balance only if the combined price elasticities of export and import demand exceed 1.

A weaker currency makes exports cheaper and imports more expensive, but whether the trade balance improves depends on how responsive trade volumes are to those price changes. If the sum of the absolute price elasticities of demand for exports and imports is greater than one, volume changes outweigh the worsening price effect and the trade balance improves; if less than one, it deteriorates. Because elasticities are low immediately after depreciation but rise over time, the condition explains the J-curve's delayed improvement. It is central to debates over whether devaluation can fix a trade deficit.