AP MacroeconomicsInternational Trade & Finance
J-Curve Effect
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.