According to economics, J Curve refers to a country's trade deficit, what gets prominent after its currency depreciation. It happens mainly because elevated prices will have a greater effect on an overall importation rather than a lowered amount of import in the forseeable future. Thus, the nominal trendline has a peculiar shape of a letter J.
The idea of J Curve
The J Curve is based on the idea that the amount of import-export primarily may change as prices are adjusted before quantities. After a while, the number of export gets drastically high because it creates favourable conditions for buyers. At the same time native customers find it unprofitable to acquire imported goods due to their higher cost.
The fact of these simultaneous actions eventually leads to a trade balance change, what is considered to be a bigger surplus in a comparison with pre-devaluation indices. Therefore, the theory also works in an opposite way. When a country has enough of currency depreciation, the graph forms J Curve upside down.
A gap between the graph curve and the devaluation itself may be referred to an increased import price despite a nation’s currency getting depreciated. Nevertheless, the exportation remains in the same state until the previous trade deals are implemented.
In the long term an extensive number of international customers may increase their purchases made in devaluated countries.Those products are getting cheaper, compared to domestic goods.
Another option of using J Curve
J curves represent the tendency of equity funds to get negative yields first few years after their launching but then taking profit incomes immediately as they find their stable ground. Equity funds may incur losses in the beginning of their way as investment and management require too much resources to spend on.
But as the funds put down roots, they start to bring previously unspent profits due to such actions as “Mergers and acquisitions” (M&A), “Initial public offering” (IPO) and leveraged recapitalization.
In other words, any phenomenon that indicate a primary paradoxical reaction to a change, followed by an intense reaction in the expected direction, can demonstrate the shape of the letter J when plotted as a linear graph and thus be called a J curve.
In a medical industry J curve appears on the chart, where X-axis gauges one out of two potentially treatable states, whereas Y-axis represents the possibility of a disease progression.
The theory of the J curve is also used in a study of politics. Famous scientist James Chowning Davies included the curve to a model in order to explain the tendencies of political revolutions. He claimed that a social turmoil may appear as a reaction to an unexpected twist of fate after a prolonged period of economical growth.
J Curve in a modern life
Not far to seek — look at Japan in a past decade. In 2013 the trade balance of the country got worse after an unexpected yen devaluation, basically because it took some time for an import-export amount to give a proper response to price signals.
- The J curve is an economic term that claims that the trade deficit will initially lower after currency depreciation.
- The nominal trade deficit initially increases after devaluation, as export prices rise before forming product volumes.
- If the amount of importation expands, but export remains static, while overall result may be interpreted as surplus — the chart shows J curve.
- The J curve theory may be referred to other spheres, including medicine, political science and private investment.