J-Curve

J-curve

Theory that says a country's trade deficit will initially worsen after its currency depreciates because higher prices on foreign imports will more than offset the reduced volume of imports in the short run.

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J-Curve

1. In charting, the theoretical trend of a country's trade balance after the devaluation of its currency. After a devaluation in currency, there is often a slight increase in the trade deficit, but the long-term effect is a trade surplus, due to the fact that a good sold in a devalued currency makes a good less expensive for international buyers. This is represented graphically as a curve that briefly dips below the x-axis, which represents time, before turning upwards, resembling the letter J. On this graph, the y-axis represents the trade balance.

2. In equity funds, the theoretical trend of the internal rate of return over several years. Most funds operate at a loss at their beginning, due in part to their start-up costs. Later, if the fund is successful, the internal rate of return rises significantly. This is represented graphically as a curve that briefly dips below the x-axis, which represents time, before turning upwards, resembling the letter J. On this graph, the y-axis represents the internal rate of return.