J-curve effect

J-curve effect

the tendency for a country's BALANCE OF PAYMENTS deficit to initially worsen following a DEVALUATION of its currency before then moving into surplus. This is because the full adjustment of trade volumes to devaluation involves a time lag: there is an immediate fall in export prices and a rise in import prices so current exports earn less foreign exchange and current imports absorb more foreign exchange, thereby increasing the size of the payment deficit (the downturn of the J-curve). Over time, however, the lower export prices will increase overseas demand and export earnings will rise, while higher import prices will reduce domestic demand for imports, leading to an improvement in the balance of payments (the upturn of the J-curve).

See BALANCE OF PAYMENTS EQUILIBRIUM.

Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005