The J-Curve Effect

The J-Curve Effect

The J-Curve Effect outlines the consequences of the Marshall-Lerner Condition as it pertains to the relationship between time and the elasticity of goods and services being exported.

The J-Curve Effect

If a country decides to devalue it's currency in order to become more competitive in the international market, the revenue from exports will only increase if the exports are elastic and if imports are also elastic. Unfortunately, in the short-run, products are inelastic because of an information lag.

The balance of payments initially worsens because the higher exchange rate that comes as a result of a devalued currency forces up the prices of imports without an immediate effect on export prices in other countries. However, after awhile, the number of exports demanded will increase because they will be cheaper to purchase and thus more competitive in other countries. This is why the curve looks like a J, because the Balance of Payments Current account decreases and then increases with time.