The fact that the balance of trade normally falls before increasing after a devaluation is known as
A)the J-curve.
B)the pass-through effect.
C)the balance of payments paradox.
D)the indifference reflection.

Question

Quizplus · Accepted Answer

The phenomenon of the balance of trade initially falling after a devaluation, before eventually recovering and increasing, is referred to as the J-curve. The downward slope of the J-curve reflects the fact that initially, the increased cost of imported goods following a devaluation leads to a rise in import expenditure, reducing the trade balance. Over time, however, the expectation is that the devaluation will lead to increased competitiveness in exports, eventually boosting exports and improving the balance of trade.

The Fact That the Balance of Trade Normally Falls Before