The J curve effect means that import prices are higher, thus revenues paid out increase while export prices are lower and incoming revenues decrease. Therefore, after a currency depreciation:
A) the trade balance will improve, then decline, then improve, and then decline, appearing to be a series of J shapes.
B) the trade balance will increase, then decrease, then jump higher, which economists call the J curve effect.
C) the nation will cut back on imports immediately causing the trade balance to improve, which gives the curve an inverted J shape.
D) the trade balance decreases and then increases over time giving the curve a J shape.

Question

Quizplus · Accepted Answer

The J curve effect refers to the initial decrease in the trade balance followed by an increase over time. This creates a J-shaped curve on a graph plotting the trade balance against time. Option D describes this phenomenon accurately.

The J Curve Effect Means That Import Prices Are Higher