The J-Curve is a curved line in which it decreases, reaches a point of inflection, and then increases in a manner that resembles the letter "J". Usually, the line increases to a point that is higher than the original starting point. The J-curve shows the effects of policies and investments: they lead to a loss, and then a gain that's usually larger than the loss.
A professional illustration of the J-curve can be found in proximity to this sentence.
In order to explain the main ideas of a J-curve, we can use an example such as the effects of a currency's depreciation. The x-axis represents time. The y-axis below 0 represents a current account deficit, while the y-axis above 0 represents a current account surplus. If a country's currency was to depreciate, the current account would encounter a greater deficit than before. This is true, in theory, because imports will become more expensive, while exports will become cheaper. In the short term, demand for imports is inelastic, because businesses are likely to continue importing the same amounts as before due to contracts or habit. Demand for exports in the short run is inelastic as well, because the world will take some time to notice the price difference. For these reasons, a currency's depreciation will lead to a current account deficit until the point of inflection.
In the long run the current account will rise towards a surplus, and hopefully will rise above it. Demand for imports will become elastic in the long run, because contracts will expire and businesses will find cheaper domestic alternatives. Demand for exports will become elastic in the long run, because the international market will find out about the cheaper exports and will make use of them. Hopefully, through this example, the main ideas of the J-curve have become clear.
What is the Marhsall-Lerner condition? The Marhsall-Lerner condition is a concept that can be used to determine whether a depreciation or a devaluation of a currency will lead to an improvement in the balance of payments. If the PED of imports and the PED of exports add up to a value that is greater than 1, an improvement in the balance of payments will occur in the long run after a depreciation or devaluation of a currency.
The consequences of the falling Euro on Latvia's Current account will be evaluated using relevant concepts and knowledge in economics. In the table above, we can see that the current account in Latvia is negative. We can also see that imports exceed exports. A fall in the Euro will lead to imports becoming more expensive in the short run. Exports will become cheaper. Since PED for imports and exports in the short run is inelastic, this situation will lead to a higher current account deficit.
In order to explain the main ideas of a J-curve, we can use an example such as the effects of a currency's depreciation. The x-axis represents time. The y-axis below 0 represents a current account deficit, while the y-axis above 0 represents a current account surplus. If a country's currency was to depreciate, the current account would encounter a greater deficit than before. This is true, in theory, because imports will become more expensive, while exports will become cheaper. In the short term, demand for imports is inelastic, because businesses are likely to continue importing the same amounts as before due to contracts or habit. Demand for exports in the short run is inelastic as well, because the world will take some time to notice the price difference. For these reasons, a currency's depreciation will lead to a current account deficit until the point of inflection.
In the long run the current account will rise towards a surplus, and hopefully will rise above it. Demand for imports will become elastic in the long run, because contracts will expire and businesses will find cheaper domestic alternatives. Demand for exports will become elastic in the long run, because the international market will find out about the cheaper exports and will make use of them. Hopefully, through this example, the main ideas of the J-curve have become clear.
What is the Marhsall-Lerner condition? The Marhsall-Lerner condition is a concept that can be used to determine whether a depreciation or a devaluation of a currency will lead to an improvement in the balance of payments. If the PED of imports and the PED of exports add up to a value that is greater than 1, an improvement in the balance of payments will occur in the long run after a depreciation or devaluation of a currency.
However, in the long run the situation should improve. PED of imports will become elastic due to contracts expiring and businesses finding cheaper domestic alternatives. This will lower the county's expenses on imports. The low price of exports will be noticed in the long run in the international market, therefore making PED for exports elastic. This will increase the inflow of money from exports in Latvia, effectively improving the current account in terms of bringing it closer to a surplus. An improved current account will assist the balance of trade to react a surplus.
