"The J Curve Occurs Because of Differences of Short-Run Elasticities

Question

Examlex · Accepted Answer

The Answer is The J curve phenomenon occurs when there is a temporary worsening of a country's trade balance before it improves in the long run. This is often seen in the context of currency depreciation, where in the short run, the quantity of imports and exports may not change significantly in response to changes in exchange rates. However, in the long run, the elasticities of imports and exports may adjust, leading to a more significant change in the trade balance.

The reasoning behind this statement lies in the concept of elasticity. In the short run, the demand for imports and the demand for exports may not be very responsive to changes in prices (in this case, exchange rates). This means that even if a country's currency depreciates, the quantity of imports and exports may not change significantly, leading to a temporary worsening of the trade balance.

However, in the long run, the elasticities of imports and exports are likely to be higher, meaning that the quantity of imports and exports will be more responsive to changes in prices. This can lead to a more significant improvement in the trade balance over time, as the effects of the currency depreciation become more pronounced.

Overall, the J curve phenomenon is a result of the differences in short-run and long-run elasticities of imports and exports, which can lead to a temporary worsening of the trade balance before it improves in the long run.

"The J Curve Occurs Because of Differences of Short-Run Elasticities

Definitions: