economics medium MCQ

In the context of international trade, what does the 'J-Curve effect' describe?

  1. The long-term increase in foreign direct investment following a currency appreciation
  2. The phenomenon where a country's trade balance initially worsens following a currency depreciation before eventually improving
  3. The relationship between tariff rates and government tax revenue
  4. The cyclical nature of global commodity prices over a decade

Answer: The phenomenon where a country's trade balance initially worsens following a currency depreciation before eventually improving

When a country's currency depreciates, its imports immediately become more expensive in domestic currency terms, worsening the trade deficit in the short run because import/export volumes are locked in by pre-existing contracts. Over time (the upward slope of the 'J'), as new contracts are signed, foreign buyers purchase more of the now-cheaper exports, and domestic consumers switch away from expensive imports, ultimately improving the trade balance.

Topic International Economics - Trade
Exam Relevance UPSC Prelims, SSC CGL, Banking
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