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J-Curve /exchange-rates/

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Presentation on theme: "J-Curve /exchange-rates/"— Presentation transcript:

1 J-Curve /exchange-rates/

2 Summary:  In the short term a depreciation of an exchange rate may not improve the current account deficit of the balance of payments  This is due to the low price elasticity of demand for imports and exports in the immediate aftermath of an exchange rate change. (Inelastic, at least in the short run)

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4 When will the balance of trade improve?  Providing that the elasticities of demand for imports and exports are greater than 1 (elastic) in the long term the trade balance will improve over.  This is known as the Marshall-Lerner condition.

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6 The Inverse J Curve Effect  An appreciation in the exchange rate can lead to a short term improvement in the balance of trade.  Imports become cheaper and exports more expensive in overseas markets.  But initially the elasticity of demand for both imports and exports is fairly low - leading to an overall improvement in the trade balance.


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