The J-curve effect theorizes a depreciation will cause a:

Question

BlackTom AI · Accepted Answer

The J-curve effect predicts that after a currency depreciation, values (prices and values of trade flows) adjust immediately while physical quantities respond only with a lag, so export prices change before export quantities do.

1) Relevant knowledge points and concepts
- Exchange-rate depreciation: domestic currency falls in value relative to foreign currencies.
- Trade balance (TB) decomposition: TB = P_X·X - P_M·M, where P_X and P_M are prices of exports and imports in domestic currency and X and M are quantities.
- Exchange-rate pass-through and time lags: prices denominated in foreign currencies or set by contracts adjust quickly; quantities (export volumes or import volumes) adjust slowly because of contracts, habits, search and delivery lags, and demand elasticities.
- J-curve: short-run deterioration then long-run improvement of the trade balance after depreciation.

2) Complete reasoning, step by step
- Immediately after depreciation, the domestic currency is weaker. If export prices are priced in domestic currency or convert at the new rate, the domestic-currency value of each unit exported rises (P_X rises) even if the foreign-currency demand for the good hasn’t changed.
- Quantities X supplied to foreign buyers do not change instantaneously because of pre-existing contracts, shipping times and slow demand responses.
- Therefore P_X·X increases initially (or the import bill increases), so the trade balance often worsens at first.
- Over time, foreign buyers respond to cheaper foreign-priced exports (in their currency) or domestic producers become more competitive; export quantities X rise and import quantities M fall, improving TB. That delayed quantity response creates the J-shaped time path.

3) Calculational/expressive intermediate steps
- Let e = domestic price of foreign currency (higher e means depreciation). Export revenue in domestic currency ≈ e·(foreign price)·X. When e rises, revenue rises immediately if X fixed. Only later does X change.

4) Why the correct answer is correct
- The core J-curve mechanism is exactly that prices or values react first (immediate effect from exchange-rate change) while quantities adjust later; thus a change in export prices comes before a change in export quantities.

5) Why other options are incorrect
- "trade deficit to shrink before it grows" is the reverse of the J-curve (it typically grows/worsens first then shrinks).
- "change in import quantities before a change in import prices" contradicts the usual ordering: prices/values adjust rapidly while quantities lag.
- "all of these" cannot be correct because the first two listed alternatives are incorrect statements.

6) Conclusion
The correct answer is "change in export prices before a change in export quantities," which matches the provided answer.

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