Question

The J-curve theory suggest that the increase in export cannot happen overnight. So, would anyone like to do a research on how long it would take?

Answer 1

Answer:

J-curve determines the time path of trade flows when a currency is depreciated. The depreciation in currency impacts the trade flow by changing the export earning and import expenditure. In the very short run, the import expenditure will increase by 10% if the currency depreciates by 10%. The import will then gradually decline according to elasticity of demand in the home country. Similarly, export earning will decrease by 10% because the volume will remain same but price in the international market has decreased. Gradually the demand for domestic goods in the international market will increase according to the elasticity of demand in the foreign countries. Hence, it takes time to adjust with the change i.e depreciation of the currency.

The time period taken to adjust with the change depends on various factors such as dissemination of information on the change in the exchange rate, time taken for physical movement of goods and services, promptness of actions taken by the foreign countries, presence of import substitutes etc.

There is no hard and fast rule to adjust with the change. However, when US dollar depreciated in 1985, the import increased suddenly and it took 3 years to adjust with the depreciation. From 1988, exports started increasing and import decreasing. Up to 1991, the trade deficit improved a lot due to increase in export earning and decrease in import expenditure. From this empirical finding, we can say it may take 2-3 years for export to increase.