Question

In a recent article, John Bluedorn investigates how the current account position of small Caribbean and Central American economies react to ‘hurricane shocks.’ Hurricanes are not infrequent events in these parts of the world. When they hit, they invariably lead to a transitory decline in real per capita GDP (at least, controlling for several other factors). The author finds that the current account position of these economies first falls and later increases in response to a hurricane shock. Is this feature of the data consistent with our theory? Explain

Answer 1

Yes, There is J-curve effect on country's export-imports due to change in currency value.

It is clear that Caribbean and Central American economies lose productive resources when hit by hurricanes. They have to depend on import of goods and services. As demand for imports go up and exports due to productivity loss goes down, the value of currency goes down leading to depreciation.

Hence as show in the figure below, the trade deficit worsens if demand for exports and imports is elastic in nature. More imports and less exports will happen.

However, as. imports get expensive and exports get cheaper, people will prefer domestic goods and people abroad will prefer goods coming from these countries as productive capacities will be back then recovering from economic shocks and hence trade imbalance which was showing deficit will start to lessen with time.

Trade balance XzM x=M х

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