Forex Questions and Answers - FXAnswer

J-Curve theory is a theory that says a country's trade deficit will initially worsen after its currency depreciates because higher prices on foreign imports will more than offset the reduced volume of imports in the short run.

J Curve
1. In charting, the theoretical trend of a country's trade balance after the devaluation of its currency. After a devaluation in currency, there is often a slight increase in the trade deficit, but the long-term effect is a trade surplus due to the fact that a good sold in a devalued currency makes a good less expensive for international buyers. This is represented graphically as a curve that briefly dips below the x-axis, representing time, before turning upwards, resembling the letter J. On this graph, the y-axis represents the trade balance.

2. In equity funds, the theoretical trend of the internal rate of return over several years. Most funds operate at a loss at their beginning, due in part to their start-up costs. Later, if the fund is successful, the internal rate of return rises significantly. This is represented graphically as a curve that briefly dips below the x-axis, representing time, before turning upwards, resembling the letter J. On this graph, the y-axis represents the internal rate of return.

Source(s):

http://financial-dictionary.thefreedictionary.com/ J-Curve

Devaluation of a currency will trigger export gains in the long term, rather than the short term, because of previous contracts, existing inventories, and behavior modification.

The term J-curve is used in several different fields to refer to a variety of unrelated J-shaped diagrams where a curve initially falls, but then rises to higher than the starting point.

Devaluation of a currency will trigger export gains in the long term, rather than the short term, because of previous contracts, existing inventories, and behavior modification.