J-CURVE EFFECT

 This refers to a phenomenon wherein the trade balance of a country worsens following the depreciation of its currency before it improves.

any depreciation in the value of a currency is expected to improve the economy’s overall trade balance by encouraging exports and discouraging imports.

this may not happen immediately due to some other frictions within the economy.

Many importers and exporters in the country, for instance, may be locked into binding agreements that could force them to buy or sell a certain number of goods despite the unfavourable exchange rate of the currency.Several factors contribute to the J-Curve effect. First, at the time of devaluation, commodities in transit are priced at the old exchange rate

If the trade balance had been deteriorating before devaluation, it will continue to deteriorate after devaluation

at the time of devaluation a country could experience a rapid increase in its economic activity, leading to economic growth

Since a growing economy consumes more of not only domestically produced goods but also of imported goods, its imports could rise substantially. The increase in imports may offset any favorable effects of devaluation, resulting in a short-run deterioration of the trade balance.

The J-Curve effect was first observed in 1973 by Stephen Magee when the U.S. trade balance deteriorated in 1972 despite devaluation of the dollar in 1971.

A J-curve depicts a trend that starts with a sharp drop and is followed by a dramatic rise.

J-curve shows how a currency depreciation causes a severe worsening of a trade imbalance followed by substantial improvement. When a country’s currency appreciates, economists note, a reverse J-curve may occur. The country’s exports abruptly become more expensive for importing countries. 

In private equity, the J Curve represents the tendency of private equity funds to post negative returns in the initial years and then post increasing returns in later years when the investments mature.

The negative returns at the onset of investments may result from investment costs, management fees, an investment portfolio that is yet to mature, and underperforming portfolios that are written off in their early days.