The J curve explains how a country’s trade balance changes after its currency loses value (depreciates). It describes why the trade balance often worsens in the short term before improving in the long term, creating a pattern that looks like the letter J.

Here is what happens:

• Short-term: Because trade contracts and prices are often fixed, a weaker currency makes imports more expensive immediately. Since the volume of goods bought and sold does not change right away, the country’s deficit grows.
• Long-term: As people and businesses adjust to the new prices, they start buying fewer expensive foreign goods and export more local products. This causes the trade balance to recover and eventually improve.