J curve

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[edit] Balance of Trade model

A J-Curve is the shape of the trend of a country’s trade balance following a devaluation of the domestic currency, according to a violation of the Marshall-Lerner Condition, that the price elasticities of exports and imports are too low to adjust to the devaluation. A lower exchange rate initially makes the trade balance less positive, or even negative, as the goods and services being exported are being purchased for less domestic currency, and foreign currency (and the goods and services imported) cost more.

Also explained by the contract currency period and pass-through effects.

Over time, the elasticities of the goods and services being traded will increase, as buyers both domestic and foreign find substitutes and trade contracts come to term. The volume of exports will increase, as the devaluation has made them relatively less expensive to foreign buyers, and the volume of imports will decrease as they will be more expensive to domestic buyers.

[edit] Country Status model

There is a different J-Curve based on the correlation between stability and openness. This theory was suggested initially by the author Ian Bremmer, in his book The J Curve: A New Way to Understand Why Nations Rise and Fall.

The x-axis of the political J-Curve graph measures the 'openness' of the economy in question and the y-axis measures the stability of that same state. It suggests that those states that are 'closed'/undemocratic/unfree (such as the Communist dictatorships of China and Cuba) are very stable; however, as one progresses right, along the x-axis, it is evident that stability (for relatively short period of time in the lengthy life of nations) decreases, creating a dip in the graph, until beginning to pick up again as the 'openness' of a state increases; at the other end of the graph to closed states are the open states of the West, such as the United States of America or the United Kingdom. Thus, a J-shaped curve is formed.

States can travel both forward (right) and backwards (left) along this J-curve, and so stability and openness are never secure. The J is steeper on the left hand side, as it is easier for a leader in a failed state to create stability by closing the country than to build a civil society and establish accountable institutions; the curve is higher on the far right than left because states that prevail in opening their societies (Eastern Europe, for example) ultimately become more stable than authoritarian regimes.

Bremmer's entire curve can shift up or down depending on economic resources available to the government in question. So Saudi Arabia's relative stability at every point along the curve rises or falls depending on the price of oil; China's curve analogously depends on the country's economic growth.