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The theory which explains the effect of devaluation on balance of trade is known as:

The theory which explains the effect of devaluation on balance of trade is known as: Correct Answer J Curve Theory

The correct answer is J Curve Theory

Key Points J Curve Theory:

  • ​J curve theory explains the effect of devaluation on balance of trade.
  • A J Curve is an economic theory that states that, under certain conditions, a country's trade deficit will initially worsen after its currency depreciates, mostly because higher import prices will have a greater influence on total nominal imports in the near term than the reduced number of imports.
  • The nominal trade deficit initially grows after a devaluation, as prices of exports rise before quantities can adjust.
  • Then, as quantities adjust, there is an increase in imports as exports remain static, and the trade deficit shrinks or reverses into a surplus forming a “J” shape. 
  • Apart from trade deficits, the J Curve idea can be applied to other fields such as private equity, medicine, and politics.

Important Points [ alt="625404ac15b205e629af9c39 16557984135721" src="//storage.googleapis.com/tb-img/production/22/06/625404ac15b205e629af9c39_16557984135721.png" style="height: 256px; width: 330px;">

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