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

Option 3 : J Curve Theory

The correct answer is J Curve Theory

 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.

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