Indian Economic Service D-45 || J-Curve Effect Why Deficit Worsens First || Ecoholics

Added: 2026-05-26

[00:00:00]If you are preparing for Indian Economic Service Examination, this is a very important extension of Marshall-Lerner condition, the J-curve effect. J-curve effect is frequently linked with previous year question papers. We just learned that depreciation should improve trade balance in the last video, but here's the twist. In reality, it often gets worse first. The question is, why?

[00:00:25]This is explained by the J-curve effect.

[00:00:27]It shows that after currency depreciation, trade balance initially worsen, then improve over time. So, the path looks like the letter J. In the short run, import price rises immediately, but the quantity of import doesn't fall. Why? Because contracts are fixed, demand is inelastic, so import bill increases. But in the long run, export volume increases, import demand reduces because consumers and firms adjust their behavior. Now, trade balance improves. Take India. If rupee depreciates, oil imports become expensive immediately. India still imports oil, so deficit worsens first, but over time, exports increases, imports adjust, and trade balance improve. So, remember, Marshall-Lerner explains if it works, J-curve explains when it works. In Indian Economic Service PYQs, questions often asked, "Explain J-curve with diagram." Or, "Why trade balance worsen initially?" Student must mention this time lag. The J-curve effect reflects short-run deterioration and long-run improvement in the trade balance following currency depreciation.

[00:01:41]So, next time when someone says, "Currency depreciation will fix everything." you know the truth. Not immediately. Save this video, and we'll see you in day 46.