Dec 12 2008
The Marshall-Lerner Condition, the J-curve, and the US trade deficit
Published by Jason Welker at 9:45 am under Balance of Payments,Balance of Trade,Currency,Current account,Exchange Rates,Exports,Foreign exchange markets,Free Trade,Trade
For a video lesson on the Marshall Lerner Condition and the J-curve, click here: The Marshall-Lerner Condition (HL Only) | The Economics Classroom
Read the following article before reading the blog post below:
Managing Globalization » Business Blog » International Herald Tribune » Blog Archive » Here’s that silver lining, finally
In IB Economics we’ve been studying concepts relating to balance of trade and exchange rates. The Marshall-Lerner Condition and the J-curve are two concepts that explain the relationship between a the exchange rate for a nation’s currency and the country’s balance of trade. (click on the graph to see a larger version)
Common sense might indicate that if a country’s currency (let’s say the US dollar) depreciates relative to other currencies, then this should lead to an improvement in the country’s balance of trade (economists call this the current account). The reasoning goes as such: a weaker dollar means foreigners will have to give up less of their money in order to get one dollar’s worth of American output. At the same time, since the dollar is worth less in foreign currency, imports become more expensive, as Americans have to fork over more dollars for a certain amount of another country’s output; hence, imports should decrease.
Fewer imports and more exports means an improvement in the country’s balance of trade, right? Well, not necessarily. What matters is not whether a country is importing less and exporting more, rather, whether the increase in income from exports exceeds the decrease in expenditures on imports. Here is where the Marshall-Lerner Condition can be applied.
The M-L condition examines the price elasticities of demand for exports and imports of a particular country. Say the US experiences a depreciation of its currency (as it has over the last year or so). If foreigners’ demand for exports from America is relatively elastic, then a slightly weaker dollar should cause a dramatic increase in foreign demand for American output, causing export income in the US to rise dramatically. On the other hand, if American’s demand for imports is highly price elastic, then a slightly weaker dollar should likewise cause Americans’ demand for imports to decrease drastically, reducing greatly American’s expenditures on imports. If the combined elasticities of demand for exports and imports is elastic (i.e. the coefficient is greater than 1), then a depreciation of a nations currency will shift its current account towards surplus. This is the Marshall-Lerner Condition.
Marshall-Lerner Condition: If PEDx + PEDm > 1, then a depreciation or a devaluation of a nation’s currency will shift the the balance on its current account towards surplus.
So what if the Marshall Lerner Condition is not met? Demand for exports and imports may not always be so responsive to changes in exchange rates. Imagine a scenario where a weaker dollar does little to change foreign demand for America’s output. In this case income from exports may actually decline (in real terms, since the dollar is weaker) as the dollar depreciates. Likewise, if Americans’ demand for imports is highly inelastic, then more expensive imports will only minimally affect Americans’ demand for imported goods, in which case expenditures on imports may actually rise as they become more expensive. In this case, where the elasticities of demand for exports and imports are highly inelastic, a depreciation of the currency will actually worsen a trade deficit. Americans’ import expenditures will go up while export income from abroad will decline shifting the current account further into deficit.
In the article above, some data is presented that points to evidence that in the US today, the Marshall-Lerner Condition is in fact being met:
“Exports in the year through September are up by 12 percent from 2006, while the dollar’s trade-weighted exchange rate dropped by only 6 percent. That means foreigners may actually be spending more – even in their own currencies – on American products. It’s a support that the American economy, and in turn the global economy, can really use right now.
Of course, this process isn’t helping the trade deficit too much, No one, it seems, can change Americans’ taste for foreign products. But it does show, for all to see, that the risks of an open economy are at least somewhat balanced by the benefits.”
An increase in exports of 12% in response to a 6% weakening of the dollar indicates a price elasticity of demand coefficient for America’s exports of 2, meaning foreigners are highly responsive to cheaper US goods.
We can assume that Americans’ demand for imports is highly inelastic, as the article hints at when it says, “imports to the United States, including oil, are still rising in volume and value.” If a 6% weaker dollar leads to an increase in expenditures on imports, then demand must be less than one. In order for M-L Condition to be met, PEDx+PEDm must be greater than 1. Clearly, with a PEDx of 2, the condition is met, and a weaker dollar in leading to an improvement in America’s balance of trade with the rest of the world.
Discussion Questions:
- What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
- Is America experiencing an improvement in or a worsening of its current account deficit?
- What determinants of demand are fueling America’s ever-increasing expenditures on imports?
- What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
About the author: Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course.
Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this authorRelated posts:
- Lesson plan: Elasticity, exchange rates and the balance of payments – understanding the Marshall Lerner Condition
- Yeah, we have a trade deficit, SO WHAT?!
- Exchange rates and trade: a delicate balancing act, currently out of balance!
- Silver lining of US recession- more balanced trade
- Politics, priorities, and the Phillips Curve
Well, it is from a different point of view anyway.
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this was an excellent blog…thanks for your instruction…i read about the J-curve in one of my texts but this makes it clear…
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This makes more sense now. In class yesterday when Mr. Welker first introduced it, I somewhat understood it, but for some reason some concepts where so confusing. Now that I read this blog post on my own it makes more sense.
In the long run, goods will become more responsive. In this case, time matters a lot. For example, cigarettes became more expensive. Well consumers are not going to care, because they are still addicted to it and will keep buy it, so there is a very inelastic response. However, over time, consumers are more responsive to the change in price and will realize how expensive cigarettes are and by that time some may decide to quit or not buy cigarettes anymore.
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The J-curve effect, as I understand it, seems to illustrate the effect of the Marshall-Lerner Condition (MLC=[PEDm+PEDx>1]) on a country's current account over time. When the MLC is not met (i.e. PEDm+PEDx1, the MLC is met, the foreign demand for exports, or domestic demand for imports being elastic, and so more responsive to a depreciation of domestic currency. This moves the balance of payments towards surplus.
Evidently from the information in the article, the US economy is on the upward sloping section of the J-curve, moving towards current account surplus.
The determinants of demand for American consumers are clearly tastes and preferences, yet also necessity. American consumers demand oil, an input to production and other goods. They are dependent on it, and so it is price inelastic. As the price rises, there is only a marginal fall in demand for it.
If the dollar remains weak, in the long term consumers will find it harder to spend on imports, thus contributing to America's current account surplus, as exports will begin to exceed imports as demand for exports increases more due to the lower value of the dollar. By this point, both domestic and foreign demanders will have had time to adjust to the newly weakened dollar, and the US economy will find itself on the upward sloping part of the J-curve.
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I agree with Joel that the US is in the upward sloping section of the J-curve. This is due to the responsiveness of consumers and the elasticity of American goods, foreigners buy more American goods and services. in the long-run there will be an increased export revenue and decreased import expenditure and this will then improve the current account deficit in the US and move them towards current account surplus.
As Elisabeth explained, the price elasticity of demand changes over a period of time becoming more elastic. The J-curve also shows that in the short-run the demand is inelastic for exports, therefore the export revenue will decrease, worsening he current account deficit.
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I agree with both Meri and Joel; based on the information from the article, the US economy is on the upward sloping section of the J-curve, moving towards current account surplus. The J-curve implies that PEX x and PED m are > than elasticicty over time. If a consumer is responsive to a new tax placed on a good the day after this tax is introduced for instance, this shows a worsening of the current acount deficit in the short run. However, if the consumer subsitutes this for a "better good", the Marshall Lerner Condition will be met. More specifically, the Marshall-Lerner Condition, as illustrated by the "J Curve", demonstrates how time is a determinant of PED.
As it is explained in Meri's and Elisabeth's comment, the J-Curve being upward sloping is a result of the responsiveness of consumers and the elasticity of American goods. This means that foreigners buy more American goods and services. Again, as it is mentioned in
Joel's, Meri's, and Elisabeth's comment,there will be an increased export revenue and decreased import expenditure and this will then improve the current account deficit in the US and move them towards current account surplus in the long-run .
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The effect of the J-curve depends shows the elasticity of a good. In the short run consumers will stay very unreactive to an depreciation/devaluation in the currency because it takes some time to change their habits. In the long run as the the currency is low domestic consumers will stop importing foreign goods and buy locally, therefore moving towards surplus.
The determinants of demand that are fueling Americas expenditures are obviously tastes and preferences as well as necessities. Oil has become a necessity because it is used in most production areas and is very inelastic.
In the long run as the American Dollar stays weak it means that imports will decrease. This means that the USA will move toward a current account surplus because American's will demand more local goods.
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The J curve effect shows the effect of time on elasticities of imports and exports. In most cases as time passes by goods tend to become more elastic because people have more time to adjust to the price change. According to the article America should be on the part of the J curve that is sloping upwards, because of this America is experiencing an improvement of its current account deficit. This is also evident because PEDx + PEDm > 1.
The determinants of demand the are fueling America's ever increasing expenditures is tastes, preferences and because the good is a necessity(e.g. oil)
Elasticity of demand for imports should increase if the dollar remains weak in the long run because people will have more time to adjust to the higher prices. This would result in a shift along the J curve.
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*This would result in a shift along the J curve towards an account surplus.
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4.) What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
Well, as we all seem to agree already, the US is definitely in the upward sloping section of the J-curve, and moving towards a trade surplus by weakening its dollar. Btw I think the article does a great job of explaining exactly why and how "it depends" what will happen to a nations current account if its currency depresiates.
Anyway, as we learned today in class, time is also in its own way, a determinant of elasticity. For example, addictiveness: If I'm addicted to coffee, and there is a typhoon or something that ruins Brazils coffee farms (I hope im right in thinking that Brazil makes a lot of coffee. anyway, you get the point) and prices skyrocket, I won't really care in the short run, because my need to satisfy my craving will outweigh the higher opportunity cost of buying the (now very expensive) coffee.
However, in 6 months, once I have made a conscious effort to stop drinking so much coffee because my savings account is decreasing, I won't be as willing to give up so much to buy the over-expensive coffee (assuming that Brazil's imaginary coffee farms keep getting hit by natural disasters).
Basically, what this highly hypothetical example demonstrates is a general tendency for time to lower the inelasticity of a good (or service) as one gets used to not consuming it.
So, in answer to the question, if the dollar remains weak in the long run, the US consumers' "inelastic demand tendencies" towards imports, as is referred to by the article, will become more elastic. Essentially, this will mean that that as PED for imports becomes more elastic, (assuming ceteris paribas), it will simply add more to the PED for exports, and this combined greter value of the two will move America's position on the J-curve even higher.
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As already stated in the blog, the J curve is the graphical representation of the M-L condition as it shows what will happen to a country as it either meets or does not meet the M-L condition. As seen, if the condition is not meet, a countries economy moves toward a deficit as time progresses, however, it the condition is meet, the economy will move toward a capital account surplus (which means more income is gained from exports then lost as expenditure in imports.) the equation used to represent this is PEDx +PEDm > 1, for there to be movement toward a surplus.
As stated in the article, the value of the dollar has depreciated, but this is movement toward a surplus, this means that the goods exported must be elastic, as exports have increases 12% and the dollar has weakened by 6%. Meaning the PEDx is 2, so the economy will move toward a surplus regardless of the PEDm. On the J curve, the US economy is on the upward slopping section of the line. This means that the American economy is improving it current account deficit, by reducing the deficit.
As stated in other blog posts and the article, American consumers continue to demand goods, even if they have become relatively more expensive. Their demand is based on taste and preference (as America is a known as a consumer nation and is one of the largest trading partners of China) and necessity (as they are very dependent on foreign oil and gas.
If the dollar remains weak, American consumers will become more responsive to price changes in their imports. Meaning if the price changes on slightly, American consumers will be less willing to buy foreign goods, and begin to buy domestically (helping the economy move toward a current account surplus).
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The J-curve assumes that goods become more price elastic over time. In other words, consumers are more responsive to a change in price as time goes by. Although this may be true for goods which are elastic to begin with, it may not be necessarily true for goods which are inelastic. For example, if the price of cigarettes increases, smokers will not be more responsive to the change in price one month later than they will be one day later. Therefore, does the j-curve still apply for very inelastic goods?
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That the US is responsive to change in the value of a currency is obvious. But as they are responsive, china does do not have a buffer zone when the RMB appreciates in respect to the dollar. So when the RMB appreciates, chinas exports will decreases quickly as the US consumers are responsive to a change in price. This is the problem with responsive consumers, the economy is directly affected to any change in price which requires politicians to make quick and hasty decision which harm the economy most of the time instead of repairing it.
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Just a question, if the M L condition is already met (taking the USA as an example) then there is no J curve at all… Or can you illustrate it on the upward sloping part of the curve?
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What determinants of demand are fueling America’s ever-increasing expenditures on imports?
The determinants of demand that are fueling America's ever-increasing expenditures on imports are cheap substitute goods that are imported from asian nations such as China, Taiwan, Bangladesh, and many others. They are cheap due to the capital resource that these nations have available in abundance: labour. These cheap imports are welcomed by american consumers especially since Americans are trying to save money, due to a possible economic world recession.
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As everybody has already said, America is in the upward sloping part of the J-curve. But looking at the graph, there are a lot of options for the actual position of the US economy. Due to the unresponsiveness of consumers to rising prices of imports, I would argue that the US are still experiencing a deficit, and most likely are at the very bottom of the curve, right as it starts to obtain a positive slope.
I agree with what Sebastian wrote, and think that price increases in China will harm their economy in the long run, and they must therefore act very carefully.
Myrthe, I would say that there would be no J-curve. The J-curve best represents the effects of a change in PED (price elasticity of demand) for imports and exports on the countries current account. Therefore, if the M L curve is already met, then I would argue that there is no need for the J-curve.
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What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
The J-curve is a graph indicating whether the economy is at a current account surplus or deficit. It shows the natural reaction that should take place over time, meaning that if a country is experiencing a trade deficit (meaning it has expenditure on imports exceeding income from exports) and at the same time, the m-l condition is not met (meaning that most probably both the price elasticity on exports and imports is demand inelastic), it will gradually have an increase in trade deficit, until elasticity changes and the m-l condition is eventually met. At this point, the economy would start to move towards a trade surplus, while still being in deficit, until surplus is indeed reached.
As clear from the article, the US economy is still experiencing a trade deficit, as "this process isn’t helping the trade deficit too much, No one, it seems, can change Americans’ taste for foreign products". But as the price elasticity of demand for exports + imports is equal to 2, the m-l condition is met (as 2 is greater than 1). Sooo the US is slowly moving towards a surplus, and only time will show when a current account surplus will indeed occur. So right now, the US economy is on the upward sloping part of the curve but it is still below the time-axis, in other words, still in deficit.
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I found this article really interesting, and it clarified the Marginal-Lerner Condition and the J-curve. This post was really helpful and explained the scenario in detail.
If a good is inelastic (let's take the example of cigarettes), foreign consumers are relatively unresponive or slightly responsive to a change in price. If the currency of a country depreciates, exports will be cheaper for foreign consumers. We would expect that the demand for exports would increase, however since cigarettes are addictive (inelastic), foreign consumers' demand for exports will only slightly increase. At the same time, as the currency depreciates, domestic consumers have to afford more of their currency to demand imports. Anyhow, since the good is inelastic, domestic consumers will demand the same amount or even more imports.
This means that the increase in income from exports exceeds the decrease in expedinture on imports. Thereby the Marshall-Lerner Condition is not met as PED x (Price elasticity of demand on exports) + PED m (Price elasticity of demand on imports) < (is smaller than) 1.
As we can see on the J-curve, in the short-run this may be the case. However, in the long-run consumers may consider the price of cigarettes and thus stop smoking or switch into a substitute good in the long-run. Hence, in the long-run the MLC is met.
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Having not been here the previous day (when this was presented in class) I think this writeup is great in explaining the MLC and the J curve.
It's interesting to relate the relationship between the elasticity of demand for imports and exports and how this relates to currencies and the ultimate impact which it has on the current account balance.
America is findint it difficult to get out of its account deficite at the moment because of its high necessity for imported goods and thus inelasticity of demand: for a large change in price there will only be a small change in quantity demanded.
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I thought this article clarified the J-curve really well. The comments by, for example, Nic and Lisa have summarized the current account deficit situation well in America.
A new question to consider might be if an inverse J-Curve is possible, which according to one (unreliable) source, happened in Greece. An inverse J-Curve might be when one country's currency appreciates in comparison to other nations currencies, and in the short run causes an movement towards current account surplus, but in the long run towards a deficit. Imports could be elastic in the short run, and exports inelastic. This would lead to the expediture from imports being less than the income gained from exports. In the long run, other nations would be willing to purchase less of that nations exports because of relative price, and would then lead to a deficit.
I don't know if this argument is valid but I thought it good to bring additional points of discussion to the debate, so if you disagree, leave a comment.
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It is not really said whether US economy is in the upward part of the sloaping curve. Given the current economic situation, the likely increasing unemployment will cause a fall in real incomes, with lower consumption of both domestic and imported goods and services. I believe demand of imports will become more elastic and, at least in the coming 12 months, PEDx will not increase that fast, as it will require some time to US to recover and increase export of goods and services. An increasing PEDm will of curse help to keep the MLC condition. At least in 2009, current account deficit might decrease as a result of lower imports than higher exports. This, as Nick and Sebastian have said, may cause harm to China, with a current account surplus highly depending on exports to US. If RMB will tend to appreciate against USD, China could, however, react by using its huge reserves in US and buy US treasury bonds in the attempt to keep steady the current exchange rate.
It is really uncertain, at least nowadys, what the development could be.
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haha ^^ nice, is there a section to follow the RSS feed
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[...] posts:The Marshall-Lerner Condition, the J-curve, and the US trade deficitExchange rates and trade: a delicate balancing act, currently out of balance!How do changing [...]
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For a country to devaluate her currency in order to improve her balance of payment, her export must be elastic and import be inelastic. This will make her export cheaper and import dearer. Consequently, export earnings will be more than the import spendings. In the case of my own Nigerian economy and other third world countries like mine where we are majorly primary producers at the global market, this so-called devaluation has done us more harms than good (if any). This will work if we can engage in production of secondary products.
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1. What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
The J-curve affect is actually shwoing after the devaluation of a currency that the trade deficit continues to get worse, however over long term improves. It appears that America are in "phase 2" which suggests that exports are picking up, which is benefitting the United states.
2. Is America experiencing an improvement in or a worsening of its current account deficit?
With this its attempting to improve its current account deficit by increasing exports, as imports are outnumbering exports by a vast amount. The devaluation of the currency makes imports less attractive so domestic consumers might turn to domestic produced products.
3. What determinants of demand are fueling America’s ever-increasing expenditures on imports?
Changes in the price, as the devaluation is making foreign imports more expensive, probably looking more at substitutes here as well.
4. What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
The elasticty of demand will react more over the long term, as the J-curve suggets that it takes time for the elasticity of demand to adjust to new prices. If the dollar continues to remain week in the long run imports will become less attractive as they are expensive to buy.
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1. The J-curve effect explains the affect of a devaluation of a country’s currency on the trade balance. Assuming that the nation is experiencing a trade deficit, at first the Marshall-Lerner condition is not met and the trade deficit gets worse. Then, the nation makes up the deficit and moves into a trade surplus, as this continues in the long-run. The U.S. seems to be at about the bottom of the J-curve right now, starting to move up.
2. It’s experiencing a worsening of its current account deficit right now. According to this article, this deficit should be improving soon, though.
3. The poor economic conditions are making Americans look for cheaper goods. This is causing them to consider substitutes from other countries. With their higher-valued currency, it’s making them shift their purchasing habits. Also, consumers may be anticipating that the U.S. government is going to further devalue their currency, affecting their decisions.
4. The demand for imports should fall precipitously. With a devalued currency and elastic demand for imports such permanent changes in price will probably turn off consumers from these goods for good. It should push America up the J-curve maybe close to the balanced trade line.
Trevor Tezel
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Ralph,
Looking at your answer to the second question, I wonder: “What if demand for domestically-produced goods doesn’t increase? What if American goods (such as cars) are so out-of-league with Japanese products or Americans are so comfortable with easily recognizable brands, that no change takes place?” I guess this mostly ties into elasticity of demand of imports but these are factors that simply can’t be measured. We only truly know the elasticity after the economic actions have already taken place. Interesting thing to think about….
Trevor Tezel
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1. What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
The J-curve measures the effectiveness of the devaluation on the demand for imports and exports. Initially, the current account balance will fall because time lag exists between the devaluation and consumer’s reaction. If the PED of export is relatively inelastic to imports, the current account will improve after a while. According to the article, US is meeting the Marshall-Lerner condition.
2. Is America experiencing an improvement in or a worsening of its current account deficit?
American is experiencing an improvement of its current account deficit because the demand after the depreciation is increasing.
3. What determinants of demand are fueling America’s ever-increasing expenditures on imports?
The volume and value of oil is driving the expenditure on imports.
4. What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
If the dollar remains weak in the long-run, the rising value and volume of oil import will exceed the volume of exports. If this happens, the current account balance will worsen.
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@Trevor
Although theoretically, US current account balance could be equalized but I personally believe that it would never be able to achieve that level because ultimately, United States is the largest consumer nation.
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1. The J-Curve effect holds that after the currency of a nation depreciates, the trade deficit will get worse before it gets better. In the long term, the deficit will begin to decrease and sometimes a surplus will be reached. It seems like the United States is currently down in curve of the model. Although the dollar has depreciated, demand for American goods and American demands for imports remain high enough that the current account is still in deficit.
2. The United States is experiencing an increase in its current account deficit. As I stated before, this is because it's in the bottom of the J-Curve. If this pattern continues, then it is likely that the United States will soon experience an improvement in the current account as they move up the J–that is, as Americans buy more domestically produced goods.
3. The determinant of demand price is driving up American demand for imported goods. Because Americans want to buy the cheapest goods possible and other nations make these goods readily available, it is logical that the United States would want to buy these products.
4. If the dollar remains weak in the long run, then American goods will continue to get cheaper. Americans will therefore be more likely to buy domestically produced goods. This will push the US up the J-Curve and closer to a balance or surplus of the Current Account.
Chamonix
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Myrthe,
I think that if the Marshall-Lerner condition is already met, then it still fits in with the J-Curve. The balance of payments simply starts on the upward sloping part of the curve. I guess that this means that the surplus will continue to increase into the long run. This might not always be the best thing for a country, but I think that it still fits in with the model.
Thanks,
Chamonix
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1. The J-curve effect states that after a currency depreciation, the current account will worsen before improving. The US is probably in the worsening stage, as the currency has depreciated but the current account has yet to improve.
2. The deficit is becoming larger, as demand for imports has increased or remained the same while demand for exports has decreased.
3. Price is the main determinant of demand here. Imports are cheaper, and thus Americans are more likely to buy them.
4. If the dollar remains weak, domestic goods will seem cheaper while imports will seem more expensive. The current account will improve and America will move up the J-curve.
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Masaya,
You said that the weakening of the dollar in the long run will lead to a worsening of the current account. This doesn't really fit with the model. As the dollar depreciates, imports become more expensive while exports become cheaper. Depending on price elasticity of demand, exports could probably exceed imports to the point where the the trade deficit decreases and the current account improves.
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1. The effect of the J-curve depends shows the elasticity of a good. In the short run consumers will stay very unreactive to an depreciation/devaluation in the currency because it takes some time to change their habits. In the long run as the the currency is low domestic consumers will stop importing foreign goods and buy locally, therefore moving towards surplus. According to the article America should be on the part of the J curve that is sloping upwards, because of this America is experiencing an improvement of its current account deficit.
2.With this its attempting to improve its current account deficit by increasing exports, as imports are outnumbering exports by a vast amount. The devaluation of the currency makes imports less attractive so domestic consumers might turn to domestic produced products.
3.The determinants of demand that are fueling America’s ever-increasing expenditures on imports are cheap substitute goods that are imported from asian nations such as China, Taiwan, Bangladesh, and many others. They are cheap due to the capital resource that these nations have available in abundance: labour. These cheap imports are welcomed by american consumers especially since Americans are trying to save money, due to a possible economic world recession.
4.The elasticty of demand will react more over the long term, as the J-curve suggets that it takes time for the elasticity of demand to adjust to new prices. If the dollar continues to remain week in the long run imports will become less attractive as they are expensive to buy.
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Ralph,
Looking at your answer to the second question, I wonder: “What if demand for domestically-produced goods doesn’t increase? What if American goods (such as cars) are so out-of-league with Japanese products or Americans are so comfortable with easily recognizable brands, that no change takes place?” I guess this mostly ties into elasticity of demand of imports but these are factors that simply can’t be measured. We only truly know the elasticity after the economic actions have already taken place. Interesting thing to think about.
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1. The J curve effect demostrates the effect of time on elasticities of imports and exports. In most cases as time passes by goods tend to become more elastic because people have more time to adjust to the price change. According to the article the US should be on the part of the J curve that is sloping upwards, therefore they are experiencing an improvement of its current account deficit.
2.With this its attempting to improve its current account deficit by increasing exports, as imports are outnumbering exports by a vast amount. The devaluation of the currency makes imports less attractive so domestic consumers might turn to domestic produced products.
3. Changes in the price, as the devaluation is making foreign imports more expensive, probably looking more at substitutes here as well.
4. If the dollar remains weak in the long run domestic goods will seem cheaper while imports will seem more expensive. causing to improve the current accountthe US will move up the J-curve.
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Sara,
I agree with you for the fact that if the dollar continues weak in the long run domestic goods will seem cheaper while imports will seem more expensive
Armando
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1.) The U.S. is closer to the bottom of the J-curve now. The J-curve effect occurs when a nation's trade balance worsens after a depreciation of currency. At first, imports will be more expensive, and exports will be cheaper. However, the demand for cheaper exports will increase, and the trade balance will improve in the future.
2.) America is currently experiencing a worsening of its account deficit.
3.) The determinants of demand fueling America’s ever-increasing expenditures on imports are changes in price.
4.) If the dollar remains weak, imports will become more price elastic, and will be less attractive than domestically made products. Consequently, the U.S. would probably move up the J-Curve.
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Armando,
You brought up an interesting point – that, with time, goods tend to become more elastic. A good example of this is oil. The demand for oil, in the long run, became more elastic. This is generally because (among other reasons) people find close substitutes for resources, like oil, and also learn to rely less on certain things. Interesting ideas.
Cheers,
Catherine
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[...] After watching the video, read and respond to the discussion questions in the following blog post: The Marshall-Lerner Condition, the J-curve, and the US trade deficit [...]
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[...] After watching the video, read and respond to the discussion questions in the following blog post: The Marshall-Lerner Condition, the J-curve, and the US trade deficit [...]
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1. What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
The J-curve is a graphical representation of the Marshall-Lerner condition which says that when PED for net exports is greater than one the current account balance will move towards a surplus while if the PED is less than one the current account balance will move towards a deficit if a nation’s currency depreciates. Based on evidence from the article, I would say that the US is on the upward sloping portion of the J-curve but still below the line of a balanced current account.
2. Is America experiencing an improvement in or a worsening of its current account deficit?
America is experiencing and improvement, even if it is slight, in its current account deficit as the revenue from exports rises and the expenditures on exports falls slightly.
3. What determinants of demand are fueling America’s ever-increasing expenditures on imports?
I guess taste and preferences is very important in fueling America’s ever increasing expenditures on imports. Like the article says American consumers have a liking for all things foreign.
4. What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
In the long run the elasticity of demand for imports if the dollar remains weak will fall and become inelastic. This will mean that expenditures from imports may actually rise to counter-act the increased revenue from exports bringing the United States left-bound on the J-curve, back to where the Marshall-Lerner condition is not being met. Hence, the United States would see a worsening deficit in its current account balance.
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1. What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
The J-curve is a representation of the Marshall-Lerner condition, which states that the current account will move towards a surplus when the demand of net exports is elastic. It will move towards a deficit if the demand of net exports is inelastic.
The US seems to be in the part where its current account is negative, but in the upward sloping part of the J-curve.
2. Is America experiencing an improvement in or a worsening of its current account deficit?
America is currently experiencing an improvement, as the current account deficit is moving towards a surplus (revenues from exports are rising, and expenditures on imports are falling)
3. What determinants of demand are fueling America’s ever-increasing expenditures on imports?
American consumers like foreign goods very much.
4. What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
If the dollar remains weak in the long-run, the elasticity of demand for important will become inelastic. This means that expenditures from imports will rise, and counteract the increased revenues from exports. In this case, the US would move back to the downward sloping part of the J-curve, where its current account balance would worsen.
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1.) The J curve effect is when the current account moves towards a surplus once demand for net exports becomes elastic and vice versa. The J curve illustrates the MLC. Currently the US is still experiencing a current account deficit, but is moving upwards along the J curve.
2.) America is experiencing an improvement of its current account deficit, since the revenues from the exports are rising and the expenditures on imports are dropping.
3.)Taste and preferance is a determinant of demand for foreign goods.
4.)If the dollar remains weak in the long run this will mean that demand will become inelastic. This would mean that America would experience a larger current account deficit and move to the downwards sloping part of the J-curve.
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1. What is the J-Curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
The J-Curve is a graphical representation of the Marshall-Lerner Condition. If the currency of a nation depreciates and the PED of net exports is greater than one, the current account balance will move towards a surplus whereas it will move towards a deficit when PED is less than one. The US has an account deficit but is on the upward sloping part of the J-curve.
2. Is America experiencing an improvement in or a worsening of its current account deficit?
As revenues from exports rise and expenditures on imports fall, America is experiencing an improvement in its current account deficit.
3. What determinants of demand are fueling America’s ever-increasing expenditures on imports?
Taste and preferences are determinants of demand that are fueling America's ever-increasing expenditures on imports.
4. What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
In the long run the PED for imports will fall and become inelastic. Therefore, the expenditures on imports will increase and thus cancel out the increased revenue from exports. A shift to the downward sloping part of the J-curve is a result and the MLC is not met. Therefore, the deficit in the current account balance will increase.
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1. What is the J-Curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
The J-Curve is a curve representing the Marshall- Lerner Condition. When the current account moves towards a surplus then PED of net export is greater than one and vice versa. The US is upward sloping but below the surplus line.
2. Is America experiencing an improvement in or a worsening of its current account deficit?
America is experiencing an improvement since they are facing bigger revenues from export than expenditures from imports.
3. What determinants of demand are fueling America’s ever-increasing expenditures on imports?
The determinants of demand for foreign goods are tastes and preferences.
4. What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
If the dollar remains weak in the long-run, the elasticity of demand for imports will become inelastic. Therefore the expenditures on import will increase leading to a shift to the downward sloping part of the J-Curve. Due to this the current account deficit will increase.
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1. What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
The J-curve show the Marshall-Lerner condition, which says that, despite a countries currency depreciating, the current account will not move towards surplus is the demand for their exports is inelastic. The US is on the upwards sloping part of the J-curve at the moment, however it is not in surplus.
2. Is America experiencing an improvement in or a worsening of its current account deficit?
America's current account deficit is getting better, meaning they have increasing revenues from exports and decreasing expenditures of imports.
3. What determinants of demand are fueling America’s ever-increasing expenditures on imports?
American consumers have a high taste and preference for imported goods.
4. What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
In the long-run, the elasticity of demand for imports would become more inelastic. Therefore the expenditure on imports would increase causing the current account balance to move back towards deficit. This would cause a move to the downwards sloping part of the J-curve.
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1. What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
The J-curve effect is when the demand for net exports in a country are elastic so that the current account of will move towards a surplus. Also the other way around, when a country’s demand for net exports are inelastic, it will move towards a deficit.
The US seems to be in the upward sloping part of the J-curve.
2. Is America experiencing an improvement in or a worsening of its current account deficit?
America is currently experiencing an improvement, because the current account deficit is moving towards a surplus. This means that the revenues from exports are increasing, and expenditures on imports are decreasing.
3. What determinants of demand are fueling America’s ever-increasing expenditures on imports?
Tastes and preferences because America likes foreign goods.
4. What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
The elasticity of demand for imports, if the dollar remains weak, will fall and will become inelastic. America would get increased revenues from exports which means that they therefore might spend the money on imports. The US would move back to the downward sloping part of the J-curve.
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1. The J curve reflects the effect of changing PED for exports and imports over time on a nation’s current account after its currency depreciates. The example shows that the US is still experiencing a current account deficit, but is moving upwards along the J curve.
2. Is America experiencing an improvement in or a worsening of its current account deficit?
Since revenues from exports increase and expenditures on imports decrease, America is experiencing an improvement in its current account deficit.
3. What determinants of demand are fueling America’s ever-increasing expenditures on imports?
Taste and preferences are determinants of demand that are fueling America’s ever-increasing expenditures on imports.
4. What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
If the dollar remains weak in the long run, then American goods will continue to get cheaper. Imports will be less attractive so Americans will buy domestically produced goods. This will move the US closer to a balance of the Current Account.
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What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
The J-curve represents the Marshal-Learner conditions, this states that if demand is elastic the current account will move towards a surplus. However if if It is inelastic it will move towards a deficit.
Is America experiencing an improvement in or a worsening of its current account deficit?
America is experiencing a slight improvement as the revenue from exports rises and the expenditures on exports falls slightly.
What determinants of demand are fueling America’s ever-increasing expenditures on imports?
the determinants of demand that are fueling America's ever increasing expenditures are taste and preference.
What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
If the dollar remains weak then the demand for dollars will become inelastic which would lead to america experiencing a larger account deficit.
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1. What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
The J curve effect is a representation of the Marshal Lerner Condition, which states that a country will move into surplus due to a depreciation in their currency, given that the foreign market's demand of their products is elastic.
2. Is America experiencing an improvement in or a worsening of its current account deficit?
America is experiencing an improvement in its current account because their revenues from exports are greater than their expenditures from their imports.
3. What determinants of demand are fueling America’s ever-increasing expenditures on imports?
Their tastes and preferences for the goods.
4. What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
The elasticity of demand in the long run will become inelastic. This will apply the contrary of the Marshal Lerner condition on America
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1. The J-Curve graphically represents the Marshall Lerner Condition, which states that as a currency gets weaker, if PED (responsiveness of consumers) is more than 1 therefore elastic, their trade deficit will improve. If PED is less than 1 therefore inelastic, the country's trade deficit would actually worsen which is more likely in the short run due to the time needed for consumers to adapt. The article says that the US is experiencing an improvement in the trade deficit due to PED being 2, therefore the US is on the upward slowing portion, but still not experiencing a surplus due to Americans' love for "all things foreign".
2. America is experiencing an improvement of its current account deficit as more foreginers become more responsive to the decrease in price of goods because of a weaker dollar.
3. Americans' tastes and preferences for all things foreign and the inelastic demand for oil for example are fueling America's ever-increasing expenditures on imports.
4. In the long run if the dollar remains weak, Americans will begin to change their inelastic demand for imported goods and substitute them for cheaper, domestic goods, therefore the demand will become more elastic and expenditure on imports will decrease and there might be a chance of America's position to rise perhaps into the surplus portion of the J-Curve.
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Hi everyone,
Some of you need to think about your answers to #4. In the long run, foreign consumers of US goods will become MORE elastic, and American demand for foreign goods will become MORE elastic. Therefore, assuming the dollar remains weak, the US current account will continue to move towards surplus. HOWEVER, over time, once foreigners have begun buying more US goods and Americans less foreign goods, the dollar's value will rise again and the US current account should balance out, or even move back into deficit.
It's important not to read and copy other students' answers, even if you think they are smart!
-Mr. Welker
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Hi Mr Welker,
Thank you for the insight, it's pretty logical:) However, truth is I did not copy the answer of another student, I made an irrational guess as I was in a rush and did not go back to understand the text.
-Maphrida
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1. What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
The J-Curve is a graphical representation of the Marshall-Lerner Condition. If the currency of a nation depreciates and the PED of net exports is greater than one, the current account balance will move towards a surplus whereas it will move towards a deficit when PED is less than one. The US has an account deficit but is on the upward sloping part of the J-curve.
2. Is America experiencing an improvement in or a worsening of its current account deficit?
America is experiencing an improvement of its current account deficit as more foreginers become more responsive to the decrease in price of goods because of a weaker dollar.
3. What determinants of demand are fueling America’s ever-increasing expenditures on imports?
Americans' tastes and preferences for all things foreign and the inelastic demand for oil for example are fueling America's ever-increasing expenditures on imports.
4. What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
In the long run, foreign consumers of US goods will become more elastic, and American demand for foreign goods will become more elastic. Therefore, assuming the dollar remains weak, the US current account will continue to move towards surplus. Over time however, once foreigners have begun buying more US goods and Americans less foreign goods, the dollar's value will rise again and the US current account should balance out, or even move back into deficit.
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[...] The Marshall-Lerner Condition, the J-curve, and the US trade deficit [...]
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1.What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
The J-curve effect says that if the Price Elasticity of Demand for imports + the PED for exports is < 1, then in the short run a depreciation of a currency will not move the current account towards a surplus but further into a deficit. In the long run, however, the PED of imports and exports becomes more elastic and hence > 1 so that the current account will start to move back to balanced. The US seems to be just after the dip in the curve and headed back to balanced.
2.Is America experiencing an improvement in or a worsening of its current account deficit?
Even though they keep buying imports like oil, America seems to be improving on its current account deficit.
3.What determinants of demand are fueling America’s ever-increasing expenditures on imports?
The article mentioned oil, which is a necessity for Americans. Therefore they will be willing to pay more for it.
4.What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
In the long run, the PED will become more elastic, leading to America going to a surplus on the J-curve.
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1.What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
In the short term a devaluation or depreciation of the exchange rate may not improve the current account deficit of the balance of payments. This is due to the low price elasticity of demand for imports and exports in the immediate aftermath of an exchange rate change. As it stated in the article the US having an increase in the trade deficit because of PED which is 2. US have slowing upwards but because US is so willing to import goods there is no surplus.
2.Is America experiencing an improvement in or a worsening of its current account deficit?
America is experiencing an improvement of its current account deficit, as the earnings from exports are greater than the expenditures get from imports.
3.What determinants of demand are fueling America’s ever-increasing expenditures on imports?
The tastes and preferences to the things which are foreign and the inelastic demand for oil are the US’s ever-increasing expenditures on imports.
4.What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
In the long run if the dollar remains weak, Americans will begin to change their inelastic demand for the goods they imported and place them for cheaper, domestic goods, therefore the demand will become more elastic.
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1.What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
The 'J curve' refers to the trend of a country’s trade balance following a devaluation or depreciation under a certain set of assumptions.
The US seems to be just after the downturn or in the trough in the curve and heading back to balance.
2.Is America experiencing an improvement in or a worsening of its current account deficit?
Even though they have a big problem with oil imports and Chinese imports they seem to be improving their economy.
3.What determinants of demand are fueling America’s ever-increasing expenditures on imports?
As the population of America and the world increases there will be a higher demand of oil. America with its 300 million people consumes a huge amount of oil does not produce a lot.
Right now the demand of oil might increase since Colombia has found more oil.
4.What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
The PED will become more elastic. This change will lead America to have a surplus on the curve.
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Hi Palmi it looks like you master the topic on oil I really liked your answer for number 4
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1. The J-curve shows what happens to a current account deficit over time when the exchange rate is devalued or depreciated. It shows that in short run, the current account deficit will actually get worse before it moves towards surplus in the long run. The US current account seems to be moving toward surplus. Therefore, if you had to place the US on the J-curve right now, I would place it at the beginning of the increase in the current account balance.
2. The US is experiencing an improvement in its current account deficit. By devaluating its currency, exports seem to be increasing as foreign demand for American goods and services is very elastic. However, imports do not seem to be decreasing the lowering its currency. But because the increase in exports has been so great, the current account balance is moving toward surplus and out of deficit.
3. Increases in American incomes and increases in population size have led to general increase in imports despite the fact that they are more expensive.
4. The elasticity of demand for imports should increase if the dollar remains weak in the long-run. America’s position on the J-curve will move toward surplus in turn as the expenditure on imports will decrease, leading to a current account surplus.
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I agree will all of your answers Jaime. However, for question 3, it is also important to note that the average income in the US is also increasin. With more disposable income, poeple are more incline to consumer, thus leading to greater import expenditure and increasin the current account deficit.
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1. The J-curve effect states that when a country’s currency depreciates, the current account balance will worsen before it gets better. The US is probably in the initial stage, as the currency has depreciated but the trade deficit hasn’t yet approved.
2. The current account deficit is worsening.
3. The main determinant here is price, as with the bad economy Americans are looking to buy goods from other countries that are cheaper.
4. If the dollar remains weak, the demand for imports should decrease as foreign goods will be more expensive and the demand for exports should increase as American goods will be cheaper. The current account deficit will decrease as America moves up the J-curve.
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@ jjowett
I agree with most of your answers. But for #3, I think that it is decreases in income because of the economy that has made Americans seek cheaper goods from foreign countries.
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1)What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
Based on the evidence from the article we may say that ‘J-curve’ stands for the trend of a country’s trade balance which is devaluation. J curve shows the current trade deficit. It also shows that in the short run deficit will get worse; but it moves towards surplus in the long run.
2)Is America experiencing an improvement in or a worsening of its current account deficit?
Yes, America is experiencing an improvement of its current account deficit. Even if they have devaluated their money and they are in a competition with Chinese product; they are more open to decrease in price of goods since dollar is cheap. Therefore they earn from their exports.
3)What determinants of demand are fueling America’s ever-increasing expenditures on imports?
As it is mentioned in the article the oil will be demanded more by Americans. That is why they will be ready to pay more for it. We can say that the expenditures on imports will rise.
4)What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
The elasticity of demand for imports will increase if the dollar remains weak in the long run. Because dollar will not be appreciated so imports will be expensive for Americans. That will lead America to move towards surplus on the J curve.
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What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
A J-curve is a diagram that shows the effects a devaluation on a currency, on a country's current account. I would say that the US right now is still in the initial stages, where the MLC isn't quite met. Things will soon turn around though.
Is America experiencing an improvement in or a worsening of its current account deficit?
Right now in the US, the deficit is becoming larger. If there was a great devaluation in the value of the dollar, and the MLC was met, the current account could move towards surplus.
What determinants of demand are fueling America’s ever-increasing expenditures on imports?
The US dollar has been a very powerful currency for a long time. This means that people have gotten used to not spending very much on imports, and are very sensitive to any increases in price.
What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
Elasticity of demand reacts more in the long term. Because of this, the MLC will be better met in the long term, further pushing the US towards a surplus.
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Do you think that there may also be an influence of how long the US dollar has been valued so high? With people getting used to paying so little, any increase in price will seem significant.
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1. What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
J-curve effect basically shows that when there is a devaluation of currency, it is not necessary that trade balance will immediately improve. In the short run demand for exports and imports are price inelastic, in the long run Marshall-Lerner condition proves that the demand will be elastic, yet the situation will go from deficit to surplus. US seems to be on the initial stage and will be experiencing a current account surplus.
2. Is America experiencing an improvement in or a worsening of its current account deficit?
America experience a slight improvement of current account deficit as the revenues from exports are getting higher than expenditures from imports.
3. What determinants of demand are fueling America’s ever-increasing expenditures on imports?
Inelastic demand for oil and the tastes and preferences for foreign products seem to be the determinants.
4. What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
When the dollar remains weak in the long run, the demand for imports will be inelastic. US will be up on the J-curve.
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•What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
The jay curve effect is a diagram used to illustrate how the devaluation in the exchange rate of a country’s currency is used to help lower the trade deficit on the medium to long run, even pushing the deficit up into a surplus.
Based on the evidence in the article, the US would seem to be approximately on the upward sloping part of the J-curve because the article suggests that the US is improving its current account deficit.
•Is America experiencing an improvement in or a worsening of its current account deficit?
As stated in the above question, the US is experiencing an improvement in its current account deficit, although relatively in the negative side of the J-curve, however gradually increasing.
•What determinants of demand are fueling America’s ever-increasing expenditures on imports?
What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
The main determinants of demand that are fueling America’s increase in expenditures on imports are taste, personal preferences and the necessity for the goods and services.
If the dollar was to remain weak, the elasticity of demand for imports will decrease, and consumers will be more willing to purchase domestic goods, therefore causing a shift of the US on the J-curve, decreasing the trade deficit.
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@Wilhelm N
Your consideration of an inverse J-curve can be interesting, because we should not forget that economies also have they're exchange rates appreciate, therefore it could provoke the inverse reaction. However, after thinking about it, the reason we study the J-curve as it is, is because we are considering that the current account is in deficit, which can often be portrayed as worse than the current account being in surplus.
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1.The J-curve effect is a curve and concept that corresponds to the Marshal Lerner condition. As Marshall Lerner condition states that the total PED of exports and imports must be above 1 (elastic), in order for a country to experience an improvement in the current account. The J-curve helps explain the reality and what actually happens when there is a change in price of exports/imports (or specifically a devaluation of currency). A devaluation of one country’s currency would lead to lower prices for domestic exports. However, there are factors, which are not considered. For example a change in price would not lead to immediate change in demand. The US is on an interesting spot, and may not move on the curve dramatically. I would imagine the US being on the beginning of the rising slope of the J-curve. As it is evident that the devaluation of the US dollars is leading to an increase in exports, but it is not really improving the trade deficit due to American peoples’ tastes.
2.Although I have stated that America’s current account is not ‘really’ improving, America is experiencing an improvement in their current account (as it is also stated in the extract above). This is mainly because the price elasticity of demand for American exports is 2, significantly higher than the value of 1, which is when a product is considered price elastic. This means that there will be a significantly greater change in demand of products over a change in price (caused by the devaluation of the currency).
3.Well one example that is identified by this article and by others’ comments would be inelastic imports such as oil. In a specific good of oil, we can say that oil has no other substitutes (close substitutes) and the lack of substitutes would the ‘fueling’ determinant of demand here. At the same time, most things that lead to a higher expenditure on import would be the price of goods. In comparison to other countries like China, America has a very strong currency and therefore imports would be a lot cheaper. One of the main purpose of international trade is the price of cheaper imports, which is what consumers in America (and any country) would want.
4.The elasticity of demand for imports should increase as the devaluation or the weak US currency in the long run would mean that US exports (domestic products) are cheaper and more attractive to consumers. On the J-curve, America will experience a rise towards the surplus. However I think that this all depends on how strong/weak the currency of other countries are. The American currency can devalue and weaken, but if it is as not weak as other foreign countries, American exports would still be considered more ‘expensive’ than specific foreign imports.
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I don't think the J-curve is a graphical representation of the *Marshall-Lerner Condition*. Because… What if the PED value of the exports/imports are inelastic? This would mean that the curve (in theory) should slope downward and worsen the deficit. Yes, the curve has a deficit at first, but that's because of consumers switching from one product to another.
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1. The j- curve is an illustration of the Marshal-Lerner condition. It shows that with a depreciation if currency in the short run the account deficit may worsen, but in the long run, there will be a decrease in deficit and potentially a trade surplus. The j curve in the us is approaching the beginning of the positive sloping portion.
2. The account deficit is currently worsening because the demand for imports is relatively inelastic requiring a greater change in the price to effect the demand. The demand for exports is relatively elastic allowing it to change more quickly. The article theorizes that the account deficit will begin to improve soon.
3. Population, the us has a growing population greater then what they can support
Prices of other goods – the price of imports is low in comparison to domestic goods
4. The elasticity of demand will increase as the dollar continues to depreciate so as the cost of imports continues to increase, the total amount of imports will decrease relative to the number of imports.
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1.The J-curve effect is when the current account moves towards deficit before it moves towards surplus as a result of depreciated currency. From the article, it seems as if the US economy is on the upward end of the J-curve. It is past the point where the slope is zero.
2.It seems as if the US economy is experiencing an improvement in its current account deficit. This is because the Marshall-Lerner condition is being met.
3.America requires resources that it cannot itself supply. Oil for example is one of these goods that is demanded heavily in the US but is nearly entirely produced in foreign countries.
4.The elasticity of demand should more towards a more elastic point as consumers realise the cost advantages of buying domestic products. On the J-curve this would be shown as even more progress towards a surplus on its balance of trade.
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1.) The J-Curve effect is a theory stating that a country's trade deficit will worsen initially after the depreciation of its currency because higher prices on foreign imports will be greater than the reduced volume of imports. The US should be in the initial stages of the J Curve, going upwards as the current account is increase and exports are exceeding import expenditure.
2.) America is experiencing an improvement because the exports are significantly increasing when compared to its import expenditures, like on oil. The article states, an increase in exports of 12% in response to a 6% weakening of the dollar indicates a price elasticity of demand coefficient for America’s exports of 2, meaning foreigners are highly responsive to cheaper US goods.
3.) The US’s tastes and preferences to foreign products, along with its high demand for all for its large population, its fueling its imports.
4.) If the dollar remains weak in the long run, then the elasticity of demand for imports will increase because the dollar be depreciated. This will cause the US position to keep increasing on the J-Curve because the exports will continue increase as well (more than the imports). However, this will be a problem in the long run as the world’s supply of oil, America’s main import, will decrease. This means that the dollar must improve to cope with the problems of the future when fossil fuels and oil begins to decrease in supply.
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@Nesibe
I like and agree with your answer to number two. The U.S. is in an interesting position since the dollar is weak and the U.S. has a large expenditure on oil; however, the US is also exporting at an amount great enough to meet the imports, and more. Thus, I also think the US is in the initial phase going upward.
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@Philippa
I completely agree that what drives America's inelastic demand for foreign goods is incapability for domestic firms to produce such goods at such quantities. A good example of this is oil which America can produce, but not to the level that other countries can. However, the depreciating currency should allow for some domestic firms to be able to capitalise on their increased demand and be able to increase their market share.
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1.What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
J-curve effect mainly shows right after devaluation of a currency. It is the trade deficit which worsens for some time before recovering itself and beginning to improve. In this case, regards to the evidences from the article, US is on initial stage; recover the devaluation and improve its own. It will not pass long for US to experience a current account surplus.
2.Is America experiencing an improvement in or a worsening of its current account deficit?
Since the inputs from exports rises when it is compared with the expenditures on imports, America will be experiencing current account surplus and so improving the current account deficit.
3.What determinants of demand are fueling America’s ever-increasing expenditures on imports?
The inelastic demand of oil for America is ever-increasing expenditures on imports, including the preferences of foreign products.
4.What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
If the dollar remains weak in the long run, demand for the imports in America will be inelastic also leading America experiencing a surplus on the J-curve.
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1-Let us assume that there is a deficit in a country because the revenue for exports is lower than the expenditures on imports. If PED of net exports is greater than 1 and there is the depreciation of its current account, then the demand for that currency would be higher. This is because people tend to buy the currency when it is cheaper. That is why; the economy would lead to surpluses than the deficit which it is already in. Therefore, the graph of it on current account-time diagram would be like J-curve. Of course, it is not essential to have an improvement in the economy, MLC would determine it. From the article, it can be construed that the US has just started to have some surplus. Thus, on the J-curve, it is where deficit turns to positive side.
2-As it is stated in the article, with the help of 6% weakening in the US dollars, exports increased by 12 %. Therefore, it can be told that the MLC for US dollars is elastic which leads the US economy to have surpluses over the deficits. Thus, the economy has just started to improve.
3-One of the most basic determinants is the inelastic demand of oil. Also, cheaper prices would be appealing for the consumers and tendency to foreign products is effective.
4-In the long run, the elasticity of demand seems to more effective which would steer more surpluses for the US economy.
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Hi Dilan,
I agree with you on the last answer. I also think that it is highly possible that the demand for the currency would be more elastic, so the economy will have more surpluses.
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1. What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
The J curve effect is seen under the conditions in which a country’s trade balance is getting worse because of devaluation of the currency. According to the article the USA’s J curve is sloping upwards as the USA is improving on its deficits.
2. Is America experiencing an improvement in or a worsening of its current account deficit?
I think the USA is experiencing an improvement as they are trying to increase their exports as there is an unbalanced situation between imports and exports. Therefore as the currency devaluates the imports become less desirable for consumers which can increase the domestic products rather than imported ones. This is certainly an improvement in the economy of the USA.
3. What determinants of demand are fueling America’s ever-increasing expenditures on imports?
The biggest determinant of demand that is fueling America’s ever increasing expenditures on imports is the substitute goods that are cheaper than the domestically produced ones in the market. Therefore the USA is having hard times with Chinese products as they are cheaper substitute goods for American consumers. The other determinant is the inelasticity of oil as it is stated in the article.
4. What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
In the long run if the dollar stays weak, the imported goods in the USA will be less desirable by the consumers as they become more expensive than before.
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1.What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
The J-curve effect is when a country’s currency is devaluating and it causes trade deficit to get worse before it improves. This happens due to the fact that people need some time to respond to price changes of imports (it takes time for them to change their buying habits). Then assuming that the Marshall-Lerner condition is met then in the long term the trade deficit will improve.
Currently the US should be at the point where the current account deficit is decreasing but not yet at surplus. This is because the article states that the Marshall-Lerner condition is being met.
2.Is America experiencing an improvement in or a worsening of its current account deficit?
America is experiencing an improvement in the current account deficit because the export revenue is increasing more than import expenditure.
3.What determinants of demand are fueling America’s ever-increasing expenditures on imports?
It seems that Americans are very open to foreign goods and there is high demand for imports. There is also the inelastic demand for oil and other such goods that increases import expenditure.
4.What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
Assuming that the dollar remains week, foreign consumers of US products will begin to buy more (price elastic), as imports become more expensive it is likely to cause the trade deficit to improve (a movement up towards the balance line on J-curve graph). However if we think further, increased demand for US goods in foreign markets means that the exchange rate will begin to get stronger. This can in fact be beneficial since if this would not happen the US would move up the J-curve to a point where they are at surplus. Rising exchange rate is a factor works against there becoming a surplus.
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Hi Nesibe,
I really agree with you on the 3rd question as you stated the inleastic demand of oil and the tastes of consumers are really strong determinants. But I guess the effect of cheaper substitute goods that are imported are also effective determinant.
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regarding question 4:
are you then saying that the US will come to a point where there import expenditure will begin to exceed export revenue, even though the dollar remain weak (imports more expensive and export cheaper) due to the fact that demand for oil is so inelastic
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1.What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
The J-curve effect is a concept which describes the Marshal Lerner condition which says that the total PED of exports and imports should be elastic to allow an improvement in the current account of the country. Because of the some factors that occur, the devaluation does not always lower the prices of domestic exports. This is explained by the J-curve which shows the actual response of change in the prices of imports or exports.
2. Is America experiencing an improvement in or a worsening of its current account deficit?
Since the revenues are increasing, America is experiencing an improvement in their current account.
3. What determinants of demand are fueling America’s ever-increasing expenditures on imports?
Inelastic demand for oil, preferences and tastes.
4. What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
If the dollar remains weak in the long run, there will be inelastic demand for imports which means USA will be up on the J-curve.
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• What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
The J-curve effect is when a countries currency starts to depreciate in value. This as a result causes for a great decline in trade. One can say that the J-curve explains the relationship between the exchange rate for a nations currency and the countries balance of trade. If we say that the foreigners demand for export from America is relatively elastic, then a slightly weaker dollar should cause a dramatic increase in foreign demand for American output, causing export income in the US to rise dramatically. Meaning that on the J-curve America would be increasing to the range of surplus, so the MLC would be met after time.
• Is America experiencing an improvement in or a worsening of its current account deficit?
Due to the fact that the revenues are increasing one can say that America is experiencing and improvement.
• What determinants of demand are fueling America’s ever-increasing expenditures on imports?
The demand for oil and the different interests of American consumers
• What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
If the value of the dollar stays weak but the price of oil and demands exceeds, Americans will no longer be able to afford these goods resulting in a worsen balance of currency.
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1. J-curve illustrates the fact that the depreciation or devaluation of a currency will not shift the current account towards surplus immediately. The major reason for that is the PED of products. The low PEDs mean longer periods for shifting the current account towards surplus. The USA is in the upward sloping part of the J-curve. This is due to the fact that the US exports are highly elastic.
2. The US is experiencing an improvement in the current account deficit. Even though the demand for imports are significantly inelastic, the demand for the exports are highly elastic. So, the the high PED of exports helps the current account to meet Marshall-Lerner condition. Thus, an improvement in the deficit has been seen.
3. American society is driven by consumption. Thus, it is too difficult for the society to change their spending habits. Considering the dominance of cheap Asian imports in the economy, I don't expect the US to lower its expenditures on imports. Besides, oil is a significant raw material and America is dependent on other countries for the oil consumption.
4.Americans will be aware of the higher prices of the imports. They are going to prefer domestic products rather than foreign product. This will shift the J-curve towards surplus. However, this is theory. In my opinion, China will continue devaluing its own currency. So, the dollar will not be weak against yuan. Chinese imports will not decrease. Besides, it is hard to imagine the US people changing their consumption habits.
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I totally agree with the point on the currency of other countries. What if China were to devalue yuan against dollar?
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1) J curve depends on the elasticity of the good. The current account balance will fall in the short run as the exchange rate falls and export revenue will fall as prices have fallen by proportionately more than demand will have risen. But soon when domestic consumers have realised the low price goods, consumers will stop importing and shift to local goods. This will cause a current account surplus and J-curve from point Y will move upwards. Improvement in theh current account deficit.
2) America is experiencing an improvement. There is an increase in revenues from exports and decrease in imports.
3) it determines on the taste and preferences of demand.
4) The elasticity of demand for imports will fall if dollar remains weak. Current account deficit will gets worsen and the J curve will move downwards from even after the point Y.
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true, consumers will prefer goods which are less expensive and this will worsen the current account deficit.
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China is devaluing the yuan against the dollar on purpose right now.
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1.What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
The J-curve effect is a phenomenon that occurs when a country is trying to improve their current account deficit via currency depreciation/devaluation. For a country to improve the currency account deficit in this manner, the Marshall-Lerner condition must be satisfied. This means that the PEDexports + PEDimports > 1. Right after a country devalues/depreciates their currency, this condition is not necessarily satisfied. Once the currency loses value, exports will not automatically start becoming more favorable due to lower prices because it takes time for the market to adjust to the new “real” prices. Also contracts might already be in place at a specified price and therefore the real revenues from exports might decrease because the amount of money given to domestic firms is not as much as it was before due to currency depreciation/devaluation. The demand for imports, in the short-run, can also be price inelastic. It takes time for importers to find new suppliers overseas and therefore, because the purchasing power of the currency in question has decreased, the expenditure on imports might increase. In the long run, these issues are already resolved and as we know from Microeconomics, the demand for a good is more price elastic as time increases, the price elasticity for both the imports and the exports increases. The elasticities will increase such to satisfy the Marshall-Lerner condition. This means that the current account deficit will improve and might even become a current account surplus.
The United States, I think, is currently about to reach the minimum point on the J-curve because exports are very elastic. I do think that the movement along the curve will be very subtle because the United States is a very import based economy and therefore the demand for imports is very price inelastic. The price elasticity for imports, I think, will start to increase because of the advertisements supporting “American Made Goods”. Toyota has launched an advert campaign solely focused on informing Americans on the domestic production of their cars. I also think that with the presidential elections coming in November that there is a good chance of a republican being voted. This could probably lead to an increased production of domestic oil and therefore increase the price elasticity for both the imports and the exports.
2.Is America experiencing an improvement in or a worsening of its current account deficit?
This is a very tricky question because the question is not giving you any context. In the context of the blog, America’s current account deficit is improving. The article states that the price elasticity for the demand of American exports is 2 and that the price elasticity for the demand of imports by Americans is less than one. This means that the Marshall-Lerner condition is indeed satisfied e.g. 2 > 1 therefore 2 + PEDimports > 1. This indicates that the current account deficit will improve.
The other context in which one can view this question is in the context of the present day and time. Is the United States’ current account deficit improving or worsening today? I think that there has been a lot of advertising supporting “buying American” and this will lead to less dependency on imports therefore making them more price elastic. On the other hand, the United States has fallen through the cracks as the choice for the production of many goods. China has conquered the international market because of the devalued Yuan. The devalued RMB makes the American goods too expensive and therefore the exports are more price inelastic. I think that the United States is experiencing an improvement but not nearly as much as 6 years ago.
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3.What determinants of demand are fueling America’s ever-increasing expenditures on imports?
The United States’ most demanded import is oil. There are not many substitutes to oil that are in use today. Some substitutes are hydrogen fuel cells, but you are only able to find hydrogen in petrol stations in California. The other substitute that is more widely used is electricity to power our fuel driven needs. The United States, I believe, has more Priuses than any other country. These use less oil and therefore make a micro-substitute to oil. This lack of substitutes is what drives the increasing expenditures for imports. It seems that any increase in costs of production of oil overseas is almost immediately sent to the consumer and this indicates a very low price elasticity of demand for oil and therefore the imports in general. The United States is hoping to start producing more oil on offshore rigs and maybe (just maybe), create a pipeline to Alberta, Canada to produce more domestic oil. This would increase elasticity for the demand for exports and also decrease American’s dependency on foreign oil.
4.What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
In the long-run, if the dollar remains weak, the price elasticity of demand for imports should increase. In the long-run, Americans will have less purchasing power for imports and will have already have gradually eased of the foreign addictions. This means that Americans will be realizing that they are not able to purchase as much as they were before due to the depreciation of the dollar. This will result in less demand for imports because of the higher elasticity. The United States’ position on the J-curve will increase to almost a surplus I think, in the very long-run. The Marshall-Lerner value will continue to increase and therefore the position on the J-curve will also increase.
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1.What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
The J-curve effect indicates the effectiveness of a currency depreciation/devaluation to the country’s current account balance as time goes. The relationship between current account balance and time appears like a letter “J” in the diagram. It implies that a devaluation will usually worsen the current account in the short run as overseas buyers don’t respond to the price change immediately while domestic expense on imports remain the same. The benefit from a devaluation usually only appears in the medium to long run when consumers respond to the lower price of export and change the purchasing habit.
I think the US has just experienced the minimum point of the J-curve and is at its ascending part. The article indicates a PED of 2 for American export and according to the J-curve phenomenon, this happens only after global consumers have adjusted to the change in price. Meanwhile, the Americans’ demand for imports is highly inelastic, as the article says, “imports to the United States, including oil, are still rising in volume and value.” It means although the depreciation is beginning to show its benefit, there is still room for the current account to further improve.
2.Is America experiencing an improvement in or a worsening of its current account deficit?
America is experiencing an improvement in its current account deficit as the amount of export has increased dramatically due to the depreciation. The Marshall-Lerner condition indicates that a depreciation will improve the current account balance when PEDimport+PEDexport>1. The PEDexport is now 2, with a PEDimport between 0 and 1. It means the sum of two elasticity is larger than 1 and the condition is met.
3.What determinants of demand are fueling America’s ever-increasing expenditures on imports?
The American consumers’ taste of foreign import which can hardly be changed. The cheap price of imported goods is another factor fueling America’s ever-increasing expenditures on imports. In addition, the lack of substitutes of production materials such as oil spurs the demand of import. What’s more, growing economy and the increase in purchasing power help to increase import together with the overall aggregate demand.
4.What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
The PED for imports should gradually become elastic as the theory of J-curve effect suggests. This is because in the long run, with the development of domestic economy and the government’s effort to switch consumption pattern of the Americans, the Americans could become less dependent upon imported goods. It will put America at upper part of the J-curve as a result of an increase in current account balance. However, this could be a very long process and the maximum of J-curve that the US could possibly achieve is quite low, meaning if remaining the same level of dollar value, a PED for American export of 2 is probably the highest it could get. The PED for imports may become higher but it is unlikely that American would act sensitively towards the “more expensive” imports just because the dollar is slightly weaker than before. America is a rich country and I think the people will more likely to just accept the rising price of imports rather than sacrifice their preference. For example, American domestic production of oil cannot meet its demand so is has to import from other countries regardless of the price change. The interests lost in business due to decreasing demand for imports could be way more than the price increase (which is the result of weak dollar).
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1. J-curve is a diagram that shows the impact of depreciation of exchange rate in country's balance of trade (or current account). J-curve effect indicates that in short-run, depreciation of exchange rate causes deficit ut in long-run it will cause surplus in the balance of trade. I think America is currently at the lowest point on the J-curve since it is not experiencing any surplus although its currency is depreciated, and demand for foreign goods didn't change much yet.
2. America is experiencing improvement of current account due to improved exports. Although imports is not decreased much, since export is increased, the balance of trade is improved. (Balance of trade = Export – Import)
3. Demand for oils (petroleum) is the biggest part of America's increasing imports, as oils is important resource to run industries and to fuel cars in America. But beside oils, other demand of foreign goods is also part of America's increasing imports, as the article mentioned, that "no one can change American's American's taste for foreign products."
4. If dollars remain week for long time the elasticity of demand for imports will be increased, which means it will cause decrease of imports. Decrease of import will benefit balance of trade of America, as balance of trade is determined by subtracting imports from exports. This will move America's position on the J-curve to surplus side or increasing side.
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@Catherine
Nice answer, but I don't agree with your second answer… America might experiencing trade deficit, but I don't think the situation is worsening as its exports increased due to depreciation of currency.
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1.What is the J-curve effect? Based on the evidence from the article, where on the J-curve is the US right now?
The J curve depends on the elasticity of the good. The current account balance will be falling in the short run when the exchange rate falls. When we look at the article, J curve shows the current trade deficit.
2.Is America experiencing an improvement in or a worsening of its current account deficit?
The USA is experiencing an improvement and we can say that there is an increase in revenues from exports and decrease in imports.
3.What determinants of demand are fueling America’s ever-increasing expenditures on imports?
Their tastes and preferences because America likes foreign goods.
4.What should happen to the elasticity of demand for imports if the dollar remains weak in the long-run? How will this affect America’s position on the J-curve?
At that point, the elasticity of demand in the long run will become inelastic. This will apply contrary of the Marshal LEmer condition on America.
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