Balance of trade model The shape of the trend of a country’s trade balance following a
devaluation. A lower
exchange rate initially means cheaper
exports and more expensive
imports, making the current account worse (a bigger
deficit or smaller surplus). After a while, though, the volume of exports will start to rise because of their lower
price to foreign buyers, and domestic consumers will buy fewer of the costlier imports. Eventually, the trade balance will improve on what it was before the devaluation. If there is a currency
appreciation there may be an inverted J-curve.
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Theory that says a country's trade deficit will initially worsen after its currency depreciates because higher
prices on foreign imports will more than
offset the reduced volume of imports in the short-run.
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