What is a significant impact of the J-Curve effect on a national economy?

The J-Curve effect illustrates how a country’s trade balance is likely to react to a currency devaluation over time. Initially, after a devaluation, a country may experience a worsening of its trade balance. This is because the prices of imports increase immediately, while the quantity of exports may not adjust right away due to existing contracts or consumers' habits. As time passes, however, the demand for exports tends to increase as they become cheaper for foreign buyers, and the domestic demand for imports decreases as they become more expensive. Over time, this adjustment leads to an eventual improvement in the trade balance, which is depicted in the shape of a 'J' curve.

The J-Curve effect is critical for understanding why a devaluation does not result in an immediate trade surplus. It highlights the gradual nature of this adjustment process, emphasizing that the effects of devaluation are not instantaneous but unfold gradually. This phenomenon is crucial for policymakers and economists as they evaluate the longer-term impacts of currency adjustments on the economy.