Very Difficult To Decide What To Believe

[Auntymarybrown]

The explanation : the inverse j curve

the j curve effect

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.

Assuming that the economy begins at position A with a substantial current account deficit there is then a fall in the value of the exchange rate. Initially the volume of imports will remain steady partly because contracts for imported goods will have been signed.

However, the depreciation raises the sterling price of imports causing total spending on imports to rise. Export demand will also be inelastic in response to the exchange rate change in the short term, therefore the earnings from exports may be insufficient to compensate for higher spending on imports. The current account deficit may worsen for some months.

Expenditure Switching causes a change in trade volumes

Providing that the elasticities of demand for imports and exports are greater than one in the longer term then the trade balance will improve over time. This is known as the Marshall-Lerner condition.

Showing the J curve effect, as demand for exports picks up and domestic consumers switch their spending away from imported goods and services, the overall balance of payments starts to improve.

There is some evidence for the J Curve effect which shows the quarterly balance of trade in goods and the average value for the sterling exchange rate index between 1990-2000.

In late 1992 the pound was devalued by nearly 15% following the United Kingdom's exit from the European Exchange Rate Mechanism. The sharp fall in the exchange rate provided a welcome boost to the competitiveness of UK producers - but in the short term, the balance of trade actually worsened. Import volumes remained steady - but were more expensive following the decline in the exchange rate. Exports took time to respond to the more competitive value of sterling.

But in 1993-94 there was a clear acceleration in export volumes and a slower growth of imported goods and services as the effects of the exchange rate depreciation started to take effect. The net result was an improvement in the balance of trade in goods - although not sufficient to take the balance from deficit into surplus.

The Inverse J Curve Effect

An appreciation in the exchange rate can lead to a short term improvement in the balance of trade. Imports become cheaper and exports more expensive in overseas markets. But initially the elasticity of demand for both imports and exports is fairly low - leading to an overall improvement in the trade balance.

If you want to quote verbatim from someone else's material it is considered good manners to make reference to the original work . In this case you might also include the URL so that readers can see the pedagogical graphs.

http://www.tutor2u.net/economics/content/t...tes/j_curve.htm

Thanks for your viewpoint. Of course this exposition was nothing other than a shortened edited version of an article explaining the j curve, better than I ,or most others could have done. !

No original authorship was claimed....it was just the edited article ..and by the way, the charts did not come out when the article was pasted hence reference to them was left out. A pity you could not include these when you wrote your posting as clearly you are familiar with how this can be done..

Prior to my posting no mention was made by you or any others on the subject of the j curve as a possible explanation of the current surge in exports .

Anyone interested in the subject and wishing to read more knows to do a google search for ....j curve .....and can see many articles on the subject. .

The article gave no name of an author hence no attribution to an author was made unless of course one considers tutor2you as being an a named author ....moot point !

Sadly your posting concentrated solely on the fact of non attribution rather than your views on the subject itself, as many readers would be very interested and most keen to hear your most respected expert opinion on the matter.

Thank you.

[sonicdragon]

Thanks for your viewpoint. Of course this exposition was nothing other than a shortened edited version of an article explaining the j curve, better than I ,or most others could have done. !

No original authorship was claimed....it was just the edited article ..and by the way, the charts did not come out when the article was pasted hence reference to them was left out. A pity you could not include these when you wrote your posting as clearly you are familiar with how this can be done..

Prior to my posting no mention was made by you or any others on the subject of the j curve as a possible explanation of the current surge in exports .

Anyone interested in the subject and wishing to read more knows to do a google search for ....j curve .....and can see many articles on the subject. .

The article gave no name of an author hence no attribution to an author was made unless of course one considers tutor2you as being an a named author ....moot point !

Sadly your posting concentrated solely on the fact of non attribution rather than your views on the subject itself, as many readers would be very interested and most keen to hear your most respected expert opinion on the matter.

Thank you.

I wouldn't try to defend your position on this too strongly if I were you - it's rather untenable. The only thing that you editited from the original was to remove the text "In the diagram above" and "This is shown by the movement A to C on the diagram." from the 5th paragraph.

Quoting verbatim from another work is fine, IMHO, when putting forward some well known theory - writing it ones ones own words would be a spectacular waste of time. I just think you should have posted the URL, not only because it is good manners (and this is not made moot by it being non-attributable), but because there was a very useful diagram in the page that you copied, which lies at the very heart of the matter. The whole point about the J-curve theory is that it proposes a J shaped graph - which is very easy to understand when you can actually see the graph along with the theory explanation. Without the graph the theory becomes much harder to understand, and since this is forum populated by a people from widely differering backgrounds, it seems quite disingenuous to deny it to readers. Simply posting the URL and referring to it was the right thing to do. You should at least accept that.

I also find it disingenuous that you choose to criticise me for not putting forward my views on it. I don't feel obliged to comment on every posting, in most cases I have nothing to add, and even if I did I certainly wouldn't have the time. But I do feel obliged to let other readers have access to a better understanding of something when it is extremely easy to do so - and that is what I did.

For what it's worth, I think the j-curve theory, as with much of economic theory, is a nice way to explain often-observed events - in this case, a lagged effect on the trade balance of a rapid exchange rate movement. And, as usual in economics, it can be seen to apply in some situations and not to others. On an aggregate level there is body of empirical research that supports it. However on a sectoral level, the literature is replete with examples where it has been shown not to apply, and studies on agricultural sectors in several countries are examples of this - which may be of some relevance to thailand. Here is one such study:

http://www.agr.hr/jcea/issues/jcea7-2/pdf/jcea72-11.pdf

[Auntymarybrown]

Thanks for your viewpoint. Of course this exposition was nothing other than a shortened edited version of an article explaining the j curve, better than I ,or most others could have done. !

No original authorship was claimed....it was just the edited article ..and by the way, the charts did not come out when the article was pasted hence reference to them was left out. A pity you could not include these when you wrote your posting as clearly you are familiar with how this can be done..

Prior to my posting no mention was made by you or any others on the subject of the j curve as a possible explanation of the current surge in exports .

Anyone interested in the subject and wishing to read more knows to do a google search for ....j curve .....and can see many articles on the subject. .

The article gave no name of an author hence no attribution to an author was made unless of course one considers tutor2you as being an a named author ....moot point !

Sadly your posting concentrated solely on the fact of non attribution rather than your views on the subject itself, as many readers would be very interested and most keen to hear your most respected expert opinion on the matter.

Thank you.

I wouldn't try to defend your position on this too strongly if I were you - it's rather untenable. The only thing that you editited from the original was to remove the text "In the diagram above" and "This is shown by the movement A to C on the diagram." from the 5th paragraph.

Quoting verbatim from another work is fine, IMHO, when putting forward some well known theory - writing it ones ones own words would be a spectacular waste of time. I just think you should have posted the URL, not only because it is good manners (and this is not made moot by it being non-attributable), but because there was a very useful diagram in the page that you copied, which lies at the very heart of the matter. The whole point about the J-curve theory is that it proposes a J shaped graph - which is very easy to understand when you can actually see the graph along with the theory explanation. Without the graph the theory becomes much harder to understand, and since this is forum populated by a people from widely differering backgrounds, it seems quite disingenuous to deny it to readers. Simply posting the URL and referring to it was the right thing to do. You should at least accept that.

I also find it disingenuous that you choose to criticise me for not putting forward my views on it. I don't feel obliged to comment on every posting, in most cases I have nothing to add, and even if I did I certainly wouldn't have the time. But I do feel obliged to let other readers have access to a better understanding of something when it is extremely easy to do so - and that is what I did.

For what it's worth, I think the j-curve theory, as with much of economic theory, is a nice way to explain often-observed events - in this case, a lagged effect on the trade balance of a rapid exchange rate movement. And, as usual in economics, it can be seen to apply in some situations and not to others. On an aggregate level there is body of empirical research that supports it. However on a sectoral level, the literature is replete with examples where it has been shown not to apply, and studies on agricultural sectors in several countries are examples of this - which may be of some relevance to thailand. Here is one such study:

http://www.agr.hr/jcea/issues/jcea7-2/pdf/jcea72-11.pdf

Thank you very much for that. Had no way intended to criticise your not giving your opinion on the subject , just stated it was sad you didn't ! Anyhow many thanks and much appreciated that you did and all your quite valid points about attribution fully taken in.

[Crash999]

Saying that We COULD loose up to 60% of our GDP is accurate but ignores the pain which has already started a year ago and is continuing as the baht strengthens.

So you are absolutely correct, you did read it wrong.

I'm slightly confused here. You said we are "in the process of losing" 60% of GDP. If something is in process, it is underway. For example documents under processing, your computer's processor, and processed chicken McNuggets. Seems that you are actually saying that as 60% of GDP value is exports that 60% of the economy is threatened by the baht's current Fx rate.

In such case I don't disagree with you that exports are under threat. And as per the original post on this thread, the issue is that the impact hadn't yet to be felt, so the (carefully worded) article doesn't mention anything about impact of the strong Baht. And there will be an impact.

However, it's not a doomsday scenario. I'm curious to know how you can foresee an appreciation of the baht to 3 to the dollar? If you are pessimistic regarding exports then you must be predicting a massive increase in the amount of capital inflows into the country to make up the shortfall in balance of payments.

A more likely scenario is depreciation of the dollar to high 30s by the end of the year based on falling export revenues and reduced capital inflows. The victims in the meantime will be moderately competitive industries such as plastics and some garment production. Yes, there will be some factories closing and resulting unemployment but life will move on.

[Crash999]

Prior to my posting no mention was made by you or any others on the subject of the j curve as a possible explanation of the current surge in exports .

The j curve is describing the lag between changes in currency value and import/export volumes. The first example explains that if a currency depreciates then the trade balance may get worse off in the short terms as there's a lag in exports. The inverse to this is with an appreciation the trade balance may improve before the effect on exports is felt.

I haven't looked at the trade data for imports but certainly the impact of the strong Baht won't be evident on paper until Q2 when goods will be shipping that were contracted after the Baht appreciated.

[Crash999]

A more likely scenario is depreciation of the dollar to high 30s by the end of the year based on falling export revenues and reduced capital inflows. The victims in the meantime will be moderately competitive industries such as plastics and some garment production. Yes, there will be some factories closing and resulting unemployment but life will move on.

Oops, should be depreciation of the baht.

For some reason I can't find the edit button!