GROUP H:

MEMBERS:

1. Lê Quốc Anh ( Nhóm trưởng )

2. Nguyễn Thái Dương
3. Vũ Quốc Cường
4. Nguyễn Tấn Phát
5. Nguyễn Nguyên Kha

ASSIGNMENT OF J-CURVE

1.Explain the J curve effect when domestic currency is appreciated?

Explain the J curve effect when the domestic currency is appreciated?
Explain the J curve effect when the domestic currency is appreciated?
The J curve effect describes the short-term negative impact and long-
term positive impact on a country's trade balance when the domestic
currency is appreciated. Initially, when a country's currency
appreciates, the price of goods and services exported by the country
increase and becomes more expensive in foreign markets, leading to a
decline in the demand for the country's exports. At the same time, the
imports of foreign goods become cheaper and relatively more
attractive to domestic consumers, leading to an increase in the
demand for imports.
Over time, however, as businesses adjust their prices and production
structures to become more competitive in foreign markets, the
country's exports become more attractive and demand increases.
Additionally, domestic consumers may shift their preferences towards
locally produced goods as foreign goods become more expensive.
The shape of the J curve illustrates that the negative impact of
currency appreciation on the trade balance initially appears as a
downward curve, forming the top of the letter 'J', followed by a longer
upward curve as the country's export competitiveness improves,
forming the bottom of the letter 'J'.
The J curve effect describes the short-term negative impact and long-
term positive impact on a country's trade balance when the domestic
currency is appreciated. Initially, when a country's currency
appreciates, the price of goods and services exported by the country
increase and becomes more expensive in foreign markets, leading to a
decline in the demand for the country's exports. At the same time, the
imports of foreign goods become cheaper and relatively more
attractive to domestic consumers, leading to an increase in the
demand for imports.
Over time, however, as businesses adjust their prices and production
structures to become more competitive in foreign markets, the
country's exports become more attractive and demand increases.
Additionally, domestic consumers may shift their preferences towards
locally produced goods as foreign goods become more expensive.
The shape of the J curve illustrates that the negative impact of
currency appreciation on the trade balance initially appears as a
downward curve, forming the top of the letter 'J', followed by a longer
upward curve as the country's export competitiveness improves,
forming the bottom of the letter 'J'.
The J curve effect explains how an appreciation of the national currency can
have both short-term negative effects and long-term positive effects on a nation's
trade balance. A country's export demand initially declines as its currency gains
because the price of the goods and services it exports rises and becomes more
costly in foreign markets. The demand for imports rises concurrently as foreign
products imports become more affordable and appealing to domestic customers
overall.
However, when companies modify their pricing and manufacturing methods to
gain a competitive edge in outside markets, the nation's exports become more
appealing and demand rises.
Furthermore, when the cost of imported items rises, home buyers can start
favoring locally made goods. The J curve's shape shows that when a country's
export competitiveness increases, a longer upward curve forms the bottom of the
letter "J," illustrating the negative impact of currency appreciation on trade
balance. This downward curve first appears at the top of the letter "J.
2.Is the depreciation of local currency the best policy to improve current account?
Explain.
The goal of currency devaluation is to increase the competitiveness of domestic
goods and thereby improve the current balance of payments. When the domestic
currency depreciates, the nominal exchange rate will increase, leading to an
increase in the real exchange rate, which will stimulate exports and limit imports,
improving the trade balance. When the exchange rate increases (devaluation), the
export price becomes cheaper when calculated in foreign currency, and the import
price calculated in domestic currency increases, called the price effect. When the
exchange rate decreases, export prices become cheaper, increasing export volume
while limiting import volume. This phenomenon is called mass effect.

However, whether the trade balance worsens or improves depends on which price
effect and quantity effect prevail.

- In the short term, when the exchange rate increases while domestic prices and
wages are relatively rigid, the price of exported goods will become cheaper and
imports will become more expensive: export contracts have been signed at high
exchange rates. old prices, domestic enterprises have not mobilized enough
resources to be ready to produce more than before to meet increased export
demand, as well as increased domestic demand. In addition, in the short term,
demand for imported goods does not decrease quickly due to consumer
psychology. When devaluing, the price of imported goods increases, however,
consumers may be concerned about the quality of domestic goods that do not have
a worthy substitute for imported goods, making the demand for imported goods
unable to decrease immediately. Therefore, the number of exports in the short term
does not increase rapidly and the number of imports does not decrease sharply.
Therefore, in the short term, the price effect often outweighs the quantity effect,
making the trade balance worse.

- In the long term, the decrease in domestic product prices has stimulated domestic
production and domestic consumers also have enough time to access and compare
the quality of domestic products with imported products. On the other hand, in the
long term, businesses have time to gather enough resources to increase production
volume. At this time, output begins to be elastic, the quantity effect outweighs the
price effect, causing the trade balance to improve.