J-Curve Effect in Trade Balance After Devaluation

Steps:

• Marshall-Lerner condition holds long-run, so elasticities sum >1, improving balance eventually.
• Short-run quantities slow to respond, implying low initial elasticities.
• Devaluation raises import prices immediately but volumes lag, worsening balance first.
• Over time, quantities adjust, boosting exports and curbing imports, improving balance.

Why B is correct:

• B depicts the J-curve: initial trade balance deterioration followed by long-run improvement, per the condition with slow quantity responses.

Why the others are wrong:

• A shows immediate improvement, ignoring short-run inelasticity.
• C indicates no change, contradicting long-run satisfaction of Marshall-Lerner.
• D shows persistent worsening, violating long-run elasticity condition.

Final answer: B