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A J curve is any of a variety of J-shaped diagrams where a curve initially falls, then steeply rises above the starting point.


Political economy


Balance of trade model

In economics, the "J curve" is the time path of a country’s trade balance following a
devaluation In macroeconomics and modern monetary policy, a devaluation is an official lowering of the value of a country's currency within a fixed exchange-rate system, in which a monetary authority formally sets a lower exchange rate of the national curre ...
or
depreciation In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the a ...
of its currency, under a certain set of assumptions. A devalued currency means
imports An import is the receiving country in an export from the sending country. Importation and exportation are the defining financial transactions of international trade. In international trade, the importation and exportation of goods are limite ...
are more expensive, and on the assumption that the volumes of imports and exports change little at first, this causes a fall in the current account (a bigger deficit or smaller surplus). After some time, though, the volume of exports starts to rise because of their lower price to foreign buyers, and domestic consumers buy fewer imports, which have become more expensive for them. Eventually the trade balance moves to a smaller deficit or larger surplus compared to what it was before the devaluation. Likewise, if there is a currency revaluation or appreciation the same reasoning may be applied and will lead to an inverted J curve. Immediately following the depreciation or devaluation of the currency, the total value of imports will increase and exports remain largely unchanged due in part to pre-existing trade contracts that have to be honored. This is because in the short run, prices of imports rise due to the depreciation and also in the short run there is a lag in changing consumption of imports, therefore there is an immediate jump followed by a lag until the long run prevails and consumers stop importing as many expensive goods and along with the rise in exports cause the current account to increase (a smaller deficit or a bigger surplus). Moreover, in the short run, demand for the more expensive imports (and demand for exports, which are cheaper to foreign buyers using foreign currencies) remain price inelastic. This is due to time lags in the consumer's search for acceptable, cheaper alternatives (which might not exist). Over the longer term a depreciation in the exchange rate can usually be expected to improve the current account balance. Domestic consumers switch to domestic products and away from the now more expensive imported goods and services. Equally, many foreign consumers may switch to purchasing the products being exported into their country, which are now cheaper in the foreign currency, instead of their own domestically produced goods and services. Empirical investigations of the J curve have sometimes focused on the effect of exchange rate changes on the trade ratio, i.e. exports divided by imports, rather than the trade balance, exports minus imports. Unlike the trade balance, the trade ratio can be logarithmically transformed regardless of whether a trade deficit or trade surplus exists.


Asymmetric J-curve

The asymmetric J-curve implies that there could be an asymmetric relationship between the exchange rate changes and trade balance. The asymmetric effects of real exchange rate on trade balance were initially reported by the American economist Mohsen Bahmani-Oskooee from the University of Wisconsin–Milwaukee. However, the term asymmetric J-curve was coined by the British economists Muhammad Ali Nasir and Mary Leung. They employed cumulative dynamic multiplier analysis and reported empirical evidence of an asymmetric J-curve in an article on US trade deficit.


Private equity

In
private equity In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a typ ...
, the J curve is used to illustrate the historical tendency of
private equity fund A private equity fund (abbreviated as PE fund) is a collective investment scheme used for making investments in various equity (and to a lesser extent debt) securities according to one of the investment strategies associated with private equity. ...
s to deliver negative returns in early years and investment gains in the outlying years as the portfolios of companies mature. In the early years of the fund, a number of factors contribute to negative returns including management fees, investment costs and under-performing investments that are identified early and written down. Over time the fund will begin to experience unrealized gains followed eventually by events in which gains are realized (e.g.,
IPO An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investment ...
s,
mergers and acquisitions Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect ...
,
leveraged recapitalization In corporate finance, a leveraged recapitalization is a change of the company's capital structure, usually substitution of debt for equity. Overview Such recapitalizations are executed via issuing bonds to raise money and using the proceeds to b ...
s). Historically, the J curve effect has been more pronounced in the US, where private equity firms tend to carry their investments at the lower of market value or investment cost and have been more aggressive in writing down investments than in writing up investments. As a result, the carrying value of any investment that is underperforming will be written down but the carrying value of investments that are performing well tend to be recognized only when there is some kind of event that forces the
private equity firm A private equity firm is an investment management company that provides financial backing and makes investments in the private equity of startup or operating companies through a variety of loosely affiliated investment strategies including lev ...
to mark up the investment. The steeper the positive part of the J curve, the quicker cash is returned to investors. A private equity firm that can make quick returns to investors provides investors with the opportunity to reinvest that cash elsewhere. Of course, with a tightening of credit markets, private equity firms have found it harder to sell businesses they previously invested in. Proceeds to investors have reduced. J curves have flattened dramatically. This leaves investors with less cash flow to invest elsewhere, such as in other private equity firms. The implications for private equity could well be severe. Being unable to sell businesses to generate proceeds and fees means some in the industry have predicted consolidation amongst private equity firms.


Political science


Revolution model

In
political science Political science is the scientific study of politics. It is a social science dealing with systems of governance and power, and the analysis of political activities, political thought, political behavior, and associated constitutions and la ...
, the "J curve" is part of a model developed by
James Chowning Davies James Chowning Davies (May 6, 1918 – March 30, 2012) was an American sociologist and professor emeritus of political science at the University of Oregon. Davies is perhaps best known for his so-called " J curve" theory of political revolutions ...
to explain political
revolution In political science, a revolution (Latin: ''revolutio'', "a turn around") is a fundamental and relatively sudden change in political power and political organization which occurs when the population revolts against the government, typically due ...
s. Davies asserts that revolutions are a subjective response to a sudden reversal in fortunes after a long period of economic growth, which is known as
relative deprivation Relative deprivation is the lack of resources to sustain the diet, lifestyle, activities and amenities that an individual or group are accustomed to or that are widely encouraged or approved in the society to which they belong. Peter Townsend, ''Po ...
. Relative deprivation theory claims that frustrated expectations help overcome the
collective action problem A collective action problem or social dilemma is a situation in which all individuals would be better off cooperating but fail to do so because of conflicting interests between individuals that discourage joint action. The collective action proble ...
, which in this case may breed revolt. Frustrated expectations could result from several factors, including growing levels of inequality within a country, which may mean those who are increasingly poor relative to the rich are getting less than they expected, or a period of sustained economic development, lifting general expectations, followed by a crisis. This model is often applied to explain social and political unrest and efforts by governments to contain this unrest. This is referred to as the Davies' J curve, because economic development followed by a depression would be modeled as an upside down and slightly skewed J.


Country status model

Another "J curve" refers to the correlation between stability and openness. This theory was suggested initially by the author
Ian Bremmer Ian Arthur Bremmer (born November 12, 1969) is an American political scientist and author with a focus on global political risk. He is the president and founder of Eurasia Group, a political risk research and consulting firm with principal offi ...
, in his book ''The J Curve: A New Way to Understand Why Nations Rise and Fall''. The x-axis of the political J curve graph measures the 'openness' of the economy in question and the y-axis measures the stability of that same state. It suggests that those states that are 'closed'/undemocratic/unfree (such as the Communist dictatorships of
North Korea North Korea, officially the Democratic People's Republic of Korea (DPRK), is a country in East Asia. It constitutes the northern half of the Korea, Korean Peninsula and shares borders with China and Russia to the north, at the Yalu River, Y ...
and Cuba) are very stable; however, as one progresses right, along the x-axis, it is evident that stability (for relatively short period of time in the lengthy life of nations) decreases, creating a dip in the graph, until beginning to pick up again as the 'openness' of a state increases; at the other end of the graph to closed states are the open states of
the West West is a cardinal direction or compass point. West or The West may also refer to: Geography and locations Global context * The Western world * Western culture and Western civilization in general * The Western Bloc, countries allied with NAT ...
, such as the
United States of America The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territori ...
or the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and Nor ...
. Thus, a J-shaped curve is formed. States can travel both forward (right) and backwards (left) along this J curve, and so stability and openness are never secure. The J is steeper on the left hand side, as it is easier for a leader in a failed state to create stability by closing the country than to build a civil society and establish accountable institutions; the curve is higher on the far right than left because states that prevail in opening their societies (
Eastern Europe Eastern Europe is a subregion of the European continent. As a largely ambiguous term, it has a wide range of geopolitical, geographical, ethnic, cultural, and socio-economic connotations. The vast majority of the region is covered by Russia, whic ...
, for example) ultimately become more stable than authoritarian regimes. Bremmer's entire curve can shift up or down depending on economic resources available to the government in question. So
Saudi Arabia Saudi Arabia, officially the Kingdom of Saudi Arabia (KSA), is a country in Western Asia. It covers the bulk of the Arabian Peninsula, and has a land area of about , making it the List of Asian countries by area, fifth-largest country in Asia ...
's relative stability at every point along the curve rises or falls depending on the price of oil; China's curve analogously depends on the country's economic growth.


Medicine

In medicine, the "J curve" refers to a graph in which the x-axis measures either of two treatable symptoms (blood pressure or blood cholesterol level) while the y-axis measures the chance that a patient will develop cardiovascular disease (CVD). It is well known that high blood pressure or high cholesterol levels increase a patient's risk. What is less well known is that plots of large populations against CVD mortality often take the shape of a J curve which indicates that patients with very low blood pressure and/or low cholesterol levels are also at increased risk.


References

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