What is the J-Curve Theory?

Definition of J-Curve Theory: This is an expression utilized in various fields that refers different types of unrelated diagrams drawn in J shaped where the curve falls at the initial stage but goes high compared to the initial point. When one talks about the different currencies and the trade balance of a country, J-curve theory declares that a trade deficit of the country will deteriorate at the initial stage where the depreciation of the currency as high costs on overseas imports will be much more compared to the reduced cost of imports. On the other hand, with time the outcome of the Forex trade changes with the cost of exports which leads to an increased demand from overseas and ultimately the total difference between the exports and imports and the stability of payments will be enhanced. This expression can also be applied to the equity funds that have to pay the initial costs with low returns. As the time moves, the returns start improving and reproduce the similar pattern when charted.