I understand that the deficit gets closer towards a surplus after a while, after demand becomes price elastic but why would it originally worsen, wouldn't it be exactly the same prior to devaluation occurring.
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Why does deficit originally worsen on the J curve? watch
- Thread Starter
Weak pound means imports are dear.
UK businesses are tied into contracts with foreign suppliers and finding new suppliers is a long process. In the short term we end up paying more for our imports because of the weak pound, leading to a trade deficit in the short run.
Over time the contracts expire and we can be more competitive. Foreign companies will choose UK suppliers and net exports will improve.
The length of dip depends on the flexibility of businesses to switch suppliers