Country B's currency depreciates from 1 B-dollar per 1 FCU to 2 B-dollars per 1 FCU. In the quarter immediately after the depreciation, exports remain at $120 billion while imports rise from $130 billion to $135 billion; two quarters later, exports rise to $140 billion and imports fall to $125 billion. Following the change in the exchange rate, which statement best reflects the likely short-run versus later effect on net exports, given time lags in trade adjustment?
- Net exports likely fall at first but rise later as quantities adjust to improved price competitiveness. (correct answer)
- Net exports rise immediately because depreciation always increases exports and decreases imports without delay.
- Net exports are unchanged because exchange rates affect only the trade balance, not net exports.
- Net exports fall later because a weaker currency makes exports more expensive to foreigners.
- Net exports rise because depreciation increases foreign purchases of domestic assets, counted in net exports.
Explanation: Net exports equal exports minus imports, and currency depreciation affects trade through price competitiveness. When Country B's currency depreciates (from 1 to 2 B-dollars per FCU), B's goods become cheaper for foreigners while imports become more expensive domestically. However, trade adjustments take time—the J-curve effect shows NX often worsens initially before improving. The data confirms this: immediately after depreciation, NX fell from -$10B to -$15B as import values rose while export quantities hadn't adjusted yet. Later, NX improved to $15B as export quantities increased and import quantities decreased. This pattern demonstrates that depreciation improves competitiveness but with a lag.