The country has a current account deficit when it is at the starting point (the very left side of the curve) of the J curve. The exchange rate of the currency is lowered to rectify this. In the short term, because of existing contracts and imperfect knowledge, the deficit worsens to the minimum point on the curve. However, int he long term, if the Marshall-Learner condition is fulfilled, exports revenues will begin to increase and import expenditure will start to fall. The current account deficit will get smaller, moving in the positive section of the J-curve.
When the government gives a subsidy to domestic producers, the domestic supply curve shifts downwards from S1 to S2. S2 represents the domestic supply with the addition of the subsidy. The price to consumers remains the same but imports will fall while domestic production will increase. Though the overall quantity supplied does not increase in terms of world supply, the ratio of imports to domestic changes.
The diagram above depicts an increase in supply of the yen in terms of USD. Factors such as increased interest rates abroad, like the US, could have led to an increased supply of Japanese yen. The increase in supply from S1 to S2 results in a depreciation of the currency (Price point P1 moves down to P2).
China has an absolute advantage in the production of both shoes and cloth. It can produce more of both than India with the same factor inputs. However, India has a comparative advantage in producing shoes, since they only give up 2.5 meters of cloth for each pair, whereas China gives up 4 meters of cloth. China should specialize in cloth and India should specialize in shoes.
This diagram illustrates the supply of paper in the European Union. In this case, the European Union is importing paper from China. Because there are imports, there is a kink in the supply of paper. The quantity supplied by the EU is represented by 0 to Q1 whereas the quantity supplied by foreigners or, in this case, China, is Q1 to Q2.
