A country named Novaland has recently implemented a series o…
A country named Novaland has recently implemented a series of economic reforms aimed at opening its markets to international trade. In the first year following these reforms, Novaland’s trade deficit worsens, with imports rising faster than exports. However, government economists assure the public that this is a temporary phase and that the reforms will ultimately improve the country’s trade balance. Explain how the J curve theory relates to Novaland’s experience with its trade deficit after implementing economic reforms. What are the underlying mechanisms that cause the initial deterioration in the trade balance, and under what conditions can the trade balance improve over time? Discuss any factors that might prevent Novaland from experiencing the expected long-term improvement suggested by the J curve model.