At a certain period, the effects of a devaluation of Exchange Rate may be eroded away if increased import prices and cheaper cause
demand for local goods (expenditure switching) and
demand for to rise. Increased export earnings will serve as an injection into the domestic circular flow of income. Through the multiplier, it generates more income. Consumption and savings will increase,
interest rates will fall. Investments will increase (due to the devaluation), giving the
economy a push. Employment of resources will increase (shifting the
PPF to a point on the curve or nearer to it) and the country enjoys a higher standard of living. If the country was already at a full employment and level of income, it would lead to
inflation (general rise in price of goods and services) that could once again shoot up prices, improving the Terms of Trade and affecting the Balance of trade again.
After a survey was done mainly on Asian countries, this trend was discovered and was named the S-Curve Effect as an extension of the J-Curve Effect (Backus, Kehoe and Kydland 1995). Notice the similar shape of the curve to a sin graph reflected off the x-axis; no relationship has been derived from these findings just yet I believe.
As a conclusion, we can only determine whether a worsening of the Terms of Trade results in the worsening of the Balance of trade if we take into account other factors such as elasticity of both and and inflation rates both domestically and in foreign countries. It is up to the government to take certain steps and policies to manipulate Terms of Trade and Balance of trade to the greater benefit of the country.
