Among many theories on the impact of exchange rate movements on trade balance, the J-Curve Theory gained most of the attention. The theory claims that the impact of exchange rate on trade is time-dependent. This current study criticizes the literature on the theory because of its incomprehensiveness and its inability to examine whether the impact of exchange rate depreciation is more related to the nature of trade commodities or due to the circumstances of bilateral trade relations. This study investigates the J-Curve Theory between Malaysia and each of China, Singapore, and Japan for 20 trade sectors over the period 1987-2016. We find that the impact of exchange rate movements on trade balance is largely dependent on the nature of traded sectors as well as the trade partner-specific economic circumstances.

This paper evaluates the current state of the literature concerning the effects of exchange rate movements on trade balance. Thus, this paper is a review article and provides a survey of the alternative theories that focus on the effect of exchange rate changes on the trade balance. It systemizes the literature into four distinct reviews and approaches following the chronological order. The paper presents the (a) Standard Theory of International Trade, (b) Elasticity Approach, (c) Keynesian Absorption Approach, and (d) Monetary Approach. The study shows that higher attention should be given for the most plausible dynamic theory in this field, known as the J-Curve.

As one of the most debated topics in international trade, the J-Curve theory has undergone several stages of improvement. This paper tracks those stages consecutively by evaluating the state of the literature. Previous literature and studies on the exchange rate movements on the J-Curve theory to achieved understanding of the effects of exchange rate movements on trade balance substantially which undergone several stages of improvement was gathered within period of 1973 –2013. The study highlights the need for comprehensive studies assessing the overall effect of exchange rate depreciation on trade balance for one country and all of its major trade partners discretely on disaggregated level, i.e. the sector or commodity-level of trade. Although time-consuming and vast, this could be the only way for a country to draw a full picture for the impacts of its monetary policy on trade balance.