RDP 8910: An Analysis of the Determinants of Imports 7. Conclusion

Using simple aggregate models of imports which take explicit account of the non-stationarities in the data, movements in total and endogenous imports are well explained by movements in domestic demand, relative prices and overtime.

Our models confirm that imports respond more rapidly and to a greater extent to changes in demand than to changes in relative prices.

A notable feature of our models is that the relative price of exports is a significant explanator of import growth. We suggest two explanations for this. First, when the price of our exports rises, our capacity to consume imports increases even though our level of GDP at constant prices has not increased. Secondly, other things equal, an increase in the price of exports makes production and investment in the export sector more profitable. Because our export sector is relatively capital intensive, and since 75 per cent of Australia's imports are either capital or intermediate goods, an increase in the price of exports increases demand for these types of imports.

Finally, the rapid growth in imports over the past three years is almost entirely explained by our models of import demand. We find that movements in demand and the relative price of imports make the major contributions to this growth. Interestingly, the contribution of overtime to recent import growth is small. We also find that if in September 1986 we had accurate predictions of activity and relative price movements over the following three years, we could have predicted the surge in imports which has occurred.