RDP 9312: A Re-examination of the Determinants of Australia's Imports 1. Introduction

The equilibrium quantity of imports is primarily a function of economic activity and the price of imports relative to other goods. Of these, economic activity is most often found to be the principal determinant of import volumes.^[1] Certainly, in the past, a general direct relationship between changes in import volumes and economic activity has been evident in Australia. Consequently, there was a widely held expectation that the recent recession would curtail imports by more than in fact occurred, facilitating a significant improvement in the current account deficit. Instead, despite subdued economic activity, there remains a trend rise in the rate of import penetration. The prospect that imports may accelerate as the nation's economic recovery consolidates has, in some quarters, raised concern about further possible increases in the current account deficit. This concern warrants a re-examination of the determinants of the volume of imports – in particular, those factors other than income and relative prices that influence the import decision. One such factor central to this paper is the effect of increased openness of the Australian economy.

It might be expected that the growth in import penetration is related to the process of international integration. Over the last decade there has been a substantial increase in the openness of the Australian economy as tariff (and non-tariff) protection has been reduced. Reflecting this, the absolute value of trade as a share of national income has risen and intra-industry trade has expanded. Such increased openness is likely to impact upon both the demand for imports and the supply of domestically produced import substitutes. Thus the focus of this paper is the determinants of excess demand for importables.

The main purpose of the paper is to estimate Australia's excess demand for importables. The approach draws on that of Wilkinson (1992). However, in this exercise, an attempt will be made to identify structural changes in the market for importables that might arise from the dismantling of protection. Furthermore, the extent to which the effect of such changes is evident in the market for aggregate imports compared with the component classes of imports (consumption, capital and intermediate goods) will also be considered. It is hypothesised that the inclusion of a term for protection will prove a significant explanator of excess demand for imports, in particular those of consumer goods, as these imports have been subjected to the greatest reductions in protection.

The paper is organised as follows. In Section 2, the behaviour of imports is shown in relation to economic activity, relative prices and openness of the Australian economy. In Section 3, the conceptual framework for the analysis of imports is developed. In Section 4, the data required for estimation are described. The estimation procedure and results are presented in Section 5 and, finally, the results and their implications are discussed.

Footnote

Horton and Wilkinson (1989) and Wilkinson (1992) show that, for Australia, there have been episodes in which relative prices were the principal determinant of import volumes. Generally, however, it is shown that economic activity is the principal determinant of import volumes. See, for example, Leamer and Stern (1970), Magee (1975), Murray and Ginman (1976), Goldstein, Khan and Officer (1980), Thursby and Thursby (1984). [1]