Derivation of Growth of Import Demand: A Time Series Analysis of Less Developed Countries

Abstract

In this article, growth of import demand is estimated in a dynamic optimisation framework. Since a conventional micro-theoretic import demand function cannot capture the issue of the growth of import demand, it is derived in a macro-theoretic framework of equilibrium import demand function. Growth rate of import demand in a dynamic optimisation framework (considering utility maximisation problem) has not yet been found in the literature. The main focus of this article is to derive this. It is found that growth rate of imports is the function of the growth of domestic income or expenditure, the growth rate of relative price, which is nothing but the real exchange rate, and productivity of capital. The theoretically derived import growth equation was empirically verified for 35 less developed countries. It is observed that for most of the less developed countries, independent variables are statistically significant with expected sign. JEL Codes: F130, F14