Demand for Imports and Components of Final Expenditure: An Empirical Study with Special Reference to the Korean Import Demand Function

Abstract

This paper aims to examine the long-term association between Korea’s demand for imports and its key determinants covering the post Korea’s financial crisis period of reformed economic environment. In this respect, it provides fresh estimates of partial elasticities of demand, for imports in regard to each key component of final expenditure. A Johansen multivariate co-integration analysis is employed on the post-crisis quarterly macroeconomic data, such as final consumption of private sector, gross fixed capital formation, final consumption of government, exports, and relative import prices covering the sample period 2000-2017. Significant differences are found between the long-run elasticities of import demand as regards each key component of final expenditure. In particular, import elasticity of demand regarding expenditure on fixed capital formation is found to highly elastic and negative, implying that this type of expenditure provides an effective mechanism for reducing aggregate imports in Korea in the long run. These findings appear to have significant implications for the Korean economic policies as well as for trading policies of Korea’s key international trading partners. A by-product of this investigation is an error correction short-run forecasting model for Korea’s aggregate imports. We have found that this model appears to be performing well out of the sample period.