Estimation of Import Demand Elasticities, In the BPCG Model and the Import Demand Function (The Case Study of Iran)

Abstract

In this study, the demand elasticities of import are estimated, with two approaches, the balance of payments constrained growth (BPCG) or Thirlwall model and the import demand function, by using data in Iran during the period 1980 to 2018 and ARDL method. According to BPCG model, economic growth is equal to the ratio of export growth to income elasticity of import demand, so it is related to the growth of exports and income elasticity of import demand in the long run. Based on this model, if national income increase and the income elasticity of import demand is high, the imports increase, the effect of export growth and consequently economic growth decreases. The results showed that in the long run, the income elasticity of import demand in BPCG model isequal to 0.04 and based on the import demand function is 0.34 and the relative price elasticity of import demand (the ratio of import price to domestic price) is -0.52. Therefore, imports in Iran have been more affected by price than income effects. Due to the smaller amount of income elasticity of import demand in both models and based on the BPCG model, the greater income elasticity of import demand, reduces the effect of export growth coefficient, it can be concluded that the magnitude of this elasticity has not been a constraint to Iran's economic growth. Given the significant impact of prices on imports, economic planners should focus on increasing the competitiveness of domestic products.