Alternative Techniques of Estimating Import Demand Elasticities

T H E desirability as wel l as the difficulty o f obtaining reliable estimates o f import demand elasticities is clearly demonstrated by the extensive literature on the subject during the last few decades. Interest i n price elasticities o f import demand originated in Marshall's [14] discussion o f the possibility o f a devaluation causing a deterioration rather than an improvement in the balance o f payments. Since then, the use o f price elasticities i n theoretical and empirical w o r k has become widespread. Price elasticities have, for example, been employed exten­ sively in analysing the effects o f tariff elimination wi th in the E E C and the effect o f the "Kennedy round" tariff reductions on w o r l d trade patterns. Income/output elasticities o f impor t demand are also exceedingly useful tools. For example, they enable us to assess the implications for total impor t demand o f different projected g rowth rates o f gross national product (GNP). The estimation o f impor t demand elasticities is thus a matter o f considerable importance for economic policy. T o obtain useful elasticity estimates still remains a difficult task. Data limitations such as the absence o f quarterly GNP, inventory level and capacity utilisation series bedevil much empirical w o r k on demand functions. The simultaneousequation bias, to which Orcutt [16] referred in his classic 1950 article, continues to cause concern, even though the direction o f and reasons for the bias are now better understood than ever before. There is also the question o f what we mean by a "price" elasticity. Impor t prices may change for a number o f reasons—the foreign c.i.f. price may change, tariffs may be imposed or reduced, or a temporary levy may be placed on imports for balance o f payments purposes. Kreinin [10] and Krause [9] have argued that the reaction o f impor t demand varies according to the type o f price change involved. Thus there exists not one but two or maybe three types o f price elasticity for imports.