9. Related papers

Significance

Goods and services purchased abroad. For example, industrialised countries usually import oil from OPEC countries.

There are basically four main reasons for which a country may decide to import a certain good or service:

1. it simply does not exist in the country: a mineral which is not in the country's soil, an agriculture product that can't be produced there, an innovation that has been introduced in other countries;
2. it does not exist at a specific level of quality; thus, a country imports better products than domestic production, also as far as advertising or packaging are concerned;
3. it is cheaper abroad, since producers there are more efficient, are faced by lower costs, better exploit economies of scale and/or accept lower profits;
4. at the current domestic price, producers do not supply enough good or service as the demand requires, also because of ex ante coordination problems; accordingly, consumers buy abroad for insufficient domestic production.

For financing imports, a country must rely on export, foreign credit (cumulating to foreign debt), foreign direct investments, aid. Countries issuing internationally accepted currency (as USA or EU) may simply pay with it.

Composition

Imports can be internally divided according to economic destination and to product classes:

1. Imports contributes to domestic consumption (increasing consumers well-being through consumption goods), to domestic investments (increasing production capabilities through new - or used! - equipment), to domestic current production (e.g. raw materials and spare parts). There is an important stream of imports that first will be processed, then exported abroad. To a smaller extent, import can satisfy public expenditure (e.g. military equipment). In short, imports contributes to all GDP components, but they are usually left by central statistical offices apart as a stand-alone aggregate.

2. Import can also be divided by product classes at different levels of aggregation (e.g. "agricultural product" instead of "rice"). Import of services comprehends for instance transport and shipping of goods, tourism, banking services, patent royalties.

To identify critical issues in the trade of a country, you need to understand the its degree of concentration, i.e. whether there are only very few countries and commodities representing the bulk of exports and imports. An example of a similar analysis - with data and methodology - is offered here.

Determinants

Imports are usually seen as determined by:

1. level and dynamics of domestic income;
2. level and dynamics of each GDP components (investment, consumption, public expenditure, exports) as differentiated drivers of imports;
3. price competitiveness of domestic production, normally influenced by exchange rate level and fluctuations as well as by inflation differentials between the country and foreign nations;
4. non-price competitiveness of domestic production, for example as far as product quality, technological innovativeness, design, promotion are concerned;
5. national attitude toward foreign goods;
6. shifts in domestic patterns of demand and supply;
7. historical links with certain origin countries;
8. structural trends toward economic integration with other countries.

In particular, imports should grow when:

1. families' disposable income increases (especially if imported goods are "luxury" goods, i.e. their demand grows more than proportionally when income rises);
2. GDP at large increases, where an elasticity of 1 is often supposed, so that an increase of 5% in GDP corresponds to an increase of 5% in import (5%/5% = 1);
3. consumption, investment, exports and public expenditure rise, where different elasticity of imports to GDP components may reasonably appear;
4. a revaluation takes place and national currency rises against foreign ones;
5. inflation abroad is lower than domestically, so that foreign products become cheaper and cheaper;
6. with the widening technological and quality gap of domestic production in comparison to foreign one, also in the perception and in the requests of domestic buyers;
7. a nationalistic tone in the demand is replaced by a "foreign is better" general opinion, spread both throughout consumers and decision-makers of distribution channels (supermarkets,…);
8. a domestic left shift of supply or a right shift in demand, provided that the realistic description of the market can be offered by a standard neoclassical model;
9. integration with other countries grows, a stronger national specialisation takes place and the world get more and more interdependent.

Some contrasting arguments have been put forth to some of the aforementioned statements. In particular:
sub 2. growth rates of imports have been shown as systematically different from GDP rates, challenging the hypothesis of elasticity 1;
sub 4. if price elasticity of imports is less than 1, a revaluation will decrease imports (computed in domestic currency) and not the reverse;
sub 5. exporters can set different export prices from the prices they require on their domestic market, so that inflation there may not be used as a proxy for export price dynamics, especially if inflation is not too high.

In the IS-LM model, at any rate, only GDP and the real exchange rate are considered as determinants of imports.

Impact on other variables

The first variable on which imports exert an impact is the trade balance, i.e. the difference between export and import.

If imports displace a domestic production, this will involve a fall in that sector's production, value added, employment. Domestic firms will also reduce their orders to domestic suppliers, thus also other sectors will be touched. If imports completely substitute domestic production in certain areas, entire industries will not start and develop.

Imports can exert a (more or less) powerful influence on price and quality levels of domestic production, acting as a brake for inflation, as a challenge for managers and producers at large, as a supply for domestic downstream productions.

Import can be specially taxed with tariffs and duties, thus providing revenue for the State, its activities and expenditure. Protected with prohibitively high tariffs and duties, domestic producers may restrain from adopting new technologies and better organisation models, thus becoming "unfit" to world competition.

Long-term trends

Imports have systematically grown faster than GDP in the long-term, so that their share in GDP is much higher now than 30 years ago. The process of integration has been particularly intensive in Western Europe, but it can be seen as a quite general feature.

Business cycle behaviour

Imports are pro-cyclical and grow faster than GDP. They constitute the main brake to growth of income.

In a deep recession, a phenomenon we would call "inversion" takes place: imports fall, becoming the largest positive contributor to growth of income. As a consequence, trade balance drastically improves and may turn out to be decisive for recovery.

To the extent imports depend on exchange rate, the wide and erratic fluctuations of the latter may provoke deviations from general pro-cyclicity of imports. Similarly, since oil represents a major import item for many industrialised countries, its price may exert an important influence on import values, given the low elasticity of oil demand to oil price.

Data

Bilateral imports and exports among 186 countries (a time series of 52 years) - Huge dataset

Imports, exports, trade balances for 181 countries - a time-series - Absolute values, shares in world market, rankings
Origins and destinations in world trade - Trade flows over time Net export data from 136 countries: a long term time series
Data for all the variables in IS-LM model
EU data for all the variables in IS-LM model (Germany, France, Italy, Spain, UK, Switzerland and other 13 European countries)

Formal models

An interactive map of how the economy works according to a basic macroeconomic scheme: the IS-LM model

A simulation model of an exporter firm - to play and understand how the exchange rate impacts on trade balance

A model with necessity goods and luxury goods at different level of quality

Related papers

Country concentration of Turkish exports and imports over time

The economics of ex ante coordination

Links

International Trade Statistics by product group and country