Price and Income Elasticities of Disaggregated Import Demand in Sri Lanka

The purpose of this study is to investigate Sri Lanka’s disaggregated import demand functions and their price and income elasticities, for the post-liberalization period of 1977-2007. Although there exist many studies examining aggregate import demand, there appears to be a dearth of studies on estimating price and income elasticities import demand functions of Sri Lanka at a disaggregated level. This study aims at filling this gap by estimating disaggregated price and income elasticities for three major categories of imports, viz. consumer goods, intermediate goods and investment goods. To this end, the paper employs standard characterizations of import demand functions extensively discussed in the literature. The econometric estimates reveal that relative price is inelastic for all categories of consumer goods, intermediate goods and investment goods, implying that consumers may be less price sensitive. Further, the paper also examines the effects of changes in national income and foreign exchange availability on the demand for imported goods in Sri Lanka during 1977-2007. Based on these results several policy implications could be derived with regard to dependence on foreign trade, international finance, foreign reserve management and exchange rates, public finance, particularly taxation, as well as the impact of import demand in the face of external shocks on domestic prices and inflation.

DOI: http://dx.doi.org/10.4038/ss.v40i1.4681

Staff Studies – Volume 40 Numbers 1 & 2, 59-77