Analyzing the Import Demand Function with Expenditure Components: Evidence from Pakistan

This study highlights the responsiveness of import demand in the context of aggregate expenditure components in Pakistan over the period of 1974–2009. The study uses Johansen multivariate cointegration analysis and estimates an error correction model to drive the long-run and short run elasticities of the import demand behavior. The cointegration results provide a strong empirical validity of the presence of long run elasticities between import and macro-components. In the long-run, the consumption expenditure is the main dominant determinants of the movements in import demand in Pakistan. In the short-run, the consumption and investment expenditures are the major determinants of import demand while the import demand is not sensitive to relative price. Moreover, the parameter stability tests confirm the stability of the model, and the sensitivity analysis confirms the robustness of initial results.