INDIGENOUS AND EXOGENOUS FACTORS INFLUENCING IMPORT DEMAND

Abstract

Import demand of Sri Lanka will be determined by number of factors closely related to the international trade, international market, household income and price level of the imports etc. The problem of this study is to study how internal and external factors influence in determining the import demand of Sri Lanka. Import demand function that is based on the small country assumption was tested with the help of multiply regression analysis, with the objectives of identifying the influence of domestic income and price competitiveness and quantifying the factors affecting import demand, The model showed factors affecting the demand for imports and it also considers the influence of domestic income and price competitiveness. The price competitiveness variable showed the response of imports to changes in relative prices. The coefficient of relative price variable implied a negative relation ship showing that when the relative price of imported goods rises, there is a tendency to reallocate expenditure towards domestic goods. Test results show that there is a positive relationship between real income and import demand, as higher real income increases the capacity to import. Import price adjusted to the GDP deflator has negative relationship with Import Demand. Third variable of the model, net foreign assets had a positive impact on import demand. For the test, net foreign assets were divided by import price to identify the import capacity. The fourth variable, domestic credit shows negative relationship on import demand though it could have positive relationship according to the theory