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Modelling Australia’s imports of goods and services

Working Paper 2015–021

Release date: 16 June 2015

Alexander Beames and Michael Kouparitsas2 | Working Paper | ISBN: 978‑1‑925220‑56‑8

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This paper adds to the relatively scant Australian literature on modelling the demand and supply of Australian imports. We build on earlier demand modelling by deriving conditional import demand relationships via representative household/firm-level utility-maximisation/cost-minimisation problems, which explicitly assume households/firms have both a taste for variety and rival sources of supply. Our estimates of disaggregated price elasticities are consistent with earlier studies in finding relatively low substitutability between imported and domestically produced varieties. Our derivation of the long-run supply framework also adds to the existing literature by explaining why it is necessary for researchers to employ trade-weighted foreign prices in place of individual country prices and providing conditions under which this approach is consistent with the underlying theory. We find that the extent of the foreign cost pass-through to import prices depends critically on the choice of foreign cost variable.

1. Macroeconomic Modelling and Policy Division, Macroeconomic Group, The Treasury, Langton Crescent, Parkes ACT 2600, Australia. Correspondence: We thank Michal Krolikowski, Linden Luo, Sarah Brown and participants at the Macroeconomic Theory and Application Seminar for comments and suggestions on an earlier draft.

2. The views expressed in this paper are those of the authors and do not necessarily reflect those of The Australian Treasury or the Australian Government.

© Commonwealth of Australia 2015

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