The demand for imports and economic reform in Spain

Abstract

This study investigates the nature of the substitutability relationships among capital, labor, and imported inputs in the context of a production function for Spain, with estimates obtained from an aggregate cost function. The results are consistent with the hypothesis that all of the inputs are substitutes for one another. The findings with respect to domestic inputs and imports are particularly important as the internationalization of the Spanish economy continues since, in the short run and ceteris paribus, further removal of import restrictions may have a negative impact on the demand for domestic factors. The estimates obtained here are also consistent with the hypotheses that: a decrease in the price of imports will have a proportionately larger impact on the price of domestically‐produced investment goods than on consumption goods; and second, that the elasticity of demand for each input with respect to consumption goods production is considerably higher than for investment goods production.