The link between economic development and the income elasticity of import demand

Abstract

In both the international economics and economic development literatures, it has been noted that there is a tendency for the income elasticity of import demand to rise over time. In the first part of the paper, data from a large sample of countries is used to show that this tendency seems to be a general phenomenon. However, the previous studies on this issue have not offered a general explanation of this tendency. The second part of the paper develops a general explanation of why the income elasticity of import demand rises with the level of GDP per capita. The starting point of the analysis is that the process of economic development normally is associated with a rising share of manufacturing in GDP. In turn, this tends to increase the share of manufactured relative to nonmanufactured imports. Given that the income elasticity of import demand is higher for manufactured than nonmanufactured imports, the changing composition of imports increases the overall elasticity of import demand. The empirical results indicate that this is a plausible explanation for why the income elasticity of import demand rises with the level of GDP per capita.