Economic theory would suggest three major factors determining a country’s demand for imports. First, the capacity of the country to produce and supply the goods itself. Some imports are not competitive with domestic goods because the country does not have the physical capacity to produce them; others will be competitive, and the demand for them will partly depend on the ability of domestic producers to supply the substitutes. Second, the price of imports relative to the price of domestic substitutes will affect import demand. Third, the level of expenditure will affect the demand for imports. The composition of expenditure will also be important to the extent that the import content of different components of expenditure differs. For simplicity, however, and for the purposes of later chapters, it is assumed here that the import content of different items of expenditure is the same, so that income can be used as a proxy for expenditure in the import demand function. We stress again, however, that for income-determination analysis it is very important to recognise that there may be different import coefficients attached to different components of expenditure, and to relate imports to expenditure in deriving the foreign-trade multiplier (see Chapter 2). In addition to these three main factors, stock-building will also affect the demand for imports, as well as a host of non-quantifiable factors.
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