Modelling Import Penetration

Import penetration has grown substantially in Australia over the past two decades. This study examines import penetration using a consumer demand approach that distinguishes domestically and foreign-produced varieties. The approach avoids restrictive assumptions such as homotheticity and permits an array of hypothesis tests of a functional form. This study uses an innovative procedure to estimate the model with a relative short time series, which is important for countries with limited data. We show how consistent aggregation leads to a macro-level import demand equation that faithfully reflects the underlying micro-demands. Surprisingly, income growth is mainly responsible for the surge in imports and not for their low cost.