Using the Price and Income Elasticities for Demand Planning of Imports in Iraq

The value of trade elasticities has remained the subject of diverse opinion in most debates of international economic policy. This is due to results from most empirical studies in this area which are still mixed. Therefore, this paper uses import substitution model framework to estimate the price and income elasticities of import demand in Iraq for the period 1970 2013. Autoregressive Distributed Lag (ARDL) Bound Testing has been used to study the long run relationship between variables of interest. The results of the unit root test based on Augmented Dickey-Fuller (ADF) and Philip-Perron (PP) provide justification for the use of ARDL Bound Testing as the variables were either I (0) or I (1) and none is I (2). The cointegration results show that there is a long run relationship between import demand and the chosen explanatory variables, thus all the variables move together in the long run. The estimated long run coefficients show that the price and income elasticities of import demand in Iraq were about 0.02 and 0.31 respectively during the period covered. This implies that the long run import demand in Iraq has been price and income inelastic since the sizes of the coefficients of real Gross Domestic Product (GDP) and relative prices were less than unity and among the explanatory variables studied, real GDP was the main determinant of import demand in Iraq. Furthermore, the long run coefficient of domestic prices which is also regarded as the cross price elasticity of import demand with respect to home made goods was about 0.055 and statistically insignificant, thus there is evidence of imperfect substitution between foreign made goods and domestically produced goods. The results from the short run dynamics of the model suggest that about 59 % of the disequilibrium between the long term and short-term import demand is corrected each year.