Estimation of the aggregate import demand function for Mexico: a cointegration analysis

Abstract

This study estimates the elasticities of demand for total Mexican imports in relation to GDP, import prices, and domestic prices. A high propensity to import constitutes a major obstacle to Mexico's economic growth, as the benefits of increased exports, or any other expansion in aggregate demand, trickle down to the rest of the world. This paper estimates a vector error correction (VEC) model of the elasticities of total import demand in relation to income, import prices, and domestic prices. Total imports are a dependent variable, while GDP and domestic and import prices are the independent variables. The main conclusion is that an increase of 1 peso in Mexican GDP leads to an increase of 0.50 pesos in Mexican imports; the price elasticity of import demand is low. However, the elasticity of import demand for domestic prices is 2.14 times that of import prices.