AN ANALYSIS OF THE DETERMINANT OF SINGAPORE'S DEMAND FOR IMPORTS

Abstract

Quantitative models of import demand have revolved around numerical estimates of demand elasticities for a number of theoretical and practical reasons. As Meades (1963), p.323, concludes "The great issues of fact .. is the actual size of these elasticities. On this question, much more needs to be undertaken .." Such efforts were deemed necessary as the price elasticities of demand have important implications on the stability of the exchange market and the effectiveness of exchange rate policy for the improvement of trade balance. Singapore's foreign trade plays a vital role owing much to her resource-lacking nature. Large wave of importation has been observed over the past decades to support her domestic production. In this academic exercise, we aim to find a suitable model that reflects the characteristic features of the Singapore economy. Our estimated model (M) for the import demand of Singapore economy is as follows: M = M ( Income, Lagged Import term, Capacity Utilization, Current and Lagged Price ratios of Price of Imports to Price of Domestic Goods ) Our model bas performed well with all the expected signs for all variables except the price term. The academic exercise has focused on the appealing finding that the sign reaction for the relative price term can be different from the conventional theory. It is discovered that this unique finding can be supported by the typical feature of Singapore. In addition, the importance of non-price rationing, represented by the aggregate capacity utilization rate, is observed to play a significant role in explaining Singapore's import demand behaviour. It should be of interest to the reader that no intensive studies on inclusion of capacity utilization variable for import-modelling in Singapore has yet been presented. In general, our forecasting and simulation exercises proved the quality of the model. One interesting finding from our simulation exercise is that devaluation has a light effect on the demand for imports and that the effect will dissipate in the long run. In view of the importance of this study, further research to improve and extend our model is deserved.