Much of the literature on imports underlines the importance of high per capita incomes and population size in determining import levels. All other things being equal, countries with higher per capita incomes will be able to import more per person than countries with lower levels (Lutz, 1994). Larger countries (in terms of population) import fewer manufactured goods on a per capita basis because they tend to have a diversified industrial base, as investment will be attracted to these countries to take advantage of their big markets. This view can be exemplified by the case of the United States and Japan, both of which have low import propensities compared to countries such as Belgium or the Netherlands. Economic theory also suggests that import levels are affected by other factors, such as the price of imports denominated in foreign currency and the exchange rate, as well as the price of domestic goods relative to imports (Deyak, Sawyer, and Sprinkle, 1993; Warner and Kreinin, 1983). While relative prices have a predictable and systematic impact on imports, price elasticities tend to be low, in most instances well below unity. This suggests that large relative price swings are required to have an appreciable impact on trade patterns (Reinhart, 1995). For developing countries, however, determinants of import demand include government restrictions on
imports, and availability of foreign exchange (Sarmad, 1989). The study by Sarmad examining the factors that influenced import demand in Pakistan from 1959 to 1986 found that the policy of devaluation or raising tariffs was not significant in reducing imports except in the case of imports of machinery and transport equipment. In countries with successful import- substitution strategies, the impact of relative prices and tariffs tends to decline in terms of their influence on import demand. Import substitution is a policy that taxes and restricts imports to protect and subsidize domestic industries. This policy, which paradoxically led to more import dependence (e.g., for purchases of raw materials, components), was a popular economic strategy among some developing nations (Lindert and Pugel, 1999).
Source: Seyoum Belay (2014), Export-import theory, practices, and procedures, Routledge; 3rd edition.
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