Tradable and non-tradable expenditure and aggregate demand for imports in an emerging market economy

- An import demand function is derived under the assumption of non-separability of tradable and non-tradable expenditure.
- Tradable and non-tradable expenditure decisions are interrelated.
- The relative price of non-tradable and tradable goods is among the determinants of import demand due to of the non-separability assumption.
- The import demand function is estimated by using quarterly data for from Turkey.
- The result shows that the non-separability assumption cannot be rejected for the Turkish economy.

Using an assumption of non-separability of non-tradable expenditure from imports, this paper examines the impact of the structural transformation undertaken after 2001 on imports and, in turn, the current account stance of Turkey. In this regard, an import demand function is derived under the assumption of non-separability, and is estimated using quarterly time series data from Turkey. The empirical results show that the assumption of non-separability cannot be rejected in the case of Turkey and the relative prices of non-tradable and tradable goods must be among the determinants of import demand in addition to the relative price of imports and real GDP. This result accordingly implies that recent increases in import expenditure are, to some extent, due to changes in the relative price structure in favour of non-tradable goods.