Motivation Case

INTRODUCTION:

The roots of the foreign trade reach to the past. Trade activities taken place between countries shaped the future of the foreign trade policies. As it gained importance, foreign trade policies started to shape the economies more effectively. By the help of the theories developed by the economists, international economics as a new branch in the economy started to play crucial roles for the countries’ economic activities. Today, the importance of the boundaries has decreased as a result of the globalization of the markets and this case strengthens the significance of the foreign trade. For this reason, I wanted to evaluate the one subject matter related to international economics for my econometrics project. Moreover, my interest in macroeconomics and trade policies influenced me as well while selecting this topic.

In this project, I will proceed on the import function that is directly related with the international economics. I will regress import on the national income and inflation rate. I will examine Turkey’s case covering the years between 1987- 2004.

LITERATURE VIEW:

During my research, I utilized many articles but I will use four of them. Firstly, I read the article written by Ricardo Faini, Land Pritchett, and Fernando Clavijo. The article’s name is ‘Import Demand in Developing Countries’. They focus on the impact of import controls and the effect of tariffs and the aggregation problem. In their article, they rely on 3 different approaches.

First, a traditional import demand function relating real imports (M) to real income (Y) and the ratio of import prices (Pm) to domestic prices (PD) is estimated for 50 countries:

ln M(t) - bo + bl ln Y(t) + b2 ln [Pm(t)/PD(t)] +V 1(t) (l)

where V1(t) is an error term with the standard properties.

The second approach (Pritchett 1988; Moran 1988) aims at providing a simple way to recover the structural demand parameters. It relies on the specification of an import supply equation as well as on a standard demand equation:

ln M(t)- aO + al ln F(t) + a2 ln R(t-l) + a3 tln Pit)-ln Pv(t)] + V2(t) (4)

where M denotes imports, F and R denote real foreign exchange receipts and reserve levels respectively, and Pm and Pm denote the domestic and the border prices of imports, respectively.

They explain the third approach by saying that the direct incorporation of quantitative restrictions is the main method of recovering structural demand parameters and assessing the impact of removing import restrictions; however, that approach also suffers from many shortcomings. For example, a good indicator of quantitative restrictions is not usually available, and even if this indicator exists, interpreting its behavior may