Tradable and Non-Tradable Expenditure and Aggregate Demand for Imports in an Emerging Market Economy

Abstract

Turkish economy has showed a remarkable performance in economic growth in the early years of the 2000s. This has gone along with distinctively high current account deficits and structural transformation in the economy. As noted by Rodrik (2016), falling share of manufacturing sector and a rise in the share of non-tradable sector in GDP have been the prominent feature of the recent Turkish economy. Using the non-separability assumption of non-tradable expenditure from imports, this paper examines the impact of this structural transformation on imports and, in turn, current account stance of Turkey. In this regard, an import demand function is derived under the non-separability assumption, and it is estimated by using quarterly time series data from Turkey. Empirical results show that non-separability assumption cannot be rejected in the case of Turkey, and the relative prices of non-tradable goods to tradable ones must be considered as the detrimental factor in addition to standard determinants of import demand (namely the relative price of imports and real GDP). This result also implies that recent increases in import expenditure is, to some extent, due to changes in the relative price structure in favour of non-tradable goods