This study investigates the behavior of the aggregate import demand function for India using the yearly time-series data and by applying the Johansen Juselius multivariate cointegration technique during 1970-2003 up to which the latest data is available. In our empirical analysis of the aggregate import demand function for India, cointegration and error correction techniques have been used. Using macroeconomic variables such as gross domestic product, unit value of import prices, prices of domestically produced goods and foreign exchange reserves, the empirical evidence suggests that there exists a cointegrating relationship among these variables. Our econometric estimates of the aggregate import demand function for India suggest that import demand is dominated by GDP, when compared to the unit value of import price, and foreign exchange reserves.

Within the international trade literature, it is not uncommon to find arguments about whether the trade relationships are stable over time or not. An issue of concern to policy makers, trade economists, popular press, researchers and practitiones to investigate is this issue on international trade. In this context, Nelson and Plosser (1982) provided a widely known empirical testing for the stability of economic time series data. They concluded that most of the time series are not stationary. Moreover, another study by Goldstein and Khan (1985) has suggested that trade relationship is subject to either gradual or sudden changes over time. They argued that gradual changes are due to the process of economic development or as the result of changes in government trade policies, whereas sudden changes are due to fluctuations in exchange rates, or large oil price increases that alter the basic demand or supply relationship (p. 1073). As trade relationships are not stable over time due to many macro economic variables which are nonstationary in nature, our interest is to see whether there exists long-run relationship between imports and its determinants.

A large body of literature exists on the study of aggregate import demand function for both developed1 and developing2 countries. However, so far as a developing country like India is concerned a few studies have investigated an aggregate import demand function. For example, Dutta D and Ahmed N (2001), investigate the behavior of Indian aggregate import demand during 1971-1995. Using the variables such as relative price, GDP and dummy variables, this study uses the cointegration and error correction approach. In their aggregate import demand function, import volume is found to be cointegrated with relative import price and real GDP.

Applied Finance Journal, Econometric Estimation, Multivariate Cointegration Techniques, Gross Domestic Product, GDP, Error Correction Techniques, Economic Development, Error Correction Model, ECM, Macro Economic Variables, Consumer Price Index, Wholesale Price Index, International Monetary Fund, IMF.