The export ratio and import penetration rate are important concepts in considering a country’s trade structure. A search of the American Economic Association’s EconLit, a leading database of economics literature, resulted in 142 articles (as of April 2006) that have been published since 1969 and use the term import penetration. The oldest of these is by James Hughes and A. P. Thirlwall (1977).
The relationship between domestic output, represented by Y, and domestic demand, represented by D, can be expressed as follows: Y= D + EX–IM, with EX representing exports, and IM, imports.
The export ratio is the percentage of domestic output that is exported—in other words, EX/Y. The import penetration rate (IP), on the other hand, is the percentage of domestic demand fulfilled by imports (OECD 2003):
To illustrate, if domestic television sales during a year amount to two million units, and the number of televisions imported totals 800, 000, the import penetration rate would be calculated as follows:
The concept of the import penetration rate is important in relation to particular industries, as well as to the entire macroeconomy, and it has been a focus of much research. Representative studies were performed by Howard Marvel (1980) and Stephen Rhoades (1984), who analyzed the relationship between concentration and the import penetration rate for its potential as a way to integrate industrial organization and international economics, and Avinash Dixit (1989), who researched the relationship between the import penetration rate and exchange rate pass-through.
From a macroeconomic perspective, a country that produces manufactured goods with a high degree of international competitiveness will see increasing exports and decreasing imports. Under these circumstances, the export ratio will rise and the import penetration rate will fall. Conversely, a country that produces manufactured goods with a low degree of international competitiveness will see decreasing exports and increasing imports. In this case, the export ratio will fall and the import penetration will rise. It must be noted, however, that the relationship described here does not always hold. Two factors—import barriers and transaction costs—may interfere with it. If a country has established import barriers, another country’s comparatively better manufactured goods will have little impact on its imports, and its import penetration rate will not rise. Likewise, if transportation and other transaction costs are extremely high for traded goods, differences in international competitiveness may not be reflected in the import penetration rate.
At the industry level, the export ratio and import penetration rate reflect a country’s industrial structure. In the case of a developing country, for example, there is a
tendency to export a significant volume of primary goods and to import large quantities of industrial goods. As a result, developing countries often have high export ratios for primary goods and high import penetration rates for industrial goods. Industrialized countries, in contrast, export significant volumes of industrial goods and import large quantities of primary goods. Industrialized countries, therefore, often have high export ratios for industrial goods and high import penetration rates for primary goods.
It must be noted that low (high) import penetration rates do not necessarily mean that there are high (low) import barriers. In actuality, a low import penetration rate may reflect a particular set of industrial characteristics that are unfavorable for international trade (e.g., high transportation costs). Furthermore, the combination of a high export ratio and low import penetration rate may be an indicator of the high competitiveness of domestic companies. When the export ratio and import penetration rate are both high for a particular industry, it may very likely be that such factors as intra-industry trade have resulted in a high degree of internationalization.
Figure 1 shows the changes in the import penetration rates of the Group of Seven (G7) countries (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States) between 1991 and 1999. As this graph clearly indicates, import penetration rates in all of the G7 countries rose during this period. This may reflect an increasing degree of internationalization over these nine years.
SEE ALSO Exchange Rates; Export Penetration; Export Promotion; Import Substitution; Imports; Trade
Dixit, Avinash K. 1989. Hysteresis, Import Penetration, and Exchange Rate Pass-Through. Quarterly Journal of Economics 104: 205–228.
EconLit: The American Economic Association’s electronic bibliography of economics literature. http://www.econlit.org/.
Hughes, James J., and A. P. Thirlwall. 1977. Trends and Cycles in Import Penetration in the U.K. Oxford Bulletin of Economics and Statistics 39: 301–317.
Marvel, Howard P. 1980. Foreign Trade and Domestic Competition. Economic Inquiry 18: 103–122.
Organization for Economic Cooperation and Development (OECD). 2003. Science, Technology, and Industry Scoreboard 2003: Towards a Knowledge-Based Economy. http://www1.oecd.org/publications/e-book/92-2003-04-1-7294/.
Rhoades, Stephen A. 1984. Wages, Concentration, and Import Penetration: An Analysis of the Interrelationships. Atlantic Economic Journal 12: 23–31.