Statistical Analysis of the Relationship Between Disposable Income and Imports Before and After NAFTA Matt, Abigail, Nicole

Introduction Disposable personal income: the amount of money that households have available for spending and saving after income taxes have been accounted for Disposable personal income is often monitored as one of the many key economic indicators used to gauge the overall state of the economy The marginal propensity to import: The amount imports increase or decrease with each unit rise or decline in disposable income The marginal propensity to import is thus the change in imports induced by a change in income

Introduction NAFTA was a free trade area agreement between Canada, Mexico, and the U.S. on January 1, 1994 A free trade area reduces or eliminates tariffs on imported goods NAFTA’s purpose is to encourage economic activity between the United States, Mexico and Canada The implementation of NAFTA benefitted the US by increasing competition in product and resource markets, as well as by lowering the prices of many commodities to US consumers

Research Question What is the effect of disposable personal income on import expenditure from Canada and Mexico before NAFTA was passed? What is the effect of disposable personal income on import expenditure from Canada and Mexico after NAFTA was passed?

Hypothesis We expect personal disposable income to have a positive effect on import expenditure We expect the marginal propensity to import from Canada and Mexico to increase after NAFTA was passed in 1994

Imports Canada & Mexico Before & After NAFTA *not seasonally adjusted

Variables Natural log of Import expenditure from Canada and Mexico is the dependent variable Natural log of Disposable personal income is the independent variable NAFTA is a dummy variable. 0 denotes the pre-NAFTA years. 1 denotes the post-NAFTA years

Data Description Time Series January 1985 – January 2014 Monthly

Summary Table

Data Limitations Recessions: We did not account for the effects of the recession on US import expenditure Time period: For the pre-NAFTA years, we only have data from 1985 so we cannot see the full effect of disposable income on import expenditure Other countries: Our data does not include the imports from non-NAFTA countries Industry Specific- Some industries were affected more then others

Error Term Depreciation in the exchange rate: increases inflationary pressure so imports become more expensive Appreciation in the exchange rate: decreases inflationary pressure so imports become less expensive Also, spending/saving habits vary among consumers Interest rate: With lower interest rates, people consume more, reducing the incentive to save.

Regression Results Before NAFTA We added a Lag of natural log of Imports from Mexico and Canada to correct for autocorrelation

Regression Results After NAFTA

COMPARING OUR MODELS

Answering Research Question Disposable personal income has a positive effect on import expenditure both before and after NAFTA Smaller coefficient of disposable income after NAFTA was passed indicates that individuals are borrowing more in order to cover their expenses A country’s average disposable income is an important indicator of economic health. So the recession in 2008 might explain disposable income having a smaller effect on import expenditure International trade is very important for the industrial and overall economic growth of any economy

Previous Research In Sanjay Kumar Mangla’s paper “Personal Disposable Income and Import Expenditure,” the relationship between personal disposable income and import expenditure is studied using post-reform era India (after 1991) as a case study In this case, disposable personal income had a negative effect produced in the country due to the high volume of imports from other countries

Conclusion Our first hypothesis was right because we anticipated that disposable personal income would have a positive effect on import expenditure Our second hypothesis was wrong because the marginal propensity to import actually decreased after NAFTA was passed