Import Dependence in the Danish Production Structure: Evidence from Input-Output Analysis and Econometric Modeling

Abstract

This paper aims to develop an Almost Ideal Demand System (AIDS) model with an Input-Output (IO) framework to investigate the underlying demand patterns within the Danish pro-duction structure. From this, the import dependence of five selected industries is derived. This sectoral-level analysis of import dependence forms the basis for assessing the aggregate import reliance of the Danish economy. The model structure is divided into two blocks: i) the domestic production block, describing total production and production costs for five selected industries, and ii) the final aggregate demand block, which highlights the role of consumption, government spending, investment, inventories, and exports. The industries that have been selected are i) Pharmaceuticals, ii) Food products, beverages, and tobacco, iii) Transportation, iv) IT & Elec-tronics, and v) Other industries. The model is built and estimated using annual input-output data from 1966 to 2023 provided by Statistics Denmark. The study found that the estimated price effects revealed a varying degree of import dependence across the industries under investigation. The Pharmaceutical industry was the least import de-pendent industry since the primary inputs were characterized as substitutes. The Food products, beverages, and tobacco industry only showed one statistically significant cross-price effect, thereby making it difficult to conclude. However, the one statistically significant effect showed signs of complementarity and constituted one-fourth of the total expenditure within the indus-try, thereby highlighting some degree of import dependence. The Transportation industry also revealed a low degree of import dependence, again because of substitutability. The IT & Elec-tronics industry was highly import dependent, which was driven by the complementarity char-acterizing four of the five estimated cross-price effects. Lastly, ‘Other industries’ also revealed a high degree of import dependence, again due to complementarity within the primary inputs. Based on this, the Danish economy was found to be highly import dependent. This was be-cause the import dependent industries constituted a total of around 84 percent of the Danish production in 2023. Hence, the majority of Danish economic output was produced within in-dustries that showed signs of import dependence. By removing the first seven observations and re-estimating the model, the same conclusions were reached regarding the import reliance, thereby strengthening the robustness of the results. Therefore, the study concludes that import dependence is present within the Danish production structure. However, given that the majority of Denmark’s imports originate from the EU, it is challenging to draw definitive conclusions regarding the potential vulnerabilities arising from import dependence, given the EU’s role as a low-risk and integrated trade partner. If the critical inputs are sourced from outside the EU, they pose a greater risk and vulnerability to the Danish economy. Following this, the robustness of the results and the choice of industries were dis-cussed to highlight the reliability of the obtained results.

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A master thesis from Aalborg University

Import Dependence in the Danish Production Structure: Evidence from Input-Output Analysis and Econometric Modeling

[Import Dependence in the Danish Production Structure: Evidence from Input-Output Analysis and Econometric Modeling: Importafhængighed i den danske produktionsstruktur: Evidens fra input-output analyse og økonometrisk modellering]