This paper attempts to provide an empirically testable conceptual apparatus which could be used to understand the process of market price determination in the yarn and textile sectors, and hence to forecast important market variables. A model of the yarn and textile sectors specifying yarn production, imports, consumption, price, cloth production, demand and price is estimated econometrically. Time series data for Bangladesh (1972/3 to 1984/5 as a whole have been used in the single equation instrumental variables estimating technique (2SLS). Though the sample size was small, the results of econometric estimation for most equations of the model were good and appeal to economic intuition.

The model predicts further intensification of the structural change from cotton to non-cotton cloth which is already evident. Per capita cotton cloth demand declines from 7.20 yds. in 1985/6 to 6.25 yds. in 1994/5, while per capita non-cotton cloth consumption increases from 3.95 yds. in 1985/6 to 6.37 yds. in 1994/5. Total per capita cloth consumption increases from 11.15 yds. in 1985/6 to 12.62 yds. in 1994/5. The model also provides forecasts of other market variables mentioned above.