Determinants of Trade Balance in Ethiopia

Bantegizie Zewudie

doi:10.7176/jesd/10-3-10

Abstract

This study attempted to indentify the short and long-run determinants of trade balance in the case of Ethiopia‘s economy for the period 1978 to 2009. In order to achieve the stated objectives a synthesis model of absorption, elasticity and monetary approaches to trade balance is estimated using Engle- Granger two step procedures of cointegration and general to specific error correction model. The findings of the study suggest that the most important long run determinants of trade balance are household consumption expenditure, real effective exchange rate and terms of trade while government consumption expenditure, house hold consumption expenditure, real effective exchange rate and terms of trade are the short run determinants of trade balance. Based on the findings of this study the researcher recommended raising import tariff on final consumer goods , expand industrial base, increase domestic saving to finance domestic investment, depreciation/ devaluation of birr and improving the quality of domestic products to solve the trade imbalance.

Highlights

Ethiopia like other developing countries is highly dependent up on earnings from the sales of primary commodities and concentrating on small range of export commodities and market outlays to finance much needed capital goods imported
On the other hand Real Gross Domestic product (GDP), lag trade balance, foreign exchange available (FEA) and trade liberalization are insignificant in the short run estimation.The study recommends appropriate attention to be provided for boosting export sector and encouragement of domestic output expansion coupled with using technology in the production of output for domestic as well as international market
1.6 Methodology of the study Data Sources This study employ secondary data obtained from different institutions such as, Ministry of Finance and Economics Development (MOFED), National Bank of Ethiopia (NBE), customs authority and central statistics Authority

Summary

Introduction

Ethiopia like other developing countries is highly dependent up on earnings from the sales of primary commodities and concentrating on small range of export commodities and market outlays to finance much needed capital goods imported. On the other hand Real GDP, lag trade balance, FEA and trade liberalization are insignificant in the short run estimation.The study recommends appropriate attention to be provided for boosting export sector and encouragement of domestic output expansion coupled with using technology in the production of output for domestic as well as international market.

Results

Conclusion