The Dynamic Relationships Between Balance of Trade and Economic growth in Tanzania

Abstract

This paper analysed the dynamic relationships and causal effects between balance of trade and the Gross Domestic Product (GDPT). In regard of time series data used in this study, Tanzania has been in trade balance deficit for 23 years. On the other hand the Gross Domestic Product has been substantially increasing annually. The developed GDPT model was stationary at level and at first difference. Likewise, the system of three equations was formulated with the variables GDPT, Exports and Imports and the system was found to have combination of both I(1) and I(0). It was found from this study that the coefficient for Error Correction Term (ECT) for GDPT Model was insignificant which mean that the explanatory variables Exports and Imports were weak enabler or no effect over GDPT convergence in the long run equilibrium. However, the coefficient for ECT has negative sign which mean that the GDPT model is capable of converging in the long run normally in the current year, after having random shocks in the previous year. One of the reasons for no convergence is the speed of adjustment or annual correction rate of 2.77 percent is very low and would take 36 years to converge in the long run equilibrium. Moreover, only the Exports variable at L2D was significant and has causal relationships contributing 27.92 percent over GDPT in the short run, nevertheless, this contribution did not endure in the long run. On the other hand Imports variable was not significant and no causal effects over GDPT in the long run and short run which is quite good as imports have no direct relationship to GDPT. Either failure of Exports to endure in the long run, means that the economic policies on Imports had been little strategic in boosting local industrial productions in the short run which could enhance export demand-Led growth for International markets and local demand-Led growth for local markets and hence reduce unnecessary imports. Nevertheless, Tanzania of current is geared towards industrialized economy which in turn will reverse the situations found in this study in the near future.The researcher recommends that research and development in what to be imported, exported, strategic policies, promotions and motivations to local producers and consumers be made. Keywords: Exports(X), Imports (M) and Gross Domestic Product (GDPT) DOI: 10.7176/JESD/12-10-08 Publication date: May 31 st 2021