Determinants of Trade Balance in Ethiopia

Bantegizie Zewudie

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.


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ISSN : 2251-1555