Analysis of the Nexus Between Export, Domestic Demand and Economic Growth in the Case of Ethiopia
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Date
2025-09-02
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A.A.U
Abstract
While fundamental relationships among macroeconomic variables are often shaped by established economic theories, the actual behavior of these variables can differ significantly due to the distinct characteristics of each country's macroeconomic environment. Therefore, it is crucial to analyze these relationships in context. In particular, examining the connections between domestic demand and growth, as well as between exports and growth, is essential for understanding both the long-term development of the economy and its short-term fluctuations. This analysis also helps to identify the key drivers of economic growth. However, in the case of Ethiopia, the causal relationships between exports, domestic demand, and economic growth have not been sufficiently explored in the existing literature. The objective of this study is to investigate the relationship between export, domestic demand and economic growth in Ethiopia, using the time series data from 1974-2023 and employed an Autoregressive Distributed Lag (ARDL) bounds testing approach and Error Correction Model (ECM) in a time series economic framework. This study uses two measures for domestic demand, namely gross fixed capital formation and gross government expenditure. Result of ARDL bounds test indicates the existence of long run relationship among the variables. In the long-run granger causality tests reinforce the centrality of the export-growth nexus, showing a strong bidirectional causal link. Furthermore, unidirectional causality runs from economic growth to government expenditure and external debt. A successful and sustained economic growth requires growth in both export and domestic demand in Ethiopia.
Key words: Export, economic growth, domestic demand, VECM, and Ethiopia.