Determinants of International Trade Flows: The Case of Ethiopia
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Date
2001-07
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A.A.U
Abstract
This paper utilizes an error correction model to identify the determinants of international
trade flows of Ethiopia through the estimation of demand elasticities for aggregate imports
and exports and their respective components during 1974/75:1 - 1999/2000:4. In the
estimation of the long run relationships among the variables, the Johansen multivariate
co integration procedure is employed. Accordingly, the results show that the country faces
inelastic short-run price elasticities for aggregate import and its components (fuel and
machinery). Similarly, the real income elasticities are lower for aggregate imports but
though larger for fuel and machinery they are found to be weakly significant for machinery
(significant only at 10 percent). On the other hand, foreign exchange receipts are found to
affect imports more significantly. The lagged imports have, however, an indirect relationship
with the current import demand. The inelastic price elasticities of demand for imports imply
that price policies such as devaluation have less impact to reduce the volume of imports.
Furthermore, the lower real income elasticity for aggregate import together with its being
weakly significant for components imports implies that stabilization policies are less power/iii
in assisting trade liberalization efforts. More generally, policies that affect the foreign
exchange availability in the form of capital inflow and export earnings are likely to have a
larger impact on import volumes than those that depend exclusively on exchange rate and
aggregate demand management.
The results of the estimation of aggregate export and its components (coffee and hides and
skins) also indicate that the price and income elasticity that the exports of the country's
primary commodities face in the international markets are relatively smaller. Furthermore,
the lagged exports for both coffee and hides and skins have negative relationships with the
current export demand. The inelastic price and income elastic ties for export demand imply
that there is a need for further diversification of exports that helps to shift towards the export
of manufactured goods. The negative relationship of lagged exports with the current export
demand also implies that the counl1y has to diversify the destination of its exports.
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Keywords
Case of Ethiopia, Determinants of international trade