An Empirical Analysis of the Determinants of Trade Balance in Ethiopia (1980-2017)

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The main objective of this study is to analyze the determinants of trade balance in Ethiopia during the specified period (1980-2017). Based on review of theoretical and empirical literature, five variables (GDP, GCE, HCE, ER and MS) were identified as general determinants of trade balance in Ethiopia. Moreover, variables are based on elasticity, monetary and absorption theories of trade balance. The study implements ARDL bounds test and error correction model to analyze a time series data from 1980-2017, collected from national bank, World Bank development indicators and IFS. The finding of this study shows that real exchange rate and gross domestic product have positive and significant effect on trade balance while money supply has negative and significant effect on trade balance in long run. Again, long run ARDL model reveals government consumption expenditure and household consumption expenditure have no effect on trade balance. The error correction model of the short-run regression shows that real exchange rate and government consumption expenditure have positive and significant effect on the speed of adjustment of the long-run trend of trade balance. The estimated short run model revealed that the trade balance converges to its equilibrium value. The coefficient of the error term that captures the speed of adjustment towards the long run equilibrium found with the correct sign and magnitude. The speed of adjustment is -0.90, which implies that around 90% deviations from long run equilibrium are adjusted every year and the rest 10% in the coming year.



ARDL, Co integration, Trade balance