Statistical Analysis and Prediction of the Balance of Trade in Ethiopia Using Error Correction And Arima Models
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Date
2011-06
Authors
Arega Yibeltal
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Publisher
Addis Abeba university
Abstract
For a long period of time, Ethiopia has involved in foreign trade and
experienced trade deficit several time in the past. This deficit can be largely
explained by the unequal terms of trade between agricultural commodities (the
country's major exports) and capital goods (the country’s major imports).
The core objective behind this study is to explore the long run as well as the
short run correlates of balance of trade with reference to Ethiopia by using
Johansen cointegration approach and Error correction model (ECM), and to
forecast the balance of trade through ARIMA model by using annual data from
1974/75 to 2009/10.
The Johansen multivariate co-integration procedure reveals that Ethiopia’s
trade balance and key determinants (such as real gross domestic product, real
effective exchange rate index, debt and foreign income) are co-integrated, and
thus share a long-run equilibrium relationship. The error correction model
indicates that real gross domestic product has short run impact on the balance
of trade in Ethiopia but other determinants such as real effective exchange rate
index, debt and foreign income do not have short run effect on the balance of
trade in Ethiopia, and that about 77.8 percent of shock (disequilibria) will be
adjusted within the same year.
The value of balance of trade is forecasted by using ARIMA model. The result
indicated that the deficit in the balance of trade is expected to rise from 2010/11
up to 2015/16.
Key words: Trade balance, Johnsen coinstegration approach, Error correction
model, ARIMA
Description
Keywords
Trade Balance, Johansen Cointegration Approach, Error Correction Model, ARIMA