Guta, Fantu (Dr.)Addis, Solomon2021-11-102023-11-042021-11-102023-11-042021-10http://etd.aau.edu.et/handle/123456789/28587This study uses annual data for the period 1974/75-2018/19 to investigate the effect of exchange rate on Ethiopia’s trade balance using both descriptive and time series econometrics techniques. Based on the assertions made by the traditional theory it is expected that devaluation of domestic currency (i.e. appreciation of exchange rate) generally decreases the relative price of domestically produced goods and thereby stimulates demand for domestic export hence, the devaluation of currency can be expected to have a positive effect on trade balance of Ethiopia. So, this study uses empirical model and econometric method to examine the effect of change in exchange rate on trade balance of Ethiopia. It has to be noted that devaluation affects other items of the balance of payment; the study focuses only on the effects of exchange rate (devaluation) movement on the trade balance of the country and hence further researches has to be conducted. The empirical result finds it devaluation exerts negative effect against trade balance of Ethiopia. The finding prevails that this negative effect is because of that Marshall-Lerner condition is not applicable in Ethiopia. Following the finding of the study policy recommendations have been given. First, the structure of Ethiopian exports has to be changed. Second, the government should design a policy which enables to attract foreign direct investment. Third policy makers have to rely on supply side policies. Fourth diversification of exportable to take comparative advantage, improve the quality of the existing export commodities and providing training for exporters. Fifth Proper awareness creation has to be made on the consumers on the local product usage which costs high bills. Finally it is advisable to have research and development center domesticallyenPhrases: Real Effective Exchange rate, Trade Balance, economic growth, VAR model, VECMThesis