Determinants of Bilateral Trade between Ethiopia and Its Major Trading Partners’: A Gravity Model Approach

Abstract

International trade has increasingly become a keystone of economic prosperity in many countries of the world. Ethiopia is the one which benefit from foreign trade. Therefore, the main focus of this paper is to identify factors influencing bilateral trade between Ethiopia and its major trading partners’. The gravity model of trade was employ for the purpose. A gravity model based on a panel data for the period of 10 years (2000-2009) of sample countries was estimated by fixed effect estimators. The coefficients obtained are then used to predict the basic total trade and export trade potentials for Ethiopia.

As a result, we found that the total trade flow was determine by mass (economic size) of the importing and exporting countries, real bilateral exchange rate, FDI of Ethiopia, weighted distance and bordering between Ethiopia and the major trading parents. Ethiopia's export performance to those major trading countries’ are also determine by GDP of the importing countries, GDP of the exporting country, the weighted distance. The results of this study indicate that a depreciation of the real exchange rate would affect the international competitiveness of Ethiopian exports, therefore, we recommends Depreciation of a country's real exchange rate because it will cause a gain in competitiveness of that country and government needs also to pay adequate attention to destination markets with cheaper transport costs.

Keywords: Trade Flows, Gravity Model, Ethiopia.