Analysis on the Determinants of Trade Balance in Ethiopia a Time Series Analysis (1981-2017)

Abstract

Trade balance is one core component of gross domestic products of countries especially in the present times in which every nation have liberalization of their economies. It may be in surplus or deficit depending on the trading and economic power of the nation. For instance Ethiopia has running a negative trade balance for the previous three decades, implies that export of the country could not cover the import expenditure. There are different factors which result into having as such circumstance. This study tried to identify the main determinants of the trade balance in Ethiopia by considering ratio of export and import as an approximation to trade balance. The study investigates the determinants of trade balance in Ethiopia from 1981-2017. The Autoregressive Distributed Lag under Bounds test approach to cointegration was used for the estimation. Further, the study employed the variance decomposition and impulse response functions to investigate the dynamic simulations of the variables included in the estimated model. The results show evidence of an equilibrium long-run relationship (cointegration).

Keywords: Trade balance, ARDL, Ethiopia