Determinants of Trade Balance in Ethiopia

Abstract

Ethiopia like other developing countries is highly dependent up on earnings from the sales of primary commodities and concentrating on small range of export commodities and market outlays to finance much needed capital goods imported. Thus, the country’s exports have failed to finance its import demand this makes the country to record frequent trade deficit in international trade. So that, investigation on trade balance, its structure, volume and value and the factor that affect it is necessary. The research therefore, aims at dealing mainly with determinant of trade balance in Ethiopia and investigating the structure, value, volume and direction of export and import in Ethiopia.\xa0 This study uses unit root test, co-integration techniques, Engel-Granger test, and Error correction model.The main finding of this paper are\xa0 FEA shows a long run negative relationship with trade balance .on the other hand lag trade balance and REER shows a long run positive relationship with trade balance .However , Real GDP is insignificant in the long run. (2) REER shows a short run negative relationship with trade balance. On the other hand Real GDP, lag trade balance, FEA and trade liberalization are insignificant in the short run estimation.The study recommends appropriate attention to be provided for boosting export sector and encouragement of domestic output expansion coupled with using technology in the production of output for domestic as well as international market. Keywords: trade balance , export promotion , economic growth DOI : 10.7176/RJFA/10-3-06