A sma!! macroxunonetnc model for Ethiopia is sper:ified, estimatH:i and tested using time series data for thernperiod 1965/66 -1998/99 Wih the objectiLe of examining tk eJfo::t of an inOT'tlse in inljXJ11:pnres and thernimpaa of A IDS. 1he malel is set up in rp71!I'a/ equilibriton frtl111e1Wrk and individual equations in thernnKXid. are estimated in an ECM fonnat using tJx: Johansen approach in view of the time series properties ofrntbe maooÂ·time series mriables. In ten11S of the individual equations and dynamicwilbÂ·inÂ·samfle sinUflation,rntJx fJeliOlmana! of the model is quite wdl.rnT7W dyr1t011iJ: counle/foailal simulations are carried out 1he result of the simulation demonstrates that anrnincrease in import prUe has diverse impact on the ffXJr1011Y induding increase in the merall prUe lead, realrnexc/xmlJ! rate deprociation, reduction in imports, deterioration in tenns of trade and sfa..ving dm.m of tlxrnfX.U/7rmicgruutb. This result is ronsistentwilb the import mnpression argument raised in Ndulu (1991) andrnRatt;E (1994).rnIn addition, it can be discerned that the prewlentE of H!V/AIDS has a negatiu! impaa on the merallrnfX.U/7arty througfJ lmwing the actite falxJur force The decline in the /alxJ~nIarr:e bas a dim ~ impaarnon lxJtI, tlx output of the agricultural and nonÂ·agricultural sector.; that 7.wuld lead to the foIL in priwternconsumption, inU!stment, exports and gm:emment tax rewnue. 1he slfJW dorm of the econ(my 7Wuld also bernstrengt/xned wilb tlx fa/I in imports due to the drrline in exports and knee tbe shrinking doun of thernimfXJrting capacity.