The Effect Of Exchange Rate Movement On Trade Balance In Ethiopia

This study uses annual data for the period 1974/75-2018/19 to investigate the effect of exchangernrate on Ethiopia’s trade balance using both descriptive and time series econometrics techniques.rnBased on the assertions made by the traditional theory it is expected that devaluation of domesticrncurrency (i.e. appreciation of exchange rate) generally decreases the relative price of domesticallyrnproduced goods and thereby stimulates demand for domestic export hence, the devaluationrnof currency can be expected to have a positive effect on trade balance of Ethiopia. So, this studyrnuses empirical model and econometric method to examine the effect of change in exchange raternon trade balance of Ethiopia. It has to be noted that devaluation affects other items of the balancernof payment; the study focuses only on the effects of exchange rate (devaluation) movementrnon the trade balance of the country and hence further researches has to be conducted.rnThe empirical result finds it devaluation exerts negative effect against trade balance of Ethiopia.rnThe finding prevails that this negative effect is because of that Marshall-Lerner condition is notrnapplicable in Ethiopia. Following the finding of the study policy recommendations have beenrngiven. First, the structure of Ethiopian exports has to be changed. Second, the governmentrnshould design a policy which enables to attract foreign direct investment. Third policy makersrnhave to rely on supply side policies. Fourth diversification of exportable to take comparative advantage,rnimprove the quality of the existing export commodities and providing training for exporters.rnFifth Proper awareness creation has to be made on the consumers on the local product usagernwhich costs high bills. Finally it is advisable to have research and development center domestically

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