Statistical Analysis And Prediction Of The Balance Of Trade In Ethiopia Using Error Correction And Arima Models

For a long period of time, Ethiopia has involved in foreign trade andrnexperienced trade deficit several time in the past. This deficit can be largelyrnexplained by the unequal terms of trade between agricultural commodities (therncountry's major exports) and capital goods (the country’s major imports).rnThe core objective behind this study is to explore the long run as well as thernshort run correlates of balance of trade with reference to Ethiopia by usingrnJohansen cointegration approach and Error correction model (ECM), and tornforecast the balance of trade through ARIMA model by using annual data fromrn1974/75 to 2009/10.rnThe Johansen multivariate co-integration procedure reveals that Ethiopia’srntrade balance and key determinants (such as real gross domestic product, realrneffective exchange rate index, debt and foreign income) are co-integrated, andrnthus share a long-run equilibrium relationship. The error correction modelrnindicates that real gross domestic product has short run impact on the balancernof trade in Ethiopia but other determinants such as real effective exchange raternindex, debt and foreign income do not have short run effect on the balance ofrntrade in Ethiopia, and that about 77.8 percent of shock (disequilibria) will bernadjusted within the same year.rnThe value of balance of trade is forecasted by using ARIMA model. The resultrnindicated that the deficit in the balance of trade is expected to rise from 2010/11rnup to 2015/16.rnKey words: Trade balance, Johnsen coinstegration approach, Error correctionrnmodel, ARIMA

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