DETERMINANTS OF TRADE BALANCE IN ETHIOPIA:EVIDENCE FROM ARDL MODEL

The annual time series data used in this study span the years 1980 to 2021 to investigate the factors influencing Ethiopia's trade balance. The analysis employs the Autoregressive Distributed Lag (ARDL) model to capture both short-term and long-term dynamics among the variables. Key determinants considered include real GDP, broad money supply as a percentage of GDP, inflation rate, official exchange rate, and trade openness. The study aims to fill the empirical research gap on the impact of these factors on Ethiopia's trade balance. Descriptive statistics, correlation analysis, and various diagnostic tests are utilized to ensure the robustness of the results. The findings indicate that real GDP and trade openness positively influence the trade balance, while inflation and exchange rates have significant but mixed effects. The method of ARDL bounds testing verifies a long-term relationship between the variables, suggesting that both macroeconomic policies and structural factors play crucial roles in shaping Ethiopia's trade balance. These results provide valuable insights for policymakers to formulate strategies that enhance trade performance and economic stability.