Abstract:
Fundamental relationships between different macroeconomic variables may follow certain
common theories but local preferences are also decisive in determining their behavior
since, macro economy of every country is unique and they need to be treated after
considering their peculiarities. In this regard, looking into domestic demand-growth nexus and
export-growth nexus are, therefore, needed in order to understand the long -run economic stance
and to capture the short-run dynamics in the national economy as well as to find evidence about
the source of economic growth. However, the causal relationship between exports, domestic
demand and economic growth in Ethiopia has not received adequate attention. Therefore, the
aim of this study is to find a causal relationship between export, domestic demand and economic
growth in Ethiopia using time series data over the period 1960/61-2010/11. This study uses two
measures for domestic demand, namely household consumption and government consumption.
Granger causality and Johansen cointegration test are employed in the empirical analysis.
Result of Johansen cointegration test indicates the existence of long run relationship among the
variables. The result of Granger causality test shows that there is a dynamic relationship
between export and economic growth and between domestic demand and economic growth.
Export and domestic demand are important for economic growth as well as, economic growth
have an impact on export and domestic demand in Ethiopia. A successful and sustained
economic growth requires growth in both export and domestic demand. Nevertheless, a balance
emphasis should be to domestic demand to push the economy towards higher growth path.
