Impact of International Trade on Economic Growth of Ethiopia

Abstract

This paper examined the impact of international trade on economic growth in Ethiopia during the period from 1974/75 to 2020. The general objective of the study is to investigate the impact of international trade on Ethiopian economic growth from 1974/75-2020 by using ARDL bound test approach to examine the long and short-run relationship between economic growth and explanatory variables. The study used both descriptive and empirical techniques Source of data were secondary data. To check for the stationarity of the variables, the researcher has used augmented dickey fuller and Phillips-person unit root test and the result indicated that all variables become stationary at first difference. The results of bound test confirm existence of the long-run relationship between explanatory variables and economic growth. The empirical results show evidence of long-run positive impacts of international trade proxy by export volume while negative impact proxy by trade openness index on economic growth in Ethiopia whereas progresses in international trade sector in both proxy contribute to economic growth in short-run. Broad money and gross capital formation as a control variables were positive and have significant influence on economic growth both in long-run and short run while real effective exchange rate, government final consumption expenditure trade openness and inflation level had negatively and significantly influence on the economic growth only in long-run 0.049,0.073,0.22 and 0.012 respectively. The magnitude of the error correction term coefficient is -0.4777justifiedabout 47.77% of the disequilibrium annually converge towards long run equilibrium in the following year. The recommends that enhancing export competitiveness is pre-determined factor for sustainable economic growth in the long run and short run. Moreover, the policy maker’s focused on the long-run policies and in short run policies to stimulate economic activates in Ethiopia.