DETERMINATE OF EXPORT

PERFORMANCE IN ETHIOPIA

By: INDASHEW S.

Advisor: Rediet. A.(MA)

A Senior Essay Submitted to the Department of Economics of Arsi

University in Partial Fulfillment of the Requirements for the
Bachelor of Arts Degree in Economics

ARSI UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ECONOMICS

February, 2024
Asella, Ethiopia
Acronyms

CSA CENTRAL STATICS AUTHOURITY

DCs Developed Countries

LDCs Less Developing Country

GDP Gross Domestic Product

NBE National Bank of Ethiopia

MEDaC Ministry of Economic Development and Cooperation

MoFED Ministry of Finance and Economic Development

OLS Ordinary least square

2
Table content

Acronyms...................................................…………..........................................l
CHAPTER ONE: -
1) Introduction
1.1 Background of the
study………………………………………………….......................1
1.2 Statement of the problem
……………………………………………….......................6
1.3 Objective of the study
…………………………………………………............................7
1.3.1General
Objective……………………………………………………...............................7
1.3.2 Specific
Objective…………………………………………………….. ...........................7
1.4 Research question
…………………………………………………………..........................7
1.5 Significance of the
study…………………………………………………........................8
1.6 Scope of the
study………………………………………………………............................8
1.7 Organization of the
paper………………………………………………….......................8
Chapter Two
2) Literature Review
2.1 Definition of
export……………………………………………………………......................9
2.2 Theory of trade.........
……………………………………………………………….................9
2.2.1 Theory of international
trade…………………………………………………..............9
2.2.2 Classical
theory………………………………………………………………......................9
2.3 Empirical
Literature…………………………………………………………….....................11

CHAPTER 3
3) RESEARCH METHODOLOGY
3.1 Data source and types.....................................................…….........…………16
3.2 Data Analysis methods..............................................…………....................16
3.3 Model specification......................................................…...…..................…17
3.4. Definition of variables and Hypothesis…………………………………............
…...17
3.4.1 Dependent variable ................................................................................18
3
3.4.2 Independents variable .................................................... ......................19
3.5 Econometrics test .. ..................................................................................19
3 5.1 Stationary and Non-Stationary Series.................................................. 19
3.5.2 Unit Root test……..........................………………………………...
………………………...19
3.5.3 Tests for Co integration……………………………………………....................
………...20

CHAPTER 4
TIME BUDGET AND COST BUGET
4.1Time budget ………………………………………..
………………………….............................21
4.2 cost
budget……………………………………………………………………….................
..........21

Reference.......................................................................................................22

CHAPTER ONE
1) INTRODUCTON

1.1 Background of the study

The Ethiopian economy had recorded a promising growth performance during the
imperial regime, which was declined after the mid 1970s. In the Derge regime, the
overall economic performance was extremely low and real aggregate variables were
reduced. Since 1992, Ethiopia has tried to adopt reform packages with the aim of
reversing the deteriorating economic conditions and put the economy in a direction of
sustainable growth. However, the economy remains weak and sensitive to shocks
(KagnewWolde, 2007).
Ethiopia did not succeed in increasing manufactured exports in which the major
commodities are leather and leather products, meat, sugar and textiles (Ibid).

Like other sub-Sahara Africa economies, the economy of Ethiopia is essentially

agricultural based. But the sector that shows consistently high growth rate of value
added is the service sector the convened service sector was the largest contributor to
GDP, accounting for 45.1% in 2008 /09 overtaking the share of agriculture /43.2%/ for
the fist time /NBE, 2008/09). The official estimate for Ethiopia's GDP was $312 billion
at the end of 2023 in puchasing power partity terms.

4
World Economics has developed a database presenting GDP in Purchasing Power
Parity terms with added estimates for the size of the informal economy and adjustments
for out-of-date GDP base year data. World Economics estimates Ethiopia's GDP to be
$477 billion - 53% larger than official estimates. Distributive services such as hotel and
restaurants, trade, transport and communication contributes an average of 15% GDP
during 2021/22 period (NBE, 2021/22/)
Coffee export has taken the biggest share compare with to others commodities.
However, the share of the country supplies to world market is very few compare with the
world top coffee exporter countries, such as Colombia, Brazil and Vietnam. Coffee
export reached high export and the country share of trade to world market was 199, 446
metric and 0.01 ton respectively in the year 2009 (WTO, 2007). According to
Alemayehu (2006) the main reason of the Ethiopia export constraint comes from the
supply side. The country entrepreneurs depend on export of very few primary products
for a century. On the others hand the demand aspect also has impact on the country
export volume because of depending with very few trade partners.

Total export during 2021/22 amounted to USD 3.15 billion, about 14.8 percent higher
than the previous year .The growth was largely attributed to increased earnings from
oilseed (44.6 %), gold (30.5%), live animals(40%), pulses(15%), flower(12.4%), meat
and meat product(24.5) fruit and vegetables(42.7%),leather and leather products
(5.9),and chat(0.8).Revenue, from export of coffee decline by one percent in 2021/22
and amounted ti USD 833million.This fall in export earnings from coffee was solely
attributed to the 13.6 percent decline in volume of export despite higher price. As a
result, the share of coffee in total exports went down to 26.4 percent from 30.6 percent
of preceding year (NBE,2021/22)

Considering the export volume of different regimes of the country, the pre-
Reform regime trade strategy in Ethiopia was characterized by protectionism type.
This means both regimes followed the import substitution trade strategy. The inward
looking policies of the previous military government were an impediment to the
expansion of Ethiopian’s export sector. However, even if the imperial regime follows
an export pessimism strategy there were good performances on the sector as
compared to the Derg regime simply by trade balance. The Derg regime emphasis on
state owned exports. In other word, the main
5
exporter of the majority commodity was the government.The transitional
government acknowledged the importance of diversification unlike the pre 1992
period when the currency coupled with other measures taken as a part of the
stabilization and adjustment program have had a positive effect on the external sector
of Ethiopian economy (tewodros, 2006)

Coffee export has taken the biggest share compare with others commodity .however,
the share of country supplies to world market is very few compare with the top
coffee exporter countries, such as Colombia, Brazil and Vietnam. Coffee exporter
reached high export and the country share of trade to world market was 199,446
metric and0.01 ton respectively in the year 2009 (WTO, 2009). According to
Alemayehu (2006) the main reason of Ethiopia export constraint comes from the
supply side .The entrepreneurs depend on export of very few products for a century.
On the other hand the demand aspect also has impact on export volume because of
depending with very few trade partners. Moreover now government is more
emphasis on export sector performance. In 2021—the most recent year in which
United Nations COMTRADE data is available—Ethiopia’s major goods exports
included coffee (27%), gold (15%), oil seeds (9%), vegetables (7%), flowers (5%)
and legumes (5%). The top five destinations for Ethiopian exports in 2021 were
United Arab Emirates (18%), the United States (14%), Somalia (9%), China (7%),
and Germany (6%). By region, Ethiopia’s goods exports went to Asia (48%), Europe
(21%), the Americas (15%), and Africa (15%).

.
1.2 Statement of the problem
Most developing countries, however, are often exposed to external shocks. For instance,
many of them were hit by the widespread balance of payment crisis of the 1985, which
in turn resulted in serious development problems. The main courses for their exposure to
external shocks has been their reliance on primary commodities for export ,the real price
of which have shown a downward tend since 1980’s. Consequently, the export earning of
these countries are not significant. The situation in Ethiopia is not different from that of
other developing countries. About 90 percent of the export commodores are obtained
from agriculture and its product (MEDAC 1999). Further more, the export of the county
have been highly depending on a few products of which coffee, Hides and skin, Oilseed,
Pulses ,and Chat accounts for 26,24.6,24,6.3,9.3 of agricultural exports (NBE,
2008/09).
The export earnings generated from the export of primary commodities are also very low
and unable to cover the import needs of the county. Since agriculture is under the
vagaries of nature, the dependency on agricultural export goods resulted in poor export

6
performance. With good weather condition the export volume of the county will increase
and with bad weather condition the reverse will happen.

Low foreign exchange earnings reduced the import of essential capital goods; induced
deterioration in the quality of socio economic infrastructure, which are indispensable for
the nation .To overcome such chronic micro economic in balance and realize developed
socio economic infrastructure, Ethiopia need to increase as well as exploit agricultural
potential. Since agriculture is the base for the economy and it has significant
contribution for development of industrial sector of the country .In the year 2010
Ethiopia import bill was 8.7billion while export bill were 1.7billion ,there is very great
imbalance between export revenue and import(IMF,2010)
Ethiopian agriculture predominantly characterized by traditional method of farming with
a very little change in farming practice over the past few years. The continuous use of
such farming system, which leads to reduction of soil fertility and output, particularly the
continuous loss of forest owing to the cutting of trees for the purpose of domestic
energy and construction as well as the extension of agricultural land to marginal land
increases the production, which leads to several climatic change, particularly increase
the frequency of drought in many part of a country which results in shortage of food
consequently famine and other problems (birhanu negaand Befekadu degefe,
1999/2000).

The way for success of any policy and strategy designed to increase export calls for a
complete survey or investigation of factors, which affect export performance and the
action of economic agents, consequently, better understanding of the determinant of
export performance and direction and magnitude of relevant elasticity is mandatory.
Therefore, this study is different from the previous studies by the period, data and
variables included in the analysis. This paper tried to find an appropriate answer for the
following questions by using updated data and different variables than the preceding
works. What kind of relationship exists between economic growth (real GDP) and share
of export in Ethiopia? What are the major factors affect the performance of export sector
in Ethiopia? Why agricultural exports dominant over manufacturing exports? And how
these problems can be solved by using conductive appropriate policy measures? These
are the reason for conducting this study

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1.3 Objective of the study
1.3.1 General Ojective
The general objective of the study will be examining the performance of Ethiopian
export sector and its overall contribution for Ethiopian economy.
1.3.2 Specific Objective
 To examine the major factor which affects the country’s export
 What are the pattern and trends of Ethiopian export performance
 What are the most determinants of export performance of Ethiopian

1.4 Research Question

 What are the pattern and trends of Ethiopian export performance
 What are the most determinants of export performance of Ethiopian

1.5 Significance of the study

The paper will have the following importance
 It will help policy makers in their plan to boost the performance of sector in
general and agricultural sector in particular
 It will have significance for those who are interested in research works in the
area of export in Ethiopia context
 Moreover, this study may enables subsequent research in the area to focus on
significant factor that hinder the growth exports and also will serve as reference
for further analysis concerning the study area

1.6 Scope of the study

Due to the wideness and complex nature of the study, this investigation limited to
performance of some export commodities in the economic growth of a country. This
study is limited both in time and in scope its geographical is restricted in Ethiopia. The
studies will try to see the past 32 years export sector performance and its contribution to
the Ethiopian economy
1.7 Organization of the Paper
The paper will be organized into six parts. The first part of the study is introduction, the
second part is theoretical and empirical evidences found in literature's, third chapter will
be methodology of the study, the fourth part will be discussion on structure and
8
performance of export ,the fifth will econometrics analysis, and the last part of the study
will be concussion and possible policy recommendation

CHAPTER TWO
2) LITRETURE REVIEW
2.1 Definition of export
According to Todaro 10th edition, Export is a function of international trade where by
goods produced in one country are shipped to another country for future sale or trade.
The sale of such goods adds to the producing nation gross output. If used for trade,
exports are exchanged for the other products or service. Exports are one of the oldest
term of economic transfer, and occur in large scale between nation that have fewer
restriction on trade, such as tariff or subsidy .The term export means shipping the goods
and service out of the port of the country.

2.2 Theory of trade

Much has been said in the literature regarding the role of the export sector to the overall
economic performance. Those discussed below are among of them.

2.2.1 Theory of international trade

Theoretically, the nation of trade is believed to have originated with mercantilist school
of thought dating back to early 17 th century .Proponents of the school opened that the
only means that notion becomes more economically and politically power full and
stronger is through the sale of export over imports.

2.2.2 Classical Theory

Classical theory of trade was first developed by Adam smith, in his famous ’ the wealth
of Nations; He refuses the mercantilist control over or faith of zero-sum game theory of

9
inter national trade that one country can gain at the cost of the other. Classical
economists have stressed the role of international trade for economic development.

A.) Adam Smith Theory of Absolute Advantage

According to A. Smith argument the wealth of Nations would expand most rapidly if the
government would abandon mercantilist cover international trade flow. Smith argued
that all countries would gain from international trade through international division of
labor specialization of nations in the production of the only few goods.
In Smith model of international trade everyone will be better of without making anyone
worse of. In general, smith showed how international trade is determined and countries
can gain from it. According to Smith, each nation benefits by Specializing in production
of goods that it can produce at a lower cost than other nations (Salvatore, 2004).

B). Ricardo Theory of Comparative Advantage

Theory of comparative advantages suggests that a country should specialize in a
production and export of those goods in which either it comparative advantage is greater
or its comparative disadvantage is lesser, and it import those goods in the production of
which its comparative advantage is lesser or comparative disadvantage is greater. There
by a country would be able to maximize its production (GNP) and its consumption or
One big question that smith failed to answer was what if a country does not have
absolute advantage? What would be the structure of the trade? David Ricardo
addressed the answer for this question through comparative advantage (Ibid). He pointed
out that countries should specialize in production where their greatest comparative
advantage. Economic welfare (Salvatore, 2004)

David Ricardo principle of comparative advantage allows us to explain trade better than
most people’s intuition and better than Adam smith’s original explanation of trade pattern
(Pugel Lindert, 2000 ).Ricardo’s comparative advantage principle in the production of
both goods , a basis for mutually beneficially trade may still exist( Richardson, 1992 ).
The more efficient nation should specialize in and export that good in which it is
relatively more efficient or where its absolute advantage is greatest.

10
The absolute advantage and comparative advantage constitutes only what is called the
“supply version” of the classical theory of international trade. But the demand structure
in two countries does also affect the structure in two countries as well as the gains from
trade. The latter classical economists like Mill, Marshal and Edge Worth developed the
theory of reciprocal demand offer curve to bring together the “demand version ” of
classical theory with its supply version. Their merit lies in the fact that they resolve the
problem of determining the exact terms of the trade that emerged in trade equilibrium.
The offer curve tries to show how the term of trade is determined by the interaction of
demand and supply (Meier, 1995).

2.3 EMPIRCAL LITERATURE

Numerical studies have provided estimate of the demand for and supply of developing
countries export. For rapidly developing Asian Countries economy, the fast growth in
export volume has not been accompanied by persistent deterioration in there relative
prices Vis –a-Vis the rest of the world. This implies that the price elasticity of export of
demand is very high, so that modest increases in competitiveness are sufficient to insure
increase demand for exports. In support of this thesis, Riedel and Athurokala (1991,
cited in Lorenzo, 1997)
Export performances of African countries were negatively affected due to stagnant and
deteriorating term of trade (Svedberg 1997).

(Lassie ,1993) employ cross-section and panel data analysis to establish the direction of
causality between the growth of exports and the real output by taking a sample of 24 and
19 African countries. The result supports the hypothesis for panel data but fails to find
any positive linkage when using export growth as a share of GDP.

According to Esfahan (1991), export enables developing countries to relieve the import
shortage they face up to. Speaking differently, revenue from exports can fill ‘’the foreign
exchange gap’’ which is perceived as barrier to growth.
Michael (1977) used cross-section data set for sample of 41 less developed countries to
examine the export economic growth relation ship by applying spearman rank
correlation coefficient. The estimated coefficient suggested a positive and significant
relationship between exports and economic growth among the more developed

11
economies but not among the least developed one. He concluded that export out put
growth once countries attain some minimum level of development
Tipper (1981) looks a sample of 55 middle income developed countries to investigate the
impact of export growth on economic growth and economic development, and found a
positive and significant relation between export growth and income growth.

In Ethiopia owing to the structural problems and policies that were pursued by the
different regimes that come to power, the performance of the export sector has been less
satisfactory. The nation out put and export are highly concentrated in agricultural
commodities, primary agricultural products account for 80~90 percent of merchandise
export {Mulugeta, 2005}.

Amin{2001},in his thesis empirically tasted the effect of export instability on economic
growth of Ethiopia both in short run and long run in his econometric analysis, he found
that the short run analysis entails the significance of the magnitude of the coefficient of
the export earning instability suggesting the shortness of the time period to cushion the
effect of instability relative to the insignificant but negative result of long run models,
the short run effect can be probably due to unexpected loss 0f foreign exchange which
in turn may be due to unexpected short fall caused by either internal or external shocks
In order to insulate the effect of instability on the economy possible reason for the long
finding ,according to him is that in the long run economic agent may have many way to
adjust .

Another study related to the determinate of export performance is conducted by Berhane

(2000). According to this result, the world demand is found to be important determinant
of export performance. In other word, the existence of demand for export from
consuming countries therefore seems to be the deriving force behind the growth of our
export. He concluded that economic activities in the major industrial countries remain
the overall determinants of export of Ethiopia. Furthermore, devaluation of birr had
improved export performance while domestic consumption adversely affected its
performance. Finally result from export tax coefficients was found to be insignificant.
(Ibid).

12
The export sector performance in the country is said to be the weakest even when
compared with other developing countries. Ethiopia export trade contributes only about
9% to the GNP. Where as in most LDCs the export trade has been accounting for about
23% (statistical bulletin, number, 230; 5)

Kagnew Wolde (2006) run multivariate time series approach for Ethiopia and found a
long run equilibrium relationship among the variables and the existence of causality
between export and GDP in at least one direction and he conclude that consistent with
expectation export growth and out put growth were found to be positively related
supporting the export led growth hypothesis. This export expansion brings economic
growth in various ways. However, his result danger causality tests at different lag
lengths reveal that the causation is weak implying that export growth affects output
growth that through another channel which could be ascertained further research work.

Only four out of the top ten market for Ethiopia export we related in the conventional
West (Switzerland, Germany, Netherland and USA).while the other six countries are in
what might be termed as the South ( China, Somalia, Saud Arabia , Sudan, UAE and
South Africa).The report stated “it is also striking that countries with very low PCI and
highly un settled .Sudan and Somalia are now larger market for Ethiopia exports than
some of the world richest and most stable countries .Thus with neglecting long standing
historical trade links Ethiopia exporters would be well served by paying equal attention
to increasingly important neighboring and regional market in the developing world .The
report further noted that beyond the top three markets ,surprising shifts are taking place
in the markets for Ethiopian export (custom Authority ,2010)

Girma (1982) carried out country specific regression analysis for Ethiopia by
incorporating GDP as the dependent variable and exports as the only explanatory
variable .His result indicated that GDP and exports are highly correlated with
correlation coefficient of 96% and the coefficient of determinant (R2) was 81%.
However, his work didn’t consider the effect of other important variable that could
significantly influence economic growth.

13
The price of Ethiopia export commodities are not only highly unstable but also the
major source of the fluctuation in total export earnings .Despite the governments
minimal emphasis on the expansion of the export sector .Export are found to have a
significant impact on the country growth process .In terms of magnitude, the impact
of export on growth of output is found to be less than that of investment .The result
lead one to stress that given the countries current economic condition ;policy
emphasis should be towards the export sector and raising the level of National
income .To this end ,both domestic and foreign private investors should be
encouraged . (Johannes Ayalew,1991)

The estimation of Debele Gemechu (2002) using 2SLS is statistically robust “where
a one percent increase in export is related to about 0.16 percent growth of the
economy “ in addition ,although there is a direct contribution of export to economic
growth, indirectly exports can foster economic growth substantially by inducing
public savings, attracting foreign capital and hence promoting investment .It also
found that there is appositive and significant output exports growth
relationship .That is the hypothesis that a growth in output can positively influence
export growth is statistically supported .Lastly, the question of causality between
export growth and economic growth is examined using techniques of co integration
and error correlation model .The result should that the causality run from export to
economic growth .

In general the above mentioned reviews that export and economic growth linkage
need further investigation .Although most of the cross sectional studies indicated that
the export and economic growth is positive and significant, the time series studies
doubt about the existence of such a relationship of the export share and economic
growth and also its performance and the impact of identified variable by using time
series data ranging from (1981/82 2021/22).To do so study will apply Ordinary
Least Square (OLS) econometric technique.

14
 CHAPTER 3
3) Methodology of the study

3.1 Data source and types

The study will depend on time series data which will be collected from domestic and
international publication .The source of domestic secondary data will from National
Bank of Ethiopia.(NBE),Central Statistical Authority (CSA),and the Ethiopian
Economic Association (EEA) .World Bank (WB) ,International monetary fund
(IMF) and publication on export related issue will be as a reference for international
secondary data .Some international secondary data might be collected through
internet.

15
3.2 Data Analysis methods
The method employed for this study will econometric analysis to study both relation
and significance of the variable by using time series data ranging from 1981/82 to
2021/22.The data analysis, particularly on the part dealing with trends and
performance of export will be done by using OLS econometric method .In addition;
statistical measure such as percentage, ratio, tables, average and graphs will used for
the purpose of the analysis.

There is different methodology and variables choice to address the mentioned key
question .Since the estimation of the constraint of Ethiopia export performance is the
one the objective of this paper; a log linear form single equation export
determination will be employed as shown below .It is not easy to include all the
explanatory variable that affect the performance of export sector in Ethiopia .This
partly because of the existence of numerous variables that have influence on export
and because of difficulties to obtain the tactical information for some the variables.
To this regard the study will uses six explanatory variables of the major determinants
of the Ethiopian export performance. This include domestic consumption to GDP
ratio, Real Exchange Rate, Infrastructural facilities, Average GDP of major
Ethiopian export Importer countries (the national income of importer country),level
of import and capital formation
3.3 Model specification
The model used for the purpose of analysis in this study will formulated as follows

EXP0RT(X)=F(DOMESTIC CONSUMPTION,REAL EXCHANGE RATE,GROSS

CAPITAL FORMATION ,INFRUSTRUCTURAL FACILITY,AVERAGE GDP OF
MAJOR ETHIOPIAN EXPORT IMPORTER COUNTRY AND LEVEL OF
IMPORT)

EXPORT IS ONE OF DEPENDENCE VARIABLES IN THIS MODEL AND

DOMESTIC CONSUMPTION,REAL EXCHANGE RATE,GROSS CAPITAL
FORMATION ,INFRUSTRUCTURAL FACILITY,AVERAGE GDP OF MAJOR
ETHIOPIAN EXPORT IMPORTER COUNTRY AND LEVEL OF IMPORT
16
EXP=F(CGDP,RER,K,IF,ICNI,IM)+E
WHERE
EX=EXPORT
CGDP=DOMESTIC CONSUMPTION K=GROSS
KAPITAL RER=REAL EXCHANGE RATE
IF= INFR.FACILITY

IMP=IMPORT
E=ERROR TERM OR DISTARBUNCE
3.4. Definition of variables and Hypothesis

The equation EXPORT = (DOMESTIC CONSUMPTION, GROSS KAPITAL,

REAL EXCHANGE RATE, INFR.FACILITY, IMPORT) + ERROR TERM
represents a simple regression model that aims to explain the variation in exports
based on several explanatory variables. Let's break down the components of this
equation:

1. EXPORT: This is the dependent variable in the equation, representing the level of
exports from a country. The goal is to understand and predict changes in export
levels based on the explanatory variables.

2. DOMESTIC CONSUMPTION: This variable represents the level of domestic

consumption within the country. It is included in the model to capture the
relationship between domestic demand and export performance.

3. GROSS KAPITAL: This variable refers to gross capital investment, which

represents the level of investment in physical assets within the country. It is included
in the model to account for the impact of investment on export levels.

4. REAL EXCHANGE RATE: The real exchange rate measures the relative value of
a country's currency compared to foreign currencies after adjusting for inflation. This
variable is important as it reflects the competitiveness of a country's exports in
international markets.

5. INFR.FACILITY: This variable represents the quality and availability of

infrastructure facilities within the country. Infrastructure plays a crucial role in
facilitating trade and can impact export performance.

17
6. IMPORT: This variable captures the level of imports into the country. Imports can
have both direct and indirect effects on a country's exports, such as through
competition or as inputs for export production.

7. ERROR TERM: The error term accounts for unobserved factors or random
variation that may affect exports but are not captured by the explanatory variables
included in the model.

By including these explanatory variables in the regression model, researchers aim to

assess the relationships between domestic consumption, gross capital investment,
real exchange rates, infrastructure facilities, imports, and export levels. The model
helps to identify key drivers of export performance and understand how changes in
these variables influence a country's ability to export goods and services.

Based on this equation, a hypothesis could be that domestic consumption, gross

capital, real exchange rate, infrastructure facilities, and imports have a significant
impact on exports. The hypothesis could be that an increase in domestic
consumption, gross capital, real exchange rate, infrastructure facilities, and imports
will lead to an increase in exports. The error term captures any other factors that may
influence exports but are not included in the model.

3.4.1 Dependent variable

In the equation EXPORT = (DOMESTIC CONSUMPTION, GROSS KAPITAL,
REAL EXCHANGE RATE, INFR.FACILITY, IMPORT) + ERROR TERM, the
dependent variable is EXPORT, as it is the variable that is being explained or
predicted based on changes in the independent variables.

3.4.2 Independents variable

The independent variables in this equation are DOMESTIC CONSUMPTION,
GROSS KAPITAL, REAL EXCHANGE RATE, INFR.FACILITY, and IMPORT.
These are the factors that are hypothesized to influence or explain variations in
export levels. The error term represents the unobserved factors or random variation
that affects exports but is not explicitly included in the model as an independent
variable.

3.5 Econometrics test

3 5.1 Stationary and Non-Stationary Series
The standard classical methods of estimation which are used in the applied
econometric work are based on a set of assumptions one of which is the stationary of
the variables. A variable is said to be stationary if the mean and the variances of the
variable are constant over time and the covariance between two periods depends only

18
on the gap between the periods, and not the actual time at which this covariance is
considered.
A non-stationary series has a different mean at different points in time and its
variance increases with the sample size. So, the first thing in an econometric work is
to check whether a series is stationary or not.
Using the classical estimation methods to estimate a relationship with non-stationary
variables will results in “spurious” regression. This is a situation in which results
obtained suggest there are statistically significant relationships between the variables
in the regression model when in fact all that is obtained is evidence of
contemporaneous correlations rather than meaningful causal relations [Harris
(1995)]. Hence the non-stationary in variables needs to be removed first before
getting into any econometric work.

3.5.2 Unit Root test

Often, ordinary least squares (OLS) are used to estimate the slope coefficients of the
auto regressive model. Use of OLS relies on the stochastic process being stationary.
When the stochastic process is non-stationary, the use of OLS can produce invalid
estimates. Granger and Newbold (1981) called such estimates 'spurious regression'
results like high R2 values and high t-ratios yielding results with no valuable
economic meaning.
There are several ways of testing for the presence of unit root. The most common
and popular one in econometric work is the DF test either because of its simplicity or
of its more general nature [Harris (1995)]

Augmented Dickey-Fuller (ADF) Test

The DF test is based on the assumption that the data generating process of the
variable being tested is a random walk [auto regressive process of order one (i.e. AR
(1)].
If however, the variable follows a higher order auto regressive process, the error term
will be auto correlated which will invalidate the use of the DF distribution.
The ADF test solves this problem by considering a higher order and augmenting the
random walk equation with some more lags.
It is suggested to allow both an intercept and time trend in the regression model used
to test the presence of unit root.
In both tests the null hypothesis is that the variable is non-stationary against the
alternative stationary. The null hypothesis is rejected only when there is strong
evidence against it at the conventional levels of significant.

It is an augmented version of the Dickey and Fuller (1979) test for a larger and more
complicated set of time series models.

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The augmented Dickey–Fuller (ADF) statistic, used in the test, is a negative number.
i.e. the more negative it is, the stronger the rejections of the hypothesis that there is a
unit root at some level of confidence.
The testing procedure for the ADF test is the same as for the Dickey–Fuller test but it
is applied to the model
3.5.3 Tests for Co integration
The next step is to find out whether the variables share a common stochastic trend,
i.e. to test whether two or more variables are co integrated. Co integration can be
regarded as the empirical counterpart of the theoretical notion of a long-run
relationship among the variables.
In other words, a co integration of two or more variables suggests that there is a long
run, or equilibrium relationship between the variables (Rao, 1994).
Co integration technique provides a means of identifying and hence avoiding
spurious regressions generated by non-stationary series.

CHAPTER FOUR
TIME BUDGET AND COST BUGET

4.1Time budget

Activities Months
Dec Jan Feb Mar
Review previous findings
X
Prepare concept note
X
Prepare proposal first draft
X
Prepare proposal second draft
X
Prepare proposal final draft
X
Data collection and organization
X
Data analyzing
X
Prepare research first draft X
Prepare research second draft
X
Submitting final report
X
Presentation of final report
X
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Table 1 - Time schedule
4.2 cost budget
Description of cause of expenditure Cost (in birr)

Paper and pen expenditure 200

Printing and typing expenditure 500
Internet service fee 200
Telephone expenditure 100
Contingency 150
Total 1150

Table - cost schedule

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