Abstract:
Increasing gross domestic product per capita, gross capital formation and reduce budget deficit,
controlling inflation and exchange are enhancing domestic trade, countries can create a more just
and prosperous for all citizens. The study investigates impact of budget deficit and inflation on
domestic trade in Ethiopia from 1990 to 2024, using the Autoregressive Distributed Lag (ARDL)
model and their causality. The findings indicate that co-integration tests reveal a long-term
relationship among the study variables. The results show that gross domestic product per capita,
foreign direct investment, gross capital formation, total labor force, and money supply positively
impact domestic trade, while budget deficit, inflation, and exchange rate negatively affect it.
Specifically, gross domestic product per capita and foreign direct investment are found to
significantly enhance domestic trade, while inflation and exchange rate depreciation reducing
domestic trade. The error correction term of -0.639 suggests that the system adjusts to long-run
equilibrium at a rate of 63.9 percent. Granger causality tests indicate unidirectional causality
from budget deficit to domestic trade. Finally, the study recommends that promoting gross
domestic product per capita, foreign direct investment, and money supply, while addressing budget
deficit, inflation and exchange rate depreciation are essential for fostering domestic trade
