Impact Of Budget Deficit And Inflation On Domestic Trade In Ethiopia

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