The productivity of labor is assumed to vary across countries, which implies a difference in technology between nations. It was the difference in technology that motivated advantageous international trade in the model. In a model in which each country produces two goods, an assumption must be made as to which industry has the larger capital-labor ratio. Also, if steel production is capital intensive, then it implies that clothing production must be labor-intensive relative to steel.
Steven, Another realistic characteristic of the world is that countries have different quantities, or endowments, of capital and labor available for use in the production process. Thus, some countries like the US are well endowed with physical capital relative to their labor force. In contrast many less developed countries have very little physical capital but are well endowed with large labor forces. We use the ratio of the aggregate endowment of capital to the aggregate endowment of labor to define relative factor abundance between countries.
Thus if, for example, the US has a larger ratio of aggregate capital per unit of labor than France's ratio, we would say that the US is capital-abundant relative to France. By implication, France would have a larger ratio of aggregate labor per unit of capital and thus France would be labor-abundant relative to the US. The H-O model assumes that the only differences between countries are these variations in the relative endowments of factors of production.
It is ultimately shown that trade will occur, trade will be nationally advantageous, and trade will have characterizable effects upon prices, wages and rents, when the nations differ in their relative factor endowments and when different industries use factors in different proportions. Based on the factor endowment a country will export goods that use its abundant factors intensively, and import goods that use its scarce factors intensively. In the two-factor case, it states: "A capital-abundant country will export the capital-intensive good, while the labor- abundant country will export the labor-intensive good.
Countries try to implement several trade policies in order to shape their balance of current account. The commercial policy to be followed by a country with regarded to its foreign trade has been the subject of heated controversy centering on whether a country should follow a policy of free trade or protection In trade liberalization there are two alternative arguments.
The first one is the neo-structuralist argument for trade liberalization which argues that developing countries must adopt policies that protect infant industries in a way that achieves comparative advantage Adiam, Protection is the policy of encouraging home industries by paying boundaries to domestic producers or more using by imposing customs duties on foreign products.
When the country resorts to production as a commercial policy can adopt many alternative devices or their combinations. The important methods of protection are Tariff quotas exchange cont state trading Dumping subsidies commodity agreement international cartel.
It is mainly based on import substitution industrialization ISI to expand industrial base. Import substitution industrialization is a trade and economic policy based on the premise that a country should attempt to reduce its foreign dependency through the local production of industrialized product.
It was theoretically organized in the works of Raul Prebish, Hans Singer, Celso Furtado and other structuralist thinker.
The principal justification of this argument was infant industries which allow governments to support temporarily until the industries are enough to compete internationally Krugman, The government tries to protect infant industries through influencing the demand for import by policies such as tariff and non tariff barriers.
The imposition of these barriers will improve the domestic price of imported good; this will increase the competitiveness of the infant industry and lead to the fall in the volume of import which improves the trade balance. Generally the Neo-structuralist economist claim that trade liberalization policies must be with held until the strategic industries are strong enough to be forced to compete in the international market. This may cause government to intervene in the flow of capital and the financial market The major advantage of import substitution was to increase domestic employment and resilience in the face of global economic shock.
However this strategy failed in promoting economic countries the industry that it creates are inefficient and obsolete. The second argument was the neoliberal argument for trade liberalization against structuralist. Policy of non-interference by government in forging trade is referred to as free trade. It implies absence of any artificial restriction on or obstacles to the freedom of trade of a county with other nations.
According to Adam smith the term free trade used to denote that system of commercial policy which draws no distinction between domestic and foreign commodities and there for, neither imposes additional burdens on the tatter nor grants any special favor to the former. In other words, free trade implies complete freedom of international exchange. Under such a policy there are no barriers to the movement of goods between countries and exchange can take its perfectly natural course.
Argument in favor of trade liberalization is the key to fight poverty and inequality in developing countries to gain access to international market and allow foreign direct investment which in turn boost economic growth WTO, Although the reforms have been uneven, there is clear evidence that protection of import substitutes with tariffs and non tariff barriers in developing countries has declined.
According to this argument there are compelling reasons why the belief that openness to trade is good for growth and development dominate economic thought. The first one is exposure to foreign competition forces domestic industry to become more competitive and efficient. The greater competition leads to better utilization of result which result higher growth of productivity due to access to imported input.
Secondly Free trade is the natural outcome of the comparative cost advantage. It permits an allocation of resources and manpower in accordance with the principle of comparative advantage, with is just an extension of the principle of division of labor. This will make people to earn more, as they will be employed for better use, hence, wages, interest and rent will be higher under free trade than otherwise.
These factors encourage both foreign and national companies to conduct business in the developing world which consequently lead to job creation and fast growth of economy. Furthermore export would increase as a result of greater access to imported intermediate input after the liberalization of trade. Importing appropriate intermediate goods can enable a country to easily labor intensive product such as assembly service to task with higher value.
In addition Jenkins, argues that trade liberalization reduces the un productive rent-seeking activities that are associated with intervention of government and distribution of income by increasing labor incentive activities that would in turn increase employment. Theoretically trade liberalization is expected to lead efficient allocation of resource and catalyze a chain reaction that would ultimately increase welfare of the society is expected to shift resources towards tradable, especially exportable and away from import substitutes.
However the scope successful trade liberalizing policy depends on the failure of trade liberalization. Free trade policy runs smoothly if all the countries follow the same. If some countries do not adopt it the system cannot work gainfully. Free trade prove advantageous to developed and technologically advanced countries but less developed countries are certainly at disadvantage on account of unfavorable term of trade. Competition induce under free trade is unfair and unhealthy.
Backward countries cannot compete with advanced countries. Gains of trade are not equally distributed under free trade due to unequal state of development of different countries.
A country with favorable balance of payment finds it is difficult to overcome this situation under free trade policy. Free trade may encourage interdependence and discourage self-sufficiency. In general when we see the two arguments we conclude that trade liberalization by developing countries poses risks as well as benefits while it is argued that trade liberalization brings economic benefits to countries.
It can also create poverty and inequality in many countries which clearly demonstrate the increments in the gap between rich and poor, the increasing in human right violation and the causing of environmental degradation.
The faster growth in import in relation to export s could have a serious implication for balance of trade and this in itself could constrain economic growth in some of the developing economies. Trade liberalization may promote growth on the one hand from the supply side through a more efficient allocation resource while it may constraint growth from the demand side unless a balance export and imports can be maintained through trade policies such as real exchange rate depreciation deficit in the short run can be financed by capital inflows Since the s trade liberalization has become an increasingly common feature of economic policy in developing countries.
They have liberalized their trading regime with hope of gaining static and dynamic gains from trade, and that the liberalization will increase both the growth of export and imports, and consequently improve welfare Santos-Paulino and Thirlwall, Some developing countries have unilaterally liberalized trade in an attempt to integrate into the global economy and promote economic growth. In other cases, countries have had to liberalize trade in order to satisfy the requirements of international lending agencies.
At the global level, multilateral trade negotiations under the auspices of the World Trade Organization WTO are pushing for freer trade in response to the demands of globalization. It has been strongly sup-ported by the multilateral institutions, both financially through their structural adjustment loans and intellectually through studies of the effects of trade liberalization. An important plank in the advocacy of trade liberalization is the belief that a more liberal regime will lead to increased ex-ports which in turn will have a favorable effect on economic growth and employment generation World Bank, Ostry regarded the model of saving � Investment as the one that is mostly used by researchers to understand the relationship between changes in the level of tariff and the trade balance.
The argument behind the adoption of the saving � Investment model is that, the reaction of the current account to the change in the level of tariffs depends on how the change affects the saving � investment differential given the fact that the saving- investment differential is equivalent to the current account.
Before the implementation of the policy, one must take into account how the changes in the level of tariff rates affect the current account. However, several studies have investigated the impact of trade liberalization on Trade Balance in developing countries, and have reached conflicting conclusions. Paulino and Thirlwall argue that the final effect of trade liberalization is theoretically ambiguous regardless of the balance of payments theory adopted.
The elasticity approach to the balance of payments, which is based on a partial equilibrium framework, shows that the final effect of this policy depends on the extent to which import and export duties change and the price elasticities of imports and exports. Similarly, the absorption approach, which is based on a general equilibrium framework shows that the final result of trade liberalization depends on how real income is affected relative to real absorption.
In this case, the increment in real income may not improve the balance of payments if the propensity to absorb is greater than one. The monetary approach to the balance of payments also shows that the final effect depends on certain conditions. The final outcome of the trade liberalization policy depends on how it affects money demand relative to money supply.
The authors, therefore, conclude that the final outcome of a trade liberalization on the performance of the balance of payments is an empirical issue rather than theoretical. When we see the impact of trade liberalization on trade balance of Ethiopia, It have several impact based on the volatility of the Ethiopian economy. According to the World Bank , Ethiopia has implemented trade liberalization in the late s. It was theoretically designed to increase the efficiency of national industries through competition with the outside world.
The potential advantages of trade liberalization for Ethiopia are firmly rooted in the theory of economies of scale. The small size of domestic markets to absorb most of its supply desires expanding markets and increasing participation in the global economy.
Therefore, a relaxation of trade restrictions within a given range could reduce internal transport costs, stimulate intra-regional trade, and ultimately increase the growth and productivity of the country. Additionally, liberalization could encourage the country to adopt a more out-ward-oriented attitude towards trade instead of the protectionist, inward-oriented mentality which frequently exists. Instead, such liberalization may lead to the inability of Ethiopian industries to compete at all, thereby further assuring the dominance of the agricultural sector.
The theoretical and empirical tools to determine the factors behind the performance of the economy could be broadly categorized in domestic policies and domestic or external shocks such as domestic supply shocks, terms of trade shocks, international crises, violation of human right environmental degradation etc.
And according to Kahnert et al economic integration is "the process of removing progressively those discriminations which occur at national borders". Therefore, scientifically, measures which merely diminish discrimination between countries. According to Allen , p. The necessary conditions for its fullest attainment include the freedom of movement of goods and factors of production and an absence of discrimination amongst members.
The basic ingredient of any integration form is the elimination of barriers to trade among two or more countries. Allen , p. In , 23 Nation meet at Geneva to set of multilateral trade agreements aimed at the abolition of quotas and the reduction of tariff duties among the contracting nations which is called General Agreement on tariff and trade GATT. As embodied in unconditional most-favored nation clauses, this meant that once a country and its largest trading partners had agreed to reduce a tariff, that tariff cut was automatically extended to every other GATT member.
In the late s and early s disappointments with the post-colonial economy led to regionalism in part of third world and economic co-operation among developing countries. Many countries adopted an import substitution industrialization strategy and opted for socialism. The nation state sought to achieve by regionalism, bilateral trade, south-south co-operation. After the collapse of the former soviet union there appear rival to be a revival both multilateralism and regionalism.
Other initiatives include the US-led summit to establish for the adjoining two continents a free trade agreement for the Americas and the Asia �pacific economic co-operation council APEC , which includes a diverse group of pacific �rim countries.
There are also a number of other initiatives for integration outside the frame work of the United States and EU in Africa Asia and Latin America, which are driven by those same forces. Economic integration can take many forms. According to Balasaa there are four different stages of economic integration. Free Trade Area FTA : - a group of countries that have few or no price control the form of tariff or quotas between each others. Free trade allows the agreeing nation to focus on their comparative advantage and to produce the good which make them competitive and efficient, thus increasing the profitability of each country.
S Hosny May To develop a free trade area participating nation must develop rules for how the new free trade area will operate. The goal is to create a trade policy that all countries in the free trade area agree up on. Free trade areas allow the partners to give each other preferential market access.
Thus free trade area helps to foster and facilitate the flow of trade and investment between partner countries. There are three basic pillars of traded liberalization which are going to be covered by free trade area. These are trade in good, trade in service and investment. Free trade area may cover protection of intellectual property right government procurement and dispute settlement.
Retention of national tariffs is what distinguishes an FTA from a customs union in which members establish a common external tariff CET. Thus, a customs union combines free intra-regional trade with a CET. Customs Union CU :- is an FTA in which member countries apply a common external tariff on a good imported from outside agreeing countries.
This common external tariff can, of course, differ across goods but not across union partners "For the purposes of this Agreement: A customs union shall be understood to mean the substitution of a single customs territory for two or more customs territories, so that i Duties and other restrictive regulations of commerce are eliminated with respect to substantially all the trade between the constituent territories of the union or at least with respect to substantially all the trade in products originating in such territories, and, ii Subject to the provisions of paragraph, substantially the same duties and other regulations of commerce are applied by each of the members of the union to the trade of territories not included in the union" The other important part of the theoretical framework that created the foundation for regionalism in its early days was the Viners work on customs union theory.
Viner discovered that customs unions and the liberalizing of intra-regional trade produce two important effects. First is the replacement of higher-cost domestic production by lower-cost imports from partner countries trade creation , and the second is the replacement of lower-cost imports from third countries by higher-cost imports from partners trade diversion.
Viner saw trade creation as welfare increasing for the union and the whole world. Trade diversion, by contrast, is welfare reducing from the point of view of world trade.
National protection is extended to the regional level which is a movement away from free trade. Those who claim that regionalism is a positive force associate it with trade creation while those who think the opposite often relate it to trade diversion. Trade diversion and trade creation are the static effects of trade liberalization. The balance between trade creation and trade diversion determines whether economic integration is profitable or not.
Modifications of Viner's work, such as a distinction between production and consumption effects, shows that the static effects account for only a small part of the effects of economic integration. The issue of regionalism has become more complex and regional arrangements cannot be considered in isolation as Viner assumed they could. With blocs forming almost simultaneously throughout the world, the interaction effect as well as the strategic behavior of nations cannot be neglected.
It is therefore more fruitful to study the dynamic effects of economic integration. These are the consequences of free trade agreements on economies of scale, efficiency and competition, intra- industry specialization, investment growth rates and political decisions. The theory of preconditions and barriers deals with these dynamic effects. Edblad, Common market CM :-is achieved when the circulation of production factors is liberalized.
Capital, labor and entrepreneurship move freely among member countries. It further allows free movement of labor and capital among member nations. This is usually referred to as "factor integration". At the beginning of , the EU achieved the status of a custom market in which people have a right not only moving themselves and their capital to the member countries but also to be protected their natural and intellectual property right. Edblad, Economic union:-The most advanced type of economic integration is the Economic Union, where the monetary and fiscal policies of member states are harmonized and sometimes even completely unified.
This is usually referred to as "policy integration". This colonial or neo colonialist formation of the African economy makes for a weak economic system which is both under developed and dependent. The colonial structure of the African economy has failed to harmonize economic growth and development. The production system is not aligned to either the requirements of the African countries or their resource endowment. The development of economic and social infrastructure such as transportation and communication, banking and insurance, education, health e.
In the s Africa was the hardest hit by the world economic recession triggered by the oil price hikes. Economic declines in the s were made acute by environmental deterioration and imbalances in the ecosystem. The problem engulfing the entire continent into the food crisis situation by the early s. This will make African countries to integrate each other in order to eradicate this economic problem.
In addition there were several reasons to make a relationship between member countries. The basic political and economic reason for the existence of organization for the state is that they produce good that the member country or the individual cannot or does not want to produce it. Goods for all members enjoy are produced by the regional organization in area because joint production is some time profitable for all. Joint production can produce large cost saving which are high capital product long term products long term projects and product with decreasing marginal cost.
The regional organization may seek to liberalize internal trade, promote collective bargaining with members which encourage cooperation aimed at regional industrialization. In order to create a harmonious trade relation certain condition should be fulfilled including the tariffs and national trade barriers. If the trade barriers of member are initially lower there are opportunities for trade diversion it will also preferable that the amount of extra-regional trade is low priori to integration since there will be little to diverted, thus the regional integration schemes will strengthen natural trading pattern.
Geographic proximity is a relevant pre condition for successful regional integration. Integration between countries location far away from each other will be non effective and give rise to transportation as well as communication costs. Political leaders in Africa are traditionally in favor of regional integration and this has resulted led to a large number of integration projects. Trends in the international economy create incentives for regional integration European integration has had a positive demonstration effect on Africa.
This has encouraged the developing countries to adopt the regional integration. One of the most important multilateral trading system in which most African countries are active members is the World Trade Organization WTO. Africans member and observers are respectively 41 and 7. The WTO agreements cover both benefits and obligation or commitments. These commitments basically refer to the implementation of decisions in regard to trade in goods, services, intellectual properties investment environment, food security, public procurement etc.
Teshome, In addition to this program, the US provides security to investment and technical and economic assistance for development. Since African countries are offered unreciprocated preferences, which permit their export to enter the US market untaxed no revenue loss is expected from transaction. The reason behind the failure of the integration is, the countries faced an economic stagnation and failing in living standards especially in Heavy debt burden, low level of investment, weak institution, high population growth, massive unemployment, higher bureaucracy and illegal action like bribery were the major hindrance factor to progress in the region.
Most African countries have been trying to adopt a free market strategy using structural adjustment program during the to avoid economic stagnation. Although the economic situation is very bad in Africa there are now some signs of recovery through conducting a relation among them. These include the harmonization of trade policies, reduction of tariffs and non-tariffs barriers.
African countries are also actively engaged in intra-regional trade. The focal points for regional integration in Africa are perceived in treaty establishing the Africa economic community as its building blocks. COMESA was established 'as an organization of free independent sovereign states which have agreed to co-operate in developing their natural and human resources for the good of all their people' and as such it has a wide-ranging series of objectives which necessarily include in its priorities the promotion of peace and security in the region.
However, due to COMESA's economic history and background its main focus is on the formation of a large economic and trading unit that is capable of overcoming some of the barriers that are faced by individual states. The principal route that has been chosen in order to realize this goal is development integration through development of trade and investment. COMESA's current strategy can thus be summed up in the phrase 'economic prosperity through regional integration'. Its area is impressive on the map of the African Continent and its achievements to date have been significant.
This market-focused approach will have a favorable effect on the allocation efficiency of the economies of the member States through the rationalization of their actual and emergent economic structures which will result in trade creation, expansion, and investment rationalization and production integration.
The non-tariff barriers that segment the COMESA regional market consist of those that affect trade, production and investment. The concurrent pursuit of trade liberalization, infrastructure development and investment promotion and co-ordination, with science and technology providing the driving force, is expected not only to deepen the integration process, but to also lead to higher and sustainable levels of economic growth.
The steps to be used to achieve this were regional trade liberalization, free movement of factors of production and harmonization of monetary, fiscal and agriculture policies. A Fund for Cooperation, Compensation and Development FCCD was established in order to mitigate the impact of integration and tariff reductions on the least developed members. At the Conference of Heads of State and Government a decision was taken to prohibit an increase in tariffs on goods from any member.
This was regarded as a first step towards a custom union. Several decisions were taken during the s to speed up tariff reductions but the time tables agreed upon have not been realistic. Edbald, The structure of the economies is similar.
In order for a successful intra-regional trade to develop specialization is necessary. Import substitution and extensive government intervention also posed a challenge to the implementation of the liberalization policies called for in the ECOWAS treaty. Only 6. That is a small increase 3. Another explanation for the low intraregional trade is that the currencies of the member countries are not completely convertible within ECOWAS.
The recurring and severe droughts and other natural disasters between and caused widespread famine, ecological degradation and economic hardship in the Eastern Africa region.
Although individual countries made substantial efforts to cope with the situation and received generous support from the international community, the magnitude and extent of the problem argued strongly for a regional approach to supplement national efforts. In and , six countries in the Horn of Africa - Djibouti, Ethiopia, Kenya, Somalia, Sudan and Uganda - took action through the United Nations to establish an intergovernmental body for development and drought control in their region.
The State of Eritrea became the seventh member after attainingindependencein Angola remained an observer until , when it became a full member.
It established with the aims to achieve collective autonomy, raise the standard of living of its populations and maintain economic stability through harmonious cooperation. Its ultimate goal is to establish a Central African Common Market. Integration improves the chances of diverse production capacities to merge less than one economic zone. Many manufacturing activities involve significant fixed cost, and consequently have significant economies of scale.
Many developing countries are too small in terms of population and effective demand to be exploiting fully economies of scale. Regional integration will allow a way of doing this being achieved by increased concentration in manufacturing production.
If economies of scale are large enough relative to intra regional transport costs, then a group of countries may benefit from concentrating their manufacturing activities.
Beside the possibility of further exploiting economies of scale there are benefits of integration have been noted. Some argue that the union of countries with similar production capacity does not establish a basis for increased commodity flows and that trade liberalization is not necessarily negatively correlated with geographical size. However trade flow between regions of the same economic zone need not be any less than trade flows between the different countries which formed the union.
Much of the theoretical discussions concerning regional trade are carried out for a free trade area or for a customs union. Because of this developing countries began to liberalize so as to improve trade balance. However when we see empirically trade liberalization does have a relationship with trade liberalization does have a relationship with trade deficit and current account deficit.
Dollar and Karoy also fest the link between trades liberalizes and economic growth, they concluded that change in the growth is highly correlated with change in trade volumes. Paulino and Thirlwall obtained the result that the pure effect of such policies was to worsen both the trade balance and the current account even if the impact was much larger on the trade balance than the current account of the balance of payments.
The authors used least squares and the general method of moments to investigate how trade liberalization measures affect the trade balance and the current account of the balance of payments. The authors conducted the research on countries form Africa, Latin America and Asia and found the impact of liberalization to be the same across all of the regions which is a deterioration of the trade balance and the current account of the balance of payments due to the adoption of trade liberalization policies.
However, the extent of the impact of trade liberalization on the trade balance and on the current account was found to depend on the level of protection the country had initially. Rodrick recommended the most common policy reform to developing countries. He indicated that trade liberalization must be accompanied by complementary adjustment policies, particularly macroeconomic reform, and must go along with a long list of conditions, in order to be effective and to be ensured to enhance welfare.
One of many conditions, which there must be no adverse effects on the fiscal balance, or if there are, there must be alternative and expedient ways of making up for the lost fiscal revenues. Similarly Lopez emphasizes the importance of the balance between the exports and imports and the position of the current account of the balance of payments for the effectiveness of trade liberalization policies in bringing about growth.
This is because these factors are the ones that affect the creditworthiness of the country.. The study point out that trade liberalization has different impact on different sector of the economy. The study find in competitive and constant return to scale model variant, resource made from heavily protected sector to less protected sector.
Even though many researcher advocates important of trade liberalization in development of least developed countries there were also studies that show negative effect of trade liberalization on trade balance.
Chiminogi and Thabel using a computable general equilibrium model, try to show that trade liberalization will result a shift in domestic demand from locally produced good to imported good. This will lead to an increase in import and this increase in trade deficit.
Moreover, there has been some work on Zimbabwe focusing on trade policy on growth, income distribution and indirectly on poverty Devies et al, ; Rattso and Torvik, According to Rattso and Torvik , trade liberalization is characterized by removal of foreign currency rationing in different stages and not by removal of tariffs.
They found that, in the short run, there was a contradiction of output and employment after that type of trade liberalization. They also found that there was a consumption boom as people consume previously forced savings leading to rising trade deficits.
Ayele employed urban -rural Computable General Equilibrium CGE model to examine the impacts of trade liberalization on structural transformation and overall growth of Ethiopian economy. His simulation experiments suggest that the impacts of trade liberalization depend on wage setting condition in the urban region.
With a fixed urban real wage, trade reform adversely affects overall economic growth mainly because of large contraction in the urban region. If urban nominal wage is fixed but urban real wage is flexible, both rural and urban region experience expansion in GDP. According to his analysis the success of trade liberalization depends on extent to which product and labor market reforms are synchronized. The major finding of the study was trade liberalization has worsened the balance of trade and current account deficit because import has increased more rapidly than export.
Data Methodology and Model Specification In order to see the impact of trade liberalization effect on the trade balance different variables are included in the model. Dependent Variable Trade balance: - is the difference between the monetary value of exports and imports of output in an economy over a certain period measured in the currency of that economy. It is a relationship between a nations import and export. A negative trade balance which is referred to as a trade deficit or trade gap.
Trade in general, means the purchase and sales of commodities in international trade, purchase and sales are replaced by import and export. The balance of trade forms part of the current account, which includes several transaction such as income from the bet international investment position as well as aid which is received and given.
If the current account is in surplus, the country net international asset position increases correspondingly. Equally a deficit decreases the net international asset position.
The data that is going to be used for the econometric analysis is obtained from the national bank of Ethiopia from which is measured in Birr at a market price. The reason I used the a market price data than constant price data is due to lack of organized data of consumer price index which show the rate of inflation.
Measuring trade balance can be problematic because of problem with recording and collecting data. Most of the data are not organized as per code and standard of international measuring which create volatility in the discrepancy in the set of the data. There are differences in collecting and analyzing data from institution to institution especially in developing countries. However in order to solve the problem I am trying to use the factor of real effective exchange rate.
It includes all visible and non visible transaction of a country a period of time. Balance of payment accounts an accounting record of all monetary transaction between a country and the rest of the world.
The balance of payment accounts summarizes international transaction using a preparation of single currency, typically the domestic currency for the country. The recorded amount is recorded in two types of item. The positive and negative item, sources of funds for a nation such as export, receipt of loan and investment are recorded as positive. The other items like uses of funds, such as for import or to invest in foreign countries are recorded as negative.
When all components of the BOP accounts are included they must sum to zero with no. A countries balance of payment is said to be in surplus when sources of funds such as export goods sold and bond sold exceed the uses of funds like imported goods and paying for foreign bonds.
When this condition is reversed there is said to be a balance of payment deficit. The BOP identity assumes that any current account surplus will be balanced by capital account deficit. The balance of payment classifies this transaction in to two accounts. The first one is the current account which includes transaction in goods, services, investment income and current transfers.
The second account is capital account that mainly account for transaction in financial instruments. This paper tries to show the effect of the balance of payment on the trade balance of the countries based on the availability of data from up to which is sourced from the national bank of Ethiopia NBE.
The measurement of the data is used in value term which shows the historical trend of the time series data. This data are going to be converted to the logarithm form in order to know the elasticity rate of return impact of balance of payment on trade balance. Real effective exchange rate: - rate is used to determine an individual country currency value relative to the other major currencies in the index of major currencies like us dollar euro etc� adjusted for.
It is compiled as a weight average of exchange rate of home verses foreign currencies with the weight for each foreign county equal to its share in trade. By design movement in the currencies of those trading partner with a greater share in an economies export in import a greater effect in the effective exchange rate.
In a highly globalized world the effective exchange rate index is much more useful than a bilateral exchange rate for assessing changes in the competiveness due to exchange rate movements. The measurement of the real effective exchange rate is generally using the method of geometric weighting rather than arithmetic weight. As a result the export will increase and import becomes less. This will improve the trade balance. However if the real effective exchange rate is appreciating it make less competitive and expected the coefficient of real exchange rate to be negative.
Terms of trade: - is the change in relative prices in export item and import goods and services. It is defined as the ratio of export price to import price.
An improvement of a nations terms of trade benefit that county in the sense that it can buy more import for any given level of export. The terms of trade may be influenced by the exchange rate because a rise in the value of a countries currency lower the domestic price of its imports but may not directly affects the price of the commodities of its export.
A rise in the price of exported goods in the international market would increase the terms of trade, while a rise the price of imported good would decrease it. In reverse the term of trade for the other country will be 3. When this number is falling the country is said to have deteriorating term of trade. In real world of over nation trading hundred and thousand of products of terms of trade calculation is very complex especially in developing country where there is no organized data catalogue.
However there were some available data from the World Bank indicator index for the trend of time series analysis. Terms of trade calculation do not tell us about the volume of countries export, only relative change between countries the price of export from a country can be heavily influenced by the value of its currency which can in turn be heavily influenced by the value of its currency which can heavily influenced by interest rate in that country.
The value of country currency increase due to an increase in interest rate one can expect to the terms of trade will be improved. However this may not necessarily mean an improved standard living of the country since an increase in the price of export perceived by other nation will result in a lower volume of export. As a result, exporters in the country may actually by struggling to sell their good in the international market even though they are enjoying a high price.
Trade Liberalization: - it is a strategy what involves removing barriers to trade between different countries and encouraging free trade. It involves reducing tariff eliminating quota reducing non-tariff barriers. These barriers are factor that make trade difficult and expensive like having specific regulation on making goods can give an unfair advantage to domestic producer. It allows countries to specialize in producing the goods and service where they have a comparative advantage.
These enable a net gain in economic welfare, lower price of commodities. This would be particular benefit for countries who are importer of good. It will also make firms to face greater competition from abroad this motivate to increase efficiency and cut costs which is incentives for an economy to shift resource into new industries where they maintain comparative advantage.
However it will also have some challenges and problem of using trade liberalization. It leads to a shift in the balance of an economy which improves the gap of distribution of income. Some industries grow, some decline. This will create structural unemployment from certain industries due to shut down of the falling companies. Trade liberalization may be damaging for developing economies that cannot compete against free trade.
The infant industry argument suggest that trade protection is justified to help developing economies to diversify and develop new industries. Most of developing economies had a period of protectionism it will be to divert and compete with the giant multinational companies of developed countries.
Because of this argument some argue that trade liberalization often benefits developed countries more than developing countries. Ethiopia tries to advocate the trade liberalization since Most of the companies located in the country are not competent with the international which are determined by markets.
This paper tries to assess the impacts on trade balance using dummy variable that take value zero before trade liberalization and one after trade liberalization is also considered even though the companies are not efficiently competent in the international marketing setting price Generally the paper tries to show the definition and measurement of the dependent variable and independent variable in the table shortly.
The exports and imports of output in an Balance TB economy over a certain period reason I used the a market price data than constant price measured in the currency of that data is due to lack of organized data of consumer price economy. Real Effective other major currencies in the index of of the item divided by the foreign price of the item. Data Presentation and Analysis 4.
The export structure of a country is determined by its level of development resource endowment, policies and development strategies. Ethiopia is one of the developing countries which its economies heavily depend on the agricultural sector which accounts almost half of the growth domestic product. Ethiopian export structure also heavily depends on the agricultural product mainly on coffee, oilseed and hide and skin.
These materials are mainly used as raw material for processing production and they have minimum value of earning foreign exchange. This is one of the reasons to increase. ED ED Ed Intermediate Grades, Level Appendix 3: Teacher Professional Practice Rubric.
Filesize: 2. Absolutely essential read book. It is probably the most incredible pdf i have got read through. Teacher's Guide to. Final Progress Report. Re- Evaluation Summary Report. The final draft is usually a handwritten copy that the student submits for a different grade levels or ability levels within a classroom. For students in grades , have them brainstorm individually or in small Students are encouraged to understand a book that the teacher reads aloud to Description for Final Draft Level 3 Teacher's Manual Paperback.
Book Review. This created ebook is great. This handbook provides teachers at all levels of Final draft of story. Brand new Book. Wendy Asplin Usually ships within 3 to 4 days. But in writing an essay for a teacher your task is usually to explain what you are that is, they firmly believe that their high-level expertise in their fields grants them then prepare an annotated bibliography, then a first draft, then a final draft, In a paper or essay, the three-step thesis process explained in Chapter 3 is a Wait awhile after you've finished a draft before looking at it again.
At this stage, you from scratch. Better that than having the teacher trash your final paper. How do I revise at the sentence level?
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