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ds or accumulation of reserves. Hence, it is worthwhile to analyze the effect of exchange rate on trade balance by considering the existence of ODA and remittances taking them out of the term. Further this new variable is de-trended by taking its log form. Therefore, the modified model of Rose and Yellen (1989), considers trade balance to be a function of the real effective exchange rate (), real domestic income (), real foreign income () and income reciepts [the official reserve deducted from the sum of ODA and Remitences = (].

With the above model the expected sings are as follows:

< 0

Data Setting

Below, variables in the model have been presented with description.

Variables description for the models:

Variable Name

Definition

Description

Source

Real Aggregate Trade Balance

The difference between total export deflated by export unit value index and total import deflated by import value index for period WB Online WDI Data Base and Ethiopian Economic Association/Ethiopian Economic Policy Research Institute (EEA/EEPRI); 2009 Statistical Data base CD-room Ln Real Effective Exchange rate index

Taking Ln of Price Adjusted Nominal Effective Exchange Rate index for period t or similar to Ln of average weighted real bilateral exchange rate index ( BREjt)for the major trading partners trade weight (Wjt)

Ethiopian Economic Association/Ethiopian Economic Policy Research Institute (EEA/EEPRI) Macro Division

A proxy for Ln Real income level of Rest of The World (ROW)

Taking Ln of totally aggregated product of income of major trading partners and their trade share to Ethiopia, i.e. for period t

Own Calculation from UN Comtrade, WB Online WDI Data Base and 2009 EEA/EEPRI Statistical Data base CD-room.

Ln Real domestic income

Taking Ln of Ethiopia’s GDP for period tWB Online WDI Data Base Ln of income recipt as the sum of ODA and Remittences minus Reserves Taking WB development indicator
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