Effects of Export Price Volatility on Ethiopia’s Economy: Applied General Equilibrium Analysis

Abstract

This study explored the economy-wide effects of export price volatility on Ethiopia‘s economy using Applied General Equilibrium model calibrated through 2009/10 Social Accounting Matrix of Ethiopia. Two simulations were developed to capture price volatilities, increase and decrease in export in price. The study revealed that increase in export price appreciates the domestic currency, raises import demand, but it reduces export demand which together worsened the trade balance. The increase in export price also weakens investment demand, government income and saving and the growth of the economy. However, it raises factors return, household income and welfare. Conversely, decrease in export price depreciates domestic currency, which lead to low import and high export demand, which in turn improved the trade balance. It also increases investment demand, government income and saving, and overall economic growth. But, fall in export price results low factors return, household income and welfare. To reduce the negative impacts of export price volatility in the overall economy, it is suggested that: a) exchange rate policy of the country should be managed-floating type, b) diversification and industrialization of export sector through integrating commodity policies into the country overall development strategy, and c) harness the income gains from commodity prices to facilitate wider-economic transformations and reduction of dependence on primary commodities export.