American Journal of Theoretical and Applied Statistics 2015; 4(1-1): 19-23 Published online March 18, 2015 (http://www.sciencepublishinggroup.com/j/ajtas) doi: 10.11648/j.ajtas.s.2015040101.14 ISSN: 2326-8999 (Print); ISSN: 2326-9006 (Online) Modelling and Forecasting the Balance of Trade in Ethiopia Yibeltal Arega Ashebir * , Tewodros Getinet Yirtaw, Anteneh Asmare Godana Department of Statistics, University of Gondar, Gondar, Ethiopia Email address: mamush77@yahoo.com (Y. A. Ashebir), tedomanchu@yahoo.com (T. G. Yirtaw), antasmare@gmail.com (A. A. Godana) To cite this article: Yibeltal Arega Ashebir, Tewodros Getinet Yirtaw, Anteneh Asmare Godana. Modelling and Forecasting the Balance of Trade in Ethiopia. American Journal of Theoretical and Applied Statistics. Special Issue: Computational Statistics. Vol. 4, No. 1-1, 2015, pp. 19-23. doi: 10.11648/j.ajtas.s.2015040101.14 Abstract: For a long period of time, Ethiopia has involved in foreign trade and experienced trade deficit several time in the past. This deficit can be largely explained by the unequal terms of trade between agricultural commodities (the country's major export) and capital goods (the country’s major import). The core objective of study was to model the balance of trade in Ethiopia and forecast its value through ARIMA model by using annual data from 1974/75 to 2009/10. The appropriate model was ARIMA (3, 1, 0) and the forecasted value of balance of trade is expected to raising time to time from 2010/11 up to 2015/16. Keywords: Trade Balance, ARIMA 1. Introduction When we compare one country to another we can see differences in economic structure and economic dependence. This economic dependence creates economic interrelationships among the countries in the real world. As a consequence, foreign trade comes into existence. In general this trade covers many countries in the world. Due to this we can say foreign trade is an international trade. International trade consists of the export trade and import trade. According to demand and supply of international market structure, countries of the world create economic interrelationship. Actually the main benefit from increasing export is usually to increasing the capacity to import intermediate inputs and other goods and services which are necessary or helpful to faster economic development in the domestic market. Ethiopia has tried to implement completely different trade strategies in the past, including a strategy of import replacement/protection for infant industries during the imperial period, a heavily state-managed trading system during the military government era, and a market-oriented liberalized approach supported by the international financial institutions in the most recent period. Each of these trade regimes incorporated the policy objective of diversifying Ethiopia’s export palette to reduce dependence on coffee and other cash crops. Numerous trade related technical assistance projects have already been implemented. Policies promoting exports have been adopted. Ethiopia has experienced trade deficit several time in the past. Ethiopia's trade deficit can be largely explained by the unequal terms of trade between agricultural commodities (the country's major exports) and capital goods (the country’s major imports). It is projected to reach an all time high of USD 6.7 billion (NBE, 2007). The deficit of Ethiopia’s trade balance can be interpreted in to two ways. On the positive note, the fact that the value of imports is taken up by capital goods plus intermediate inputs is in fact an indication of growth domestic economy and expanding productive capacity of the country at an increasing rate. On a negative note, it can be seen as cause for alarm since such a wide and growing gap between the value of exports and imports of a country means that the country continues to need other sources of financing such as foreign aid and credit. 2. Methodology 2.1. Variable and Sources of Data This study uses secondary data on balance of trade (in million birr) in Ethiopia for the period 1974/75 to 2009/10 from National Bank of Ethiopia (NBE). Balance of trade (BT): - The difference in value between a country’s total exports and imports over a specific period of time. 2.2. Stationarity A given series is said to be stationary if its mean and variance are constant over time and the value of the covariance