Effects of Trade Balance on economic Growth in Rwanda. An empirical analysis.

Abstract

The central objective of this research thesis is to investigate the effects of Trade Balance on Economic Growth. Most of developing countries are experiencing trade deficits resulting from importing more and export less. The same scenario applies to Rwanda. Thus, this research is crucially motivated at understanding the magnitude effects of the deficits and impacts on economic growth. Econometric modelling was applied using E-views 8.1. The research used time series data from the World Bank dataset spanning from 1995-2015. Different econometric tests have been performed. The results from the unit root test have concluded that all variables are I(1), meaning that are integrated after the first difference. The long run estimation has been and has shown that LOER (Log Official Exchange Rate) and LINFL (Log Inflation) are both statistically insignificant. They have been removed from the estimation. The results found concluded that if the deficit increases by 1%, the economic growth retard or GDP decreases by 0.004707% in the long-run ceteris paribus. The Adjusted R2 found was 99.9745%, it informed about the goodness of fit of the model. LGDP is explained by LTB, LFDI and LCONS at 99.9745%. For the cointegration, the Johansen Test was performed and revealed presence of the cointegration (long run relationship between variables). The ECM model was also performed and tests concluded fulfilment of necessary standards. VAR and Causality was included in the study. The tests ascertained the absence of any causality direction between LGDP and LTB since statistical relationship does not imply causation.