The Effects of Exchange Rate on Ghana’s External Trade
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Date
SEPTEMBER, 2008
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Abstract
This study examines the effects of exchange rates on Ghana’s external trade. In so doing the study derived inter alia real exchange rate as a key determinant of imports and exports. That is to say, the study estimated three models, viz; imports, exports and trade balance, all incorporating real exchange rate as a determining factor using annual time series data from 1986 to 2005. The Autoregressive Distributed Lag approach to cointegration was employed to establish long run relationship between the variables in the various models. Furthermore, vector error correction model was employed in addition to cointegration analyses which confirmed a stable long run relationship between exports, imports and the real exchange rate. The results indicated that, the short run elasticities of imports and exports with respect to real exchange rate are inelastic and thus have contractionary effects of depreciation. The overall conclusion drawn from the study is that for improved balance of trade in Ghana, coordination between the exchange rate and demand management policies should be strengthened and be based on the long run fundamentals of the economy. Domestic industries should improve their level of efficiency and quality of their products in order to compete favourably with foreign goods in both home and the world markets. Though Trade liberalization has not helped much, it should not be completely condemned, as anti liberalization policies and trade restrictions may have retaliation effects. The campaign for patronization of made-in-Ghana goods by leaders of the economy, though not bad, needs some reconsideration and direction. The campaigners must recognize the fact that, the objective of the
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consumer is utility maximization and does not take into consideration how the growth of domestic firms will affect the over all performance of the macro economy. Policy makers should direct much attention to the production side and let producers know the harm they cause their own businesses and the economy as a whole by producing shoddy goods in an inefficient manner.
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A thesis submitted to the Department of Economics, in partial fulfilment of the requirements for the award of Master of Arts degree in
Economics