Abstract

Fundamental relationships between different macroeconomic variables may follow certain common theories, but local preferences are also decisive in determining their unique behaviour.  Looking into domestic demand-growth nexus and export-growth nexus is, therefore, needed in Ethiopia, so as to understand the long -run economic stance and to capture the short-run dynamics in the national economy. Thus, the aim of this study is to find a causal relationship between exports, domestic demand and economic growth in Ethiopia using time series data over the period 1960 to 2011. Household consumption and government consumption were used to measure domestic demand. Granger causality and Johansen cointegration tests were employed in the empirical analysis. Result of Johansen cointegration test indicates the existence of long run relationship among the variables and Granger causality test result shows a dynamic relationship between export and economic growth, and between domestic demand and economic growth. Exports and domestic demands are important for economic growth and economic growth has an impact on exports and domestic demand in Ethiopia. A successful and sustained economic growth requires growth in both exports and domestic demand. Nevertheless, a balance emphasis should be on domestic demand, particularly household consumption to push the economy towards higher growth path.