Effect of trade balance on the gross domestic product of Uganda (2001-2021)

Abstract

The study aimed to investigate the short-run and long-run effects of trade balance on economic growth in Uganda for 20 years. The study analyzes the relationship between GDP and trade balance, imports and exports respectively using secondary time-series annual data from 2001 to 2021 sourced from World Bank Indicators. Many developing countries experience trade deficits since the imports are more than exports. The research was motivated by the need to understand the magnitude and permanence of trade deficits and their impact on economic growth. To answer the stated objectives, correlation and regression analysis are used. The ARDL model is used to examine both the short-run and long-run effects of trade balance on GDP. In addition, descriptive analysis is used to analyze the characteristics of the different variables in the research study. The study found a significant positive relationship between exports, imports and GDP which implies that a unit increase in those mentioned independent variables would lead to a unit increase in the GDP. The trade balance was negatively related to the GDP therefore a unit increase in trade balance would lead to a unit ‘decrease in the GDP thus placing trade deficit as a hindrance to the growth of Uganda's economy. There was no long-run relationship between trade balance and GDP indicated by the absence of cointegration in the used model. In the short-run, trade balance is not a significant predictor of the GDP since its p-value is greater than 0.05. An increase in trade balance by 1 % reduces GDP by 0.421. In the absence of a trade balance, GDP is 3. 21e+12.The findings can better be used in policy formulation to boost economic growth through Government focus on export promotion in terms of improved quality, value addition and importation of capital goods as opposed to consumer goods to increase production capacity of goods and services.