An empirical test of the marshall-lerner condition in Tanzania

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University of Dar es Salaam
This study examines empirically the existence of Marshall – Lerner Condition in Tanzania during 1993 - 2013 as a move to unleash, if present, the potential of using devaluation policy to counteract the trade balance deficit experienced by Tanzania for more than three decades now. The period was chosen with a target of an era when exports of non–agricultural commodities, regarded to have relatively high price elasticity of demand, surpassed those of agricultural commodities, which are known to have low price elasticity of demand, in bringing foreign exchange earnings to our economy. Because the study used a small sample size of 21 observations, this render most common econometrics data analyzing tools unreliable for this study and therefore the rule of thumb was employed to analyze the long-run relationship between trade balance and real effective exchange rate where by the results show that the aforementioned variables do not actually have a long-run relationship. These results rule out the possibility of improving the trade balance stance of the country by using devaluation policy. However, the study propose alternative measures that can be used to improve Tanzania’s trade balance which include promotion of imports substitution industries accompanied by discouragement of luxurious imports and promotion of export oriented industries by assisting them in improving quality of their outputs and by helping them to secure international markets for their products. Another method is to trim down their costs of operation through ensuring availability of reliable low cost energy which will reduce the prices of their outputs and hence make them more competitive in the world market.
: Available in print form, East Africana Collection, Dr. Wilbert Chagula Library, Class mark (THS EAF HB141.T34M37)
Balance of trade, Economic models, Tanzania
Mashaka, A.(2015). An empirical test of the marshall-lerner condition in Tanzania, Master dissertation, University of Dar es Salaam.