I

WOLKITE UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS

DETERMINANTS OF IMPORT PRICE INFLANTION IN

ETHIOPIA

ASENIORRESEARCHPROPOSALSUBMITTEDTO
DEPARTMENT OF ECONOMICS INPARTIAL FULFILMENT
REQUIRMENT FOR THE AWARD OF THE DEGREE OF
MASTERS OF ECONOMICS

BY DAWIT GIRMA

ID NUMBER

ADVISOR

MARCH, 2024

WELKITE, ETHIOPA
ACKNOWLEDGEMENT.............................................................................................II

1. INTRODUCTION......................................................................................................1

1.1 BACKGROUND...............................................................................................1

1.2 Statement of the problem..................................................................................3

1.3 RESEARCH QUESTION.................................................................................5

1.4 OBJECTIVES OF THE STUDY......................................................................5

1.4.1 General objective.....................................................................................5

1.4.2 Specific objectives...................................................................................5

1.5 SIGNIFICANCE OF THE STUDY..................................................................5

1.6 SCOPE OF THE STUDY.................................................................................6

2. LITERATURE REVIEW..........................................................................................7

2.1. Theoretical Literature.......................................................................................7

2.1.1. Definition of Inflation............................................................................7

2.1.2. Definition of Import...............................................................................7

2.1.3. Types of inflation...................................................................................7

2.1.4. Causes of Inflation..................................................................................8

2.1.5. Theories of Inflation.............................................................................10

2.2. Empirical Literature.......................................................................................13

2.2.1. Empirical findings around the world....................................................13

2.2.2. Empirical findings in Ethiopia.............................................................14

3. METHODOLOGY...................................................................................................16

3.1 Research design...............................................................................................16

3.2 Data Type and Source.....................................................................................16

3.3 Method of Data Analysis.................................................................................16

3.3.1 Descriptive Analysis..............................................................................16

3.3.2 Econometrics Analysis..........................................................................17

3.4 Model Specification........................................................................................17

 3.5. Research Ethics..............................................................................................18

4. WORKING PLAN...................................................................................................19

5 Budget Breakdown...................................................................................................20

Reference......................................................................................................................22

ACKNOWLEDGEMENT
First and foremost, I would like to thanks the almighty God who keep my life in each
micro seconds for his mercy. My special thanks to my advisor (Mrs) for this
constrictive comment, moral assistance and valuable suggestion through my study.

Finally, I would like to express my greatest thanks my parents. I could say nothing for
of your treatment of my life.

II
 1. INTRODUCTION

1.1 BACKGROUND

Over the past two decades, high growth in Ethiopia has been accompanied by
persistent inflation and other macroeconomic imbalances (IMF, 2020).
The term inflation refers to the general increase in the price of goods and services in
the economy. Korkmaz & Abdullazade (2020) stated that inflation is a constant
increase in the general level of prices, with a general level of prices higher than the
normal level and a decrease in the intrinsic value of money. It is one of the principal
factors that measure the well-being and state of the economy. Most economists
believe that a small level of inflation is crucial for economic development. They
justify that this minimal inflation rate, though not highly mitigate the purchasing
power of consumers and really affect their demand, has potential benefit for investors
who value these slightest increases in price and produce a large quantity of products.
inflation, at different rates and in different time periods, has been a problem of every
economy mainly the rampant inflation and its effects worsen the developing
economies (S.O. Adams, A. Awujoola, A.I. Alumgudu, M(2014) ).Its causes vary
according to cross countries differences and theoretically emanated from demand-
pull, cost-push, import-induced and temporary causes (Tsidi M, 2015).

History of inflation began from the time of introduction of money. However, prior to
the Second World War inflation tended to occur during and immediately after wars,
when government financed the war, or during periods when gold discovers of the
significant kind had been made. Such as German hyperinflation of 1923, weak
government has attempted to by their way out economics crises by printing vast sum
of money (Richard, 1981), this inflation had two important characteristics

It occurred in response to some particular events, such as wars, gold discover or

unmanageable economic crises. And lasted only as long as the events with which they
were associated, and that was normally not very long.

The Second World War accompanied by rapid world inflation as had been happened
often before, the war time inflation continued into post war period. Between 1953 and
1959 retail price in the main industrial countries rise at an average rate of about 2-4

1
percent per annum. After 1974 the inflation rate quicken in most industrialized
counties (ibid)
Although the country has faced different serious macroeconomics shocks, including
drought, devastating wars and distorted investment environment the inflation in the
country was not miserable and it was very low in the past regime, except, the 1972/73
and 1978/79 oil crises and fluctuations of non-oil import prices. Because price control
has kept prices stable. The government was also distributing goods at fixed prices to
the public. In addition the lower and pegged exchange rate has also helped to lower
the impact of international price like in Ethiopia and makes imports cheaper. During
the earlier years of present regime also inflation had been low. (Sisay, 2008).
World crude oil prices, exchange rate, interest rate, broad money supply and annual
rainfall variables were incorporated in inflation model in Nigeria (S.O. Akinbode, J.
Olabisi, C.P. Adekunle, O.M. Jimoh, 2020). In Nigeria, Bawa et al. (2016) showed lag
of inflation and lag of money supply as main factors in the inflation model ( A.
Qayyum, B. Sultana, 2018).Over the past two decades, high growth in Ethiopia has
been accompanied by persistent inflation and other macroeconomic imbalances
(IMF, 2020). While the country recorded double-digit average growth rates since
2003, average inflation exceeded the 10% ceiling set in national development plans
during this period.Between 2003 and 2020, Ethiopia recorded the highest level of
average annual inflation (15%) among all the countries growing at 5% or more. The
high levels of inflation have attracted attention from policy makers as well as the
research community, since high prices affect household purchasing power and overall
welfare. Moreover, when it leads to negative real interest rates, high inflation is a
disincentive to saving (Alem & Söderbom, 2012; Geiger & Goh, 2012; Ticci, 2011).
Since 2021, the debate about inflation in Ethiopia has intensified, as inflation reached
its highest levels since the 2012 drought. The attention to inflation has been amplified
by the adverse effects of the war in Ukraine on international supply for fuels and
cereals. This is critical for Ethiopia given its dependence on Russia and Ukraine for
imports of wheat, crude and refined cooking oil, and agricultural inputs, like many
other African countries.

One of the prime objectives of countries will be to achieve stability macroeconomic

variables like having low inflation and unemployment. Ethiopia is one of the
countries that have growing economies in Africa, but inflation and unemployment

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remain significant challenges for the nation and policymakers. Inflation has been
steadily rising over the past few years.

1.2 Statement of the problem

Inflation is sustained rise in general price level of goods and services. The definition
of inflation concern, not increase in price of a particular product nor for a short period
of time. (Mishkin, 2007)

Inflation is bad not because people hate it but because of its serious economic and
social effects. It reduces the real income of people especially of those fixed income
earners and redistributes income from one group of people to the other group and
creates income inequality. Inflation also hinders foreign direct investment because it
raises cost of materials and inputs and makers FDI less profitable. Uncertainty about
prices and increase in production costs also reduce production. Inflation also results in
reduction of exports because of decrease in production and expensiveness of
domestically produced goods in international market. At the same time it also results
in imports, which adversely affects balance of payment (BOP) of the country.
(Jhingan, 2007) sited by (Sisay M, 2008).

Structuralisms explain the long run inflationary trend in developing countries in terms
of structural rigidities, market imperfection and social tension relative inelasticity of
food supply, foreign exchange constraints protective measures, rise in demand for
food, falling export earnings, hoarding import substation, industrialization and
political instabilities.(Ayinde O.Eetal, 2010)

Lim C,H.and papi L. (1997) by using econometric analysis finds that inflation in
Turkey is determined by monetary variables (i.e. money and exchange rate) and
public sector deficits.

Koech J. and Wynne M.A, (2012) finds that core import prices inflation estimators
(excluding oil price) provide little or no predictive power for head line US import
price inflation.

There is no agreement on the causes of the high inflation experienced in recent years
in Ethiopia. The government state supply bottlenecks, market structure, increased
income in the rural sector and international price development especially of petroleum

3
to be the cause of inflation. On the other hand IMF and most economists argue that
inflation in Ethiopia is caused due to increased demand caused by expansion in
money supply and increased remittance. In addition deficit is also regarded as a cause
of the inflation. In short the government attributes inflation to supply factors while
international organization and most economists attribute inflation to demand factors
(Sisay M. (2008) finds that inflation in Ethiopia is in the long run due to structural,
monetary expansion lending rates and expectation. On the other hand exchange rate
one quarter lagged money supply; gas oil prices and deficit have been found to have
no significant impact on inflation in the long run.
Asayeheng D. (2009) finds that main determinant of inflation in Ethiopia are real
GDP, exchange rate, domestic landing interest rate.

the most important determinant of inflation in the long run are mainly domestic
monetary development while cost push factors are the force behind short run inflation.
He also stated that in the long run domestic food price influenced mostly by income
growth, inflation expectation, money supply growth and increase in international food
price. While he finds determinant of non-food inflation are found to be inflation
expectation, money supply growth and interest rate. He also states in the short run,
both demand and supply appear important in the current inflationary process, with
supply factors having the edge over the demand factors. Kibrom T. (2008)

Imports share of GDP is increasing in Ethiopia in high rate from 15% in 1988/89 to
33.3% in 2012 by amounting $9.498 billion. Ethiopia imports food, live animals,
petroleum and petroleum products, chemical, machines, motor vehicles, cereals and
textiles. (Indexmundi, 2013)

Due to small economic size, production in developing countries is heavily dependent

on imported raw materials and no reasonable domestic substitution because of this
reason it is one of the major component of their output (Porter and Ranney, 1982).
They are facing the problem of BOP deficit due to their high import and inability of
their export to subsidize this import. Subsiding this leads to high public debt and
budget deficit.

However, amazingly there is no research on determinants of inflation on import

component of output in Ethiopia unlike other components of output like food,
agriculture, etc. And this appears to be relatively under researched topic, which is a

4
bit surprising as most of the relative price shocks that seem to necessitate the
construction of core inflation measure are to the prices of goods that are traded in
global market. Therefore this research try to fill this gap and it is pioneer in this
regard.

1.3 RESEARCH QUESTION

This research answer questions like

 Does a determinant of import goods inflation differ from determinants of the

general inflation?
 What are the significant determinations of import goods inflation?
 What is the trend of import good inflation?

1.4 OBJECTIVES OF THE STUDY

1.4.1 General objective

The general objective of the study is to identify the major determinants of import
goods of inflation in Ethiopia from 1994/1995 to 2024 .

1.4.2 Specific objectives

 To examine and describe the trend of import goods inflation over a specific
period.

 To examine the determinant of import goods inflation differ from determinants of

the general inflation.
 To Identify and analyze the significant determinants of import goods inflation.

1.5 SIGNIFICANCE OF THE STUDY

Modeling inflation and identifying its determinants is necessary for a number of

reasons. It is important from the point of view of poverty alleviation and social
justice. Furthermore inflation can discourage savings, if the rate of return on savings
does not reflect the increase in the level of prices. The uncertainty about future prices
can also cause unexpected gains and losses in trade and industry, thus, discourage
long term contracts and investment.
Therefore, this study will be the following purposes. First the study act will be as a
case study in Ethiopian import goods inflation for the time periods from 1994/1995 to

5
2024 . The study will be also serves as a mirror in showing the major forces causing
import goods inflation in Ethiopia. Most importantly the study is expected to raise the
interest of scholars to work on import goods inflation. The identification of the key
determinants of import goods inflation helps policy makers with appropriate ways of
intervention for controlling inflation.

1.6 SCOPE OF THE STUDY

This study will be focus only on macroeconomic determinants of import goods

inflation and ignores structural variables like structural rigidities, market
imperfection, hoarding import substation and political instabilities and it also ignore
microeconomics variables like wage. It also will be focuses only on quantitative
variables and do not cover qualitative variables like structural rigidities, market
imperfection and consumers test. This study will be specifically focus on the trend of
import goods inflation and effect of money supply, real GDP, exchange rate,
government expenditure, indirect tax and world oil. The study will be use data of the
two regimes (i.e. Derg regime and current regime) in other words it includes data
from 1994/1995 to 2024 .

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 2. LITERATURE REVIEW

2.1. Theoretical Literature

2.1.1. Definition of Inflation

Neoclassical defined inflation as a galloping rise in prices caused by excessive
increase in the quantity of money. For Keynesian it is increase of money supply
beyond full employment level. ( Jhingan, 1997) sited in (Sisay, 2008)

Generally, inflation is an ongoing rise in the general level of prices quoted in units of
money. The inflation rate is annualized percentage growth of some broad index of
money prices. (White L.H., 2008)

2.1.2. Definition of Import

An import is any good or service brought into one country from another country in a
legitimate fashion, typically for use in trade. Import goods or services are provided to
domestic consumers by foreign producers. An import in the receiving country is an
export of the sending country. (tradingeconomics, 2013)

2.1.3. Types of inflation

Creeping inflation (mild inflation): it is when the rise in prices is very slow like that
of a snail or a creeper. It is for inflation of less than 3% per annum. It is regarded as
safe and essential for economic growth. That is because this mild inflation sets
expectations that prices will continue to rise. As a result, it sparks increased demand
as consumers decide to buy now before prices rise in the future. By increasing
demand, mild inflation drives economic expectation. (Amadeo K., 2014)

Walking inflation: this type of inflation is between 3-10% a year. It is harmful to the
economy because it heats up economic growth too fast. People start to buy more than
they need. Just to avoid tomorrows much higher prices. This derives demand even
further, so that suppliers cannot keep up. As a result common goods and services are
priced out of the rich of most people. (ibid)

Galloping inflation: it is inflation greater than or equal to 10%, it wreaks absolute

havoc on the economy. Money loses its value so fast that business and employee
income cannot keep up with costs and prices. Foreign investors avoid the country,
depriving it of needed capital. The economy becomes unstable and government

7
lenders lose creditability. Therefore it must be prevented. Example of galloping
inflation occurred during WWII in the US and Europe. (ibid)

Hyperinflation: it is when the prices skyrocket more than 50% a month. It happened
mostly when government printed money recklessly to pay for war. Examples of
hyperinflation are Germany in 1920s, Zimbabwe in 2005, and America during civil
war. (ibid)

Stagflation: is when economic growth is stagnant, but there still is price inflation. It
happened in the 1970s in US when dollar become fiat. (Amadeo K., 2014)

2.1.4. Causes of Inflation

Cost push inflation

Cost push inflation occurs when businesses respond to rising production costs, by
raising prices in order to maintain their profit margins. Higher costs shift a firm’s
supply curve upwards and leads to an increase in price. There are many reasons why
costs might rise. Cost push inflation can be illustrated by upward shift of the short run
aggregate supply curve. Ceteris pribus a fall in aggregate supply causes a contraction
of real national income.

A Probability of an economy experiencing a buster of cost push inflation is greatest

when unemployment is at low level. because there are shortages of skilled labor and
the economy is starting to experience capacity constraints.

A. Rising imported raw materials costs: perhaps caused by inflation in countries that
are heavily dependent on exports of these commodities or alternative by a fall in the
value of the pound in the foreign exchange markets which increase the UK price of
imported inputs.(Ibid)
B. Rising labor costs: caused by wage increases which exceeded any improvement in
productivity. This cause is important in those industries, which are labor intensive. In
the long run, wage inflation tends to move closely with general price inflation.(Ibid)
C. Higher indirect taxes imposed by the government. Indirect taxes are levied on
producers who, depending on the price elasticity of demand supply for their products
can opt to pass on the burden of the tax onto consumers. For example if the
government was to choose to levy a new tax on aviation fuel, then this would
contribute to a rise in cost push inflation.(Ibid)

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 Oil Prices and Inflation:
an increase in international oil prices causes an inward shift in SRAS and puts
upward pressure on the price level. Put another way a sharp jump in the prices of
crude oil causes an exogenous inflationary shock and the impact of this will be
greatest when a particular country is a large-scale net importer of oil and has many
industries in different sectors of the economy that rely in crude oil and by-products
essential inputs in the production process. A significant rise in global oil prices
would have many other inflationary effects: for example increasing the cost of
heating oil, aviation fuel, plastics, chemicals, as well as raising the material costs of
all firms. (Ibid)

Demand Pull Inflation

Demand- pull inflation is likely when there is full employment of resources and
SRAS is inelastic. In this circumstance an increase in AD will lead to a general
increase in prices. AD might rise for a number of reasons some of which occur
together at the same moment of the economic cycle.(Ibid)

A. Depreciation of the exchange rate:This increases the price of imports and reduces
the foreign price of exports. If consumers buy fewer imports, while foreigners buy
more exports AD will rise. If economy is already at full employment, prices are pulled
upwards.(Ibid)
B. Reduction in direct or indirect taxation: if direct taxes are reduced consumers
have more disposable income causing demand to rise. A reduction in indirect taxes
will mean that a given amount of income will now buy a greater real volume of goods
and services. Both factors can take AD and real GDP higher and beyond potential
GDP.(Ibid)
C.The rapid growth of the money supply: perhaps as a consequence of increased
bank and building society borrowing if interest rates are low and consumer confidence
is high. Monetarist economists believe that the root causes of inflation are monetary in
particular when the monetary authorities permit an excessive growth of the supply of
money in circulation beyond that needed to finance the volume of transactions
produced in theeconomy. The effect of an increase in AD on the price level can be
shown in the next two diagrams. Higher prices following an increase in demand leads
to higher output and profits for those business where demand is growing. The impact
on prices is greatest when SRAS is inelastic. (Ibid)

9
Macroeconomic equilibrium following an outward shift of AD takes the economy
beyond the equilibrium at potential GDP. This causes an inflationary gap to triggering
higher wage and other factor costs. The effect of this is to cause an inward shift of
SRAS taking real national output back towards a macroeconomic equilibrium at YFC
but with the general price level higher than it was before. (Ibid)

price
SRAS
2
SRA
S1

AD
2
AD
1

output

Figure 1: effect of money supply on inflation when SRAS is flexible

2.1.5. Theories of Inflation

Quantity Theory of Money

This refers to the identical or equal relationship between national income
estimated at market prices and the velocity of circulation of the money supply.
Based on this theory there is a positive relationship between price level and the
money supply. This relationship is presented using the quantity equation
(MV=PY). (Mohinudin R., 2010)

Accordingly there will be a proportionate positive relationship between the money

supply and the price levels of a given economy. That is, when the money supply
increases by a certain percentage the price levels will also increases by an equal
percentage. (Ibid)

10
 According to this theory it is believed that inflation is caused by an expansion in
the money supply of a given economy. It is under the view that inflationary
situation is caused due to an increase in money supply which is not followed by or
supported by an increase in output levels of an economy. (Ibid)

Keynesian Theory
According to Keynes an increase in general price levels or inflation is created by
an increase in the aggregate demand which is created by an increase in aggregate
supply. If a given economy is at its full employment output level, an increase in
government expenditure (G), an increase in private consumption (C) and an
increase in private investment (I) will create an increase in aggregate demand;
leading towards an increase in general price levels. (Ibid)

Such an inflationary situation is created due to the fact that at optimum or full
employment of output (maximum utilization of scarce resources) a given economy
is unable to increase its output or aggregate supply inresponse to an increase in
AD.(Ibid)

Figure 4: Keynesian theory of inflation

According to the graph when the government uses monetary and fiscal policies to
improve full employment of production levels, there will be an increase in AD level
of the economy from AD0 to AD1which would result in the creation of full

11
employment level of equilibrium output represented at point E. If AD increases
further from AD1 to AD2 the general price levels shall increase since the full
employment of production level will remain unchanged at Yf. The output level will
not change since all resources are fully employed at the point of Yf. An AD level over
and above the full employment of production level will create an inflationary gap of
EF. In addition, an AD below the full employment of production level will create
deflationary gap of ED. (Ibid)

Monetarist Theory
The monetarists theory states that when the money supply is increased in order to
grow or increase production and employment, creating an inflationary situation within
an economy. A monetarist believes increases in the money supply will only influence
or increase productionand employment levels in the short run and not in the long run.
Accordingly there will be a positive relationship between inflation levels and money
supply. The monetarists explain this relationship using the theory of natural rate of
unemployment. The theory of natural rate of unemployment suggests that there will
be a level of equilibrium output, employment and corresponding level of
unemployment naturally decided based on futures such as resource employment,
technology used and the number of firms in the country etc. The unemployment level
decided in this manner will be identified as natural rate of unemployment. In short
run, expansionary monetary policies will result in the decline in the natural rate of
unemployment and increase the production but the effectiveness of the expansionary
policies will be limited in the long run and lead to an inflationary situation. (Ibid)

StructuralistTheory
This theory states that the main reason for inflation is in the inelasticity in the
structures of the economy. This theory is mainly used to explain the nature and bases
of inflation in developing countries. Originating in Latin America, this theory states
that the inflation rates in developing countries are affected by the inelasticity of the
following reasons;

 production level and capacity

 capital formulation
 institutional framework

12
  high inelasticity in the agricultural sector
 inelasticity of the labor force and employment structures (Ibid)

2.2. Empirical Literature

2.2.1. Empirical findings around the world

Lim H. and Papi L. (1997) investigated the determinants of inflation in Turkey by
using a comprehensive model of the economy. By formulating two different models
for long run and short run equilibrium for domestic price using time series data from
1970 to 1995 using econometric model; including exogenous imported input price,
exchange rate, money, exogenous price of exports and nominal wage for the long run
model and the same variables including their error correction representation. They
find that monetary variables (money and exchange rate) play a central role in the
inflation process.

Ayinde O. E. et al (2010) study the determinants of inflation in Nigeria using co-

integration approach with time series data from 1970 to 2006. they investigated
export, import, consumer price index for food and annual agricultural output, annual
interest rate, annual government expenditure, annual exchange rates and annual crude
oil exports as determinants of inflation. They find that import, consumer price index,
exchange rate has positively affect inflation while interest rates and crude oil exports
negatively affect inflation in Nigeria.

Dwyer J. and Leong K. (2001) investigated change in the determinants of inflation in

Australia using mark-up model of inflation they finds that determinants of inflation in
Australia has undergone unusual change in recent years, the effect of which have been
disinflationary.

Abdullah M. and Kalim R. (2010) investigated determinants of food price inflation in

Pakistan using time series data from 1972 to 2008 using Johansen’s co-integration
technique. They study inflation expectations, money supply, per capita GDP, support
prices, food imports and food exports. The result of the study support significant and
positive relationship between inflation and its determinants in the long run except
money supply which they found insignificant with positive sign. In the short run,
using vector error correction model they found only inflation expectations, support
prices and food exports affect the food price inflation. In general they found both

13
demand and supply side factors are important while structuralist’s point of view is
insignificant.

Coach J. and Wynne M.A. (2012) study core import price inflation in United States
using cross sectional distribution and the study suggests that limited influence
estimators of core import price inflation outperform headline or traditional
measurements of core import price inflation. The study finds that core import price
inflation estimators (excluding oil price) provide little or no predictive power for
headline US import price inflation.

2.2.2. Empirical findings in Ethiopia

Durevall D. et al (2010) investigate the inflation dynamics and food prices in Ethiopia
using monthly data over the past decade, and estimate models of inflation to identify
the importance of the factors contributing to CPI inflation and three of its major
components: cereal prices, food prices, non-food prices. They find movements in
international food and goods prices, measured in domestic currency, determined the
long run evolution of domestic prices. In the short run, agricultural supply shocks
affected food inflation, causing large deviations from long run price trends.

Asayehgn D. (2009) study economic for inflation; the Ethiopian dilemma using data
from 1992/3 to 2006/7 with multiple regression including real GDP growth rate,
percentage share of import from GDP, government budget share of GDP, lending
interest rate, nominal exchange rate as independent variables and consumer price
index as proxy for inflation. Based on the multiple regression analysis results he
concludes that the main determinants of inflation in Ethiopia are imports, depreciation
of the Ethiopian birr, decline in the domestic lending interest rate or an increase in
broad money supply.

Kibrom T. (2008) examines the sources of recent inflationary experience in Ethiopia

between 1994/5 and 2007/8 using vector auto regressive (VAR) and single equation
error correction models. He finds that the determinants of inflation differ between
sectors (food and non-food and the time horizons under consideration. The most
important forces behind food inflation in the long run are real income, money supply,
inflation expectation and international food prices. The long run determinants of non-
food inflation, on the other hand, are money supply, interest rate, and inflation

14
expectation. In the short run he found wages, international prices, exchange rates and
food supply are prime sources of inflation.

Sisay M. (2008) study inflation with the title ‘determinants of recent inflation in
Ethiopia’ using econometric technique of co-integration to study inflation in the long
run. He studies using quarterly data from third quarter of 1997/98 up to second
quarter of 2007/8. He study real GDP, broad money supply, exchange rate, interest
rate (lending) overall budget deficit, one period lagged consumer price index, one
period lagged money supply and price of gas oil. The study finds that inflation in
Ethiopia is structural and monetary phenomena. It founds inflation in the country in
the long run due to structural, monetary expansion, lending rates and expectations. On
the other hand exchange rate, one quarter lagged money supply, gas oil prices and
deficits have been found to have no significant impact on inflation in the long run.

15
 3. METHODOLOGY

3.1 Research design

In recent years, Ethiopia has seen a lot of big changes in its economy because it's
trading more with other countries. This means it's really important for the people who
make decisions, the businesses, and the whole country to understand why the prices of
things coming from other countries are going up. When prices go up, it affects how
much people have to pay for things, how much businesses have to spend, and how the
economy works. This research is all about finding out why import prices are going up
in Ethiopia, but we're only going to use quantitative data to figure it out. We're going
to look at information we already have about the economy, like how much imports
cost, and use special math and models to see if we can find any patterns and figure out
what's causing the prices to go up. This research is important because it can help us
learn more about why import prices are going up and help the people who make
decisions and businesses understand what they can do to manage prices, make the
economy stronger, and help the country grow in a good way.

3.2 Data Type and Source

This study will use only secondary data which is time series data type from 1985/86
to 2022/23. The had been collected from national bank of Ethiopia (NBE) Ethiopian
economics association (EEA) ministry of finance and development (MOFED) and
external sources like world bank, world trade organization, IMF and international
journals and publications.

3.3 Method of Data Analysis

Good data alone have no meaning if we not use appropriate method of data analysis
accordingly with the secondary data both descriptive and econometrics method of
analysis will be made.

3.3.1 Descriptive Analysis

To show the effect of different factor on investment of manufacturing sector a
descriptive analysis is used. In here the graphical relationship of the factor and of
investment in manufacturing sector and trend of investment in manufacturing sector
distribution of investment in manufacturing sector and output and employment

16
contribution of manufacturing sector is discuss in order to explain this the graph
method is implemented and to understand some characteristics of variables
descriptive method analysis such as mean, standard deviations, variance, and
covariance, minimum and maximum are used to show the structure of the variable and
also Skewness and kurtosis is use to understand the distribution of the variable and it
also indicate the kind of trend exists between them and Investment in manufacturing
sector.

3.3.2 Econometrics Analysis

In addition to the descriptive analysis, in order to capture the degree of influence of
some of the determinants of investment in manufacturing sector econometrics analysis
is applied. This study will use time series econometrics regression to analyze the
relationship between explained variable which, is investment in manufacturing sector,
and explanatory variable. Based on OLS method and also the econometrics analysis
of their regression will discuss both long run and short run. The time series data taken
to run the regression covers the year between 1986/87 and 2023.

3.4 Model Specification

Economic literature on inflation provide some models that incorporate demand side
and supply side factors “(Hassan et al, 1995; Khan and Qasim, 1996; Callen and
Chang, 1999; Bokil and Schmelfenning, 2005 and Khan and Schmelfenning, 2006)”
Abdullah M. and Kacim R. 2009. Abdullah and Kacim, 2009; Lin and Papi 2009
andKibrom, 2008 used different multiple linear regression models to estimate
determinants of inflation in Pakistan, Australia and Ethiopia respectively. Based on
these this study used multiple linear regression model including some demand side
and supply side as well as exogenous factors to estimate the determinants of import
goods inflation in Ethiopia.

IIt= α+β1M2t+β2RGDPt+β3REERtβ4Gt+β5ITRt+β6WOPt+Ut

Where, IIt= import goods, inflation at time t, M2t= broad money supply at time t

RGDPt=real GDP at time t, Gt=government expenditure at

time.

REERt= real effective exchangerate at time tITRt=indirect tax revenue at a time t

17
WOPt= world oil price at time t. Ut=the error term

The hypothesized sign of the parameters of the estimators are B1, B2, B3, B4, B5 and
B6>0

3.5. Research Ethics

Prior to obtaining authorization from the organization, Welkite University provided
ethical approvals. This includes, in particular, the researcher's obligation to safeguard
study participants' private information. All people must be covered by this privacy
safeguard, regardless of their age, color, or religion.

Lastly, the study participants' informed verbal agreement will be obtain, and data will
be collect based on their voluntary participation with the company. The responses
from the respondents will only be used for academic purposes, and all other and
related data will be keep private.

18
 4. WORKING PLAN

Work plan will be used for the researcher to know that what and when to do the
activity and also to know the starting and finishing point during proposal writing. It
also helps to obtain the accurate and sufficient information or data.

Table 2. working plan

FEB MA APRI MAY JUN JUL

R
Activity
Topic selection

Proposal writing
and literature
review
Proposal
submission
Developing
questionnaires
Data collection
Data analysis
Report writing

Research approved
by advisor
Submission and
presentation

19
 5 Budget Breakdown
Table 3: stationary and different materials

S/No Items Unit Quantity Unit Price Total

1 Pen Each 6 25 150

2 Duplication Each 1 550 550

Paper

3 Flash disk 16 Each 1 350 350

GB

1050

Table 4: cost of communication

s/no Description Unit price Frequency Total cost

1 Mobile card 50birr/14 cards As necessary 700 birr

per day

2 Payment for 2GB/100 birr 50 GB 2,500 birr

internet

3,00 birr

20
Table 5: Personal and transport cost

Personal and Frequency Duration No of people Total

Transport

Pretest 4 times per Two month 1 6,400 birr

transport cost week
200 birr for a
person per day

Table 6: Budget summary

S/No Description Total cost

1 Stationary 1,050 birr

2 cost of communication 3,200 birr

3 Personnel and transport 6,400 birr

expense

4 Total 10,650 birr

Contingency (5%) 532.5 birr

Grand total 11,182.5 birr

21
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24