Impact of Exchange Rate on Trade Balance

This study examines the relationship between exchange rate changes and trade balances in Tanzania for the period 1970 to 2010. The null hypothesis is that there is no relationship between the exchange rate and trade balances. To avoid spurious regression problems, the data were tested for stationarity and Cointegration. Augmented Dick -Fuller (ADF) tests show that the series were non stationary at Level but all of them are stationary at their first difference. The Engle granger Cointegration Test shows that there is a long run relationship between Trade balance, Exchange rate, Tanzania’s GDP and World income. Our findings are as follows Exchange rate; World income and Tanzania’s GDP have positive relationship with Trade balance. This means that Tanzania can depreciate Exchange rate to improve its Trade balance