The Effect of Terms of Trade on Economic Development in Rwanda

This study examines the effect of terms of trade on the economic development of Rwanda. The research aims to address four key objectives and three control variables to examine the effect of the TOT on Rwanda’s economic development, following several estimating methods utilizing the Stata statistical package software, Descriptive statistics are employed in this study to evaluate the quantitatively secondary data collected on all study variables from Data spanning from 2000 to 2023 was sourced from the National Institute of Statistics of Rwanda (NISR), the World Bank, and the International Monetary Fund (IMF). A time series analysis using econometric models such as multiple regression, the study employs a documentary data collection technique to gather the necessary information from reliable sources, ensuring a robust dataset for analysis using A regression model was applied to examine the relationship between the independent and dependent variables, incorporating unit root and co-integration tests. The key finds shows that, the unit root test results indicate that some variables, such as Ln GDP, Ln pop, Ln trad log, and Ln inst, are stationary at level (I(0)), meaning they do not exhibit stochastic trends and can be used directly in regression models, while the exports, imports, trade balance, and foreign direct investment The variables are non-stationary at their levels but achieve stationarity after first differencing (I(1)), indicating the existence of stochastic trends. Lag selection using criteria like AIC, FPE, and LR tests identified lag 4 as the optimal lag length, which ensures the appropriate capture of dynamic relationships among variables while preventing overfitting. And we recommend that the Government of Rwanda and the policy maker to prioritize on improving trade logistics efficiency to facilitate smoother trade processes, reduce transaction costs, and enhance the competitiveness of exports. Fostering an efficient logistics sector is critical to addressing challenges related to trade facilitation.