The paper attempted to analyze Trade volume in seven major agricultural products in Ethiopia. The data revealed in most cases the volume of export is less than volume of import. Trade balance and exchange rate based on impulse response function and the forecast error variance decompositions. The short run effect of devaluation can be captured by the impulse response functions. Impulse response results show that trade balance in Ethiopia after real depreciation of currency follows J-curve patter. More importantly the obtained estimates suggest that upon real depreciation in the first three years trade balance deteriorates (‘short run’) and subsequently improves. The forecast error variance decomposition for each variable reveals the proportion of the movement in this variable due to its own shocks versus the shocks in other variables. Further information on the linkages between the trade balance and its determinants can be obtained from variance decompositions, which measure the proportion of forecast error variance in a variable that is explained by innovations (impulses) in itself and the other variables.