Domestic demand, export and economic growth in Sri Lanka

Abstract

Export and domestic demands are both important for economic growth and economic growth has a significant impact on export and domestic demand. The main objective of the study is to identify the impact of domestic demand and export on economic growth in Sri Lanka during the period from 1977-2019. To accomplish the objective, the Johansen co-integrated test is used to investigate the long-run relationship and the Granger causality test is used to identify the direction of flow between variables. Household final consumption, Government final consumption and Gross fixed capital formation variables were used as the domestic demand variables; the value of exports is treated as export demand for national goods and services and economic growth proxied by gross domestic product. The result of Johansen co-integration test indicated the existence of the long run relationship among the variables. The results of Error correction model indicated that household final consumption, gross fixed capital formation and export have positive and statistically significant impact on economic growth in the long-run. Moreover, no independent variable in the model affected gross domestic product in the short-run. However, general government final consumption expenditure has a negative impact on economic growth in the long- run. The Granger causality test result shows a dynamic relationship between domestic demand and economic growth and between export and economic growth in Sri Lanka.