Abstract
The objectives of this study are three-fold. With reference to Sri Lanka, first the study analyzed the interdependence of three sectors of the economy-agriculture, industry and services-in a sectoral contribution to national GDP. Second, we examined how a particular sector responds to exogenous shocks of its own and the other two sectors. Finally, we analyzed the nature of forecast variance decomposition of change in contributions to the national GDP by the three sectors. Data used for the analysis were secondary in nature and were obtained from the annual report of the Central Bank of Sri Lanka for the year 2006. Data were comprised of the sectoral distribution of GDP in millions of Sri Lankan Rupees [LKR] for the period of 1970-2006. After testing for stationarity and cointegration, the study applied Vector Autoregressive [VAR] analysis to achieve the set objectives. The key components of the analysis included the estimation of VAR, generalized impulse response functions, variance decomposition and the Granger causality test.
The study found that any positive growth in the services sector generated positive impacts in the other sectors; agriculture and industry, because of a spill over link of the latter with the services. The analysis further found that the industrial sector of Sri Lanka is of key importance in determining the volume of GDP, and directly contributes to enrichment of the services sector in the economy. Finally, the agricultural sector is not productive enough to generate spill over effects to the other sectors of the economy. Hence, the study strongly recommends implementation of remedial policy actions to enhance agricultural sector productivity in the Sri Lankan economy.
JEL Classification: C12, C22, E60
