AN EVALUATION OF THE IMPACT OF TRADE ON NATIONAL INCOME IN SRI LANKA

Abstract

This paper examines the relationship between exports and income in Sri Lanka between 1960 and 2002, using descriptive and regression analysis. The links between trade balance and total exports with national income in general as well as the relationship between agricultural exports and manufacturing exports with national income in particular has been examined. To evaluate whether there is statistically significant structural change in the relationship of exports and national income during distinguished policy regimes i.e. open economy and closed economy, the chow test is done for the 2 periods 1970- 1977 and 1978-2002. The relationship between agricultural exports and national income shows a poor relationship due to the declining contribution of agricultural exports to the total exports of the country. However, very good relationship between industrial exports and national income has been discovered from the study. This may be due to the industrial policies of the government, which was aimed at export-oriented industries in an open economy. The study reveals that the country's exports, backed by favourable trade policies have an impact on the economic development of the country. However the results of the chow test indicates that no structural change has taken place in the relationship of exports and national income as a result of changes after the economic liberalization in 1977. The study also highlights the importance of integrating country's trade policy with its industrial and agricultural competent policies, which would make the domestic firms competence enough to face the increased competition in the international market.

Keywords: Exports, National income, Trade balance, Trade policies

For full Paper: fmscresearch@sjp.ac.lk