Quantitative Techniques in Business

ASSIGNMENT:
Dependent variable and independent variables analysis

SUBMITTED TO:
SIR MOHAMMAD ILYAS

SUBMITTED BY:
MUHAMMAD UMAIR BUTT WAQAS WAHEED ARSLAN AHMAD CH MUHAMMAD ASHRAF AATISAM NASIR ID # 11422 ID # 11434 ID # 11449 ID # 11410 ID # 11411

Determinate Industrial value added (% of GDP) in Sri Lanka

1. Introduction:
The Industry value added (% of GDP) in Sri Lanka was reported at 29.37 in 2008, according to the World Bank. Industry corresponds to ISIC divisions 10-45 and includes manufacturing (ISIC divisions 15-37). It comprises value added in mining, manufacturing (also reported as a separate subgroup), construction, electricity, water, and gas. Value added is the net output of a sector after adding up all outputs and subtracting intermediate inputs. It is calculated without making deductions for depreciation of fabricated assets or depletion and degradation of natural resources. The origin of value added is determined by the International Standard Industrial Classification (ISIC), revision 3. For VAB countries, gross value added at factor cost is used as the denominator. A chart with historical data for Machinery and transport equipment (% of value added in manufacturing) in Sri Lanka. Value added in manufacturing is the sum of gross output less the value of intermediate inputs used in production for industries classified in ISIC major division 3. Machinery and transport equipment comprise ISIC groups 382-84. Sri Lanka is a developing economy off the southern coast of India. In spite of years of civil war, the country has recorded strong growth rates in recent years. The main sectors of the Sri Lanka's economy are tourism, tea export, apparel, and textile and rice production. Remittances also constitute an important part of country's revenue. Exports to the United States, Sri Lanka's most important market, were valued at $1.8 billion in 2002, or 38% of total exports. For many years, the United States has been Sri Lanka's biggest market for garments, taking more than 63% of the country's total garment exports. India is Sri Lanka's largest supplier, with exports of $835 million in 2002. Japan, traditionally Sri Lanka's largest supplier, was its fourth-largest in 2002 with exports of $355 million. Other leading suppliers include Hong Kong, Singapore, Taiwan, and South Korea. The United States is the 10th-largest supplier to Sri Lanka; U.S. exports amounted to $218 million in 2002, according to Central Bank trade dataU.S. Customs data places U.S. exports to Sri Lanka at $166 million in 2002. Wheat accounted for 14% of U.S. exports to Sri Lanka in 2002, down from the previous year. This table show industrial production growth rate in Sri Lanka.

3 Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 Industrial production growth Rank rate 1.10% 117 5.80% 57 7.10% 47 8.20% 31 6.20% 60 7.60% 45 5.90% 41 4.20% 29 6.90% 48 Percentage change 427.27% 22.41% 15.49% -24.39% 22.58% -22.37 -28.81% 64.29% Date of information 2002 2003 2004 2005est. 2006est. 2007est. 2008est. 2009est. 2010est.

In 1977, Colombo abandoned statist economic policies and its import substitution trade policy for market-oriented policies and export-oriented trade. Sri Lanka's most dynamic industries now are food processing, textiles and apparel, food and beverages, telecommunications, and insurance and banking. By 1996 plantation crops made up only 20% of exports (compared with 93% in 1970), while textiles and garments accounted for 63%. GDP grew at an annual average rate of 5.5% throughout the 1990s until a drought and a deteriorating security situation lowered growth to 3.8% in 1996. The economy rebounded in 1997-98 with growth of 6.4% and 4.7% - but slowed to 3.7% in 1999. For the next round of reforms, the central bank of Sri Lanka recommends that Colombo expand market mechanisms in no plantation agriculture, dismantle the government's monopoly on wheat imports, and promote more competition in the financial sector. A continuing cloud over the economy is the fighting between the Government of Sri Lanka and the LTTE, which has cost 65,000 lives in the past 15 years. Government provides employment for 13% of the work force and follows state enterprise oriented policies. Privatization of such enterprises has stopped and reversed, with several new state enterprises launched.

I.

Research Question:

How does the growth of exports of goods and services (% of GDP), Inflation, GDP deflator (annual %), final consumption expenditure (% of GDP), and gross domestic saving (% of GDP), affects the industrial worth in Sri Lanka?

II.

Objective of study:

The objective of this study is to investigate the determinants of Industry value added (% of GDP) in Sri Lanka. In this study time series data on five variables would be used to investigate the dependence of industry value added growth on all other four independent variables.

III.

Scope of industry:

Sri Lanka has traditionally been an agro-based economy. But over a period of time the government in Sri Lanka realized the need to have an industrialization strategy for the development of the economy. The role of governments, over the years, especially in developing nations like Sri Lanka has changed radically because the world itself saw rapid changes especially over the last few decades. In Sri Lanka there was a period when the state sector led industrial growth. This gradually gave way to the semi-government sector and corporations. The three main strengths that Sri Lanka offers are:

Cheap Labor that was easily available and accessible Conducive conditions, including infrastructure and tax relief Literate Workforce, both in terms of skill and literacy

Free Trade Zones and Export Processing Zones were set up offering many concessions to foreign (and local) investors. Sri Lankas traditional exports have been tea, rubber, coconuts, gems and jeweler, in the recent past the apparel industry has gained prominence. According to the Central Bank annual report in Sri Lanka the industrial sector comprises of four main categories. Those are:

Mining and Quarrying Manufacturing (i.e. processing of agricultural products, Factory industry, Cottage Industry) Electricity, Gas & Water Construction The mining and quarrying, which has the highest growth of the industry sector has been growing with increasing rates in the last few years, while the growth of the electricity, gas and water has been reducing drastically since 2006. Further, the production of the manufacturing sector in 2007 was Rs.394, 233 million. However, when considering the growth rate, the manufacturing sector was the lowest growing sector under the industrial sector.

5 Industry account for 28% of Gross Domestic Product (GDP) in 2009. Manufacturing is the largest industrial subsector, accounting for 18% of GDP. The construction sector account for 7% of GDP. Mining and quarrying account for 1.5% of GDP. Electricity, gas, and water account for 2% of GDP. Within the manufacturing sector, food, beverage, and tobacco are the largest subsector in terms of value addition, accounting for 44%. Textiles, apparel, and leather are the second-largest sector with 20% of value addition. The third-largest sector in value added terms is chemical, petroleum, rubber, and plastic products.

2. Data and methodology:

I. Data:
A sample period of 45 years has been selected for this study for the period of 1965-2009 with annual frequency. Depending on the availability of data we have selected the longest possible sample period to avoid the small sample bias. Data on all the variables have been collected from World Development Indicators. Five variables have been selected for this study. Industry, value added (% of GDP) has been used for dependent variable to represent the industrial worth. Whereas, exports of goods and services (% of GDP), inflation, GDP deflator (annual %), final consumption of expenditure (% of GDP), gross domestic savings (% of GDP) has been used an independent variable. The description of variables has been given below.

Dependent variable: Industry, value added (% of GDP):

This variable is used as economy policy & debt. Industry corresponds to ISIC divisions 10-45 and includes manufacturing (ISIC divisions 15-37). It comprises value added in mining, manufacturing (also reported as a separate subgroup), construction, electricity, water, and gas. Value added is the net output of a sector after adding up all outputs and subtracting intermediate inputs. It is calculated without making deductions for depreciation of fabricated assets or depletion and degradation of natural resources. The origin of value added is determined by the International Standard Industrial Classification (ISIC), revision 3. Note: For VAB countries, gross value added at factor cost is used as the denominator.

Independent variable: 1. Exports of goods and services (% of GDP):

Exports of goods and services represent the value of all goods and other market services provided to the rest of the world. They include the value of merchandise, freight, insurance, transport, travel, royalties, license fees, and other services, such as communication, construction, financial, information, business, personal, and government services. They exclude compensation of employees and investment income (formerly called factor services) and transfer payments.

2. Inflation, GDP deflator (annual %):

Inflation as measured by the annual growth rate of the GDP implicit deflator shows the rate of price change in the economy as a whole. The GDP implicit deflator is the ratio of GDP in current local currency to GDP in constant local currency.

3. Final consumption expenditure, etc. (% of GDP):

Final consumption expenditure (formerly total consumption) is the sum of household final consumption expenditure (private consumption) and general government final consumption expenditure (general government consumption). This estimate includes any statistical discrepancy in the use of resources relative to the supply of resources.

4. Gross domestic savings (% of GDP):

Gross domestic savings are calculated as GDP less final consumption expenditure (total consumption).

Quality of Data:
It is really tough to comment on quality of the secondary data. However, the above definitions of the variables show that the variables measure the concepts which we intended to measure. Given that the data have been collected according to the above definitions of the variables, the data used in this study is valid for the purpose of analysis. It is important to note that the above definitions of the variables have been taken from the user guide of the World development Indicators which is the source of the data used in this study. No data values are missing from any series. Data on World Development Indicators are drawn from the sources thought to be most authoritative.

II.

Methodology:
To present the overall picture of the variables the descriptive statistics are

used. The scatter-plot is used to view the relationships among the variables used in this study. The scatter-plot is used to find the linear relationship between variables. A table of correlations among variables is also a part of the study. This table provides the values and signs of the coefficients of correlations. This table also provides the P-values of the test of the null hypothesis which states that the said variables are not correlated to each other. This table is also helpful to check the problem of multi-collinearity. The large correlations between the predictor variables indicate the problem of multi-collinearity.

7 Since the objective of this study is to check the dependence of the industry, value added (% of GDP) on different factors as stated above, in this study ordinary least square (OLS) method of multiple-regression is used to estimate the effects of those factors on the economic growth. The objective of the regression in this study is to find such an equation which could be used to find the predicted value of the industry worth for a given set of values of exports of goods and services as percentage of GDP (EXR), and inflation, GDP deflator as percentage of annual (INF), final consumption expenditure as percentage of GDP (FCE), and gross domestic savings as percentage of GDP (GDS). The specified multiple regression equation takes the following form: IVAt = 0 + 1EXRt + 2INFt + 3FCEt + 4GDSt + Ut (1)

As specified in the above equation IVAt is the dependent variable and other four variables are independent. Since all the variables are time series, subscript t denotes the time period. 0 is the constant term. 1, 2, 3, and 4 are the partial regression coefficients of the independent variables. A partial regression coefficient represents the change in dependent variable, ceteris paribus, due to one unit change in independent variable. Ut is the error term. To test the significance of the individual coefficients t-test is also employed in this study. Overall goodness of fit of the model is checked through F-test and the adjusted coefficient of determination (adj. R2). To test the problem of autocorrelation Durbin Watson (DW) test is also conducted.

Justification of the Method:

This study has used the descriptive statistics to present the overall picture of the variables. For the initial look on the relationship between different variables the scatterplot is used. The scatter-plot is used to find the linear relationship between variables. Magnitudes and signs of the correlation coefficients are provided in the table of correlations. This table is used to view the strength and direction of the relationship between the variables. This table also provides the P-values of the test of the null hypothesis that states that there is no correlation between two variables. This table is used to indicate the problem of multi-collinearity as well. The method of multiple-regression is used to estimate the effect of multiple predictors on the predicted. Considering the objective of this study the multiple-regression analysis is used in this study to estimate the partial regression coefficients of the independent variables and their

8 statistical significance. We have used the method of multiple-regression because there are four independent variables in this study and all of them are scale variables.

3. Empirical findings:
In this part of the study empirical findings have been shown and interpreted. Table 3.1 presents the descriptive statistics which show the overall picture of the variables.

Table 3.1 Descriptive Statistics

N Industry, value added (% of GDP) Exports of goods and services (% of GDP) Inflation, GDP deflator (annual %) Final consumption expenditure, etc. (% of GDP) Gross domestic savings (% of GDP) Valid N (list wise) 45 Minimum 19.70 Maximum 30.64 Mean 26.4165 Std. Deviation 2.49716

45

18.39

39.02

29.3189

5.27889

45

-1.80

24.38

10.2700

5.83487

45

80.11

91.89

85.4998

2.71969

45 45

8.11

19.89

14.5002

2.71969

Explanation:
In the above table the minimum values, maximum values, mean values and the values of standard deviation of all the five variables have been shown. Mean value provides the idea about the central tendency of the values of a variable. Number of observations of each variable is 45. Standard deviation and the extreme values (minimum in comparison to maximum value) give the idea about the dispersion of the values of a variable from its mean value. Since different units of

9 measure have been used for different variables the dispersion of a variable using standard deviation cant be compared to that of other variable unless both the variables have the same unit of measure. But still these statistics are helpful to have an idea about the central tendency and the dispersion of a variable in absolute terms rather than relative terms.

Scatter Diagrams:
Figure 1 Figure 2

Figure 3

Figure 4

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Explanation:
In this scatter plot diagrams we intend to have some idea about the relationship between industries, value added (% of GDP) and other variables. In figure 1 shows the positive relationship between industry values (% of GDP) added and grosses domestic savings (% of GDP) and also shows the linear relationship between both variables because R value(R sq quadratic-R sq linear) less then P-value (0.005 > 0.05). In figure 2 also show positive relationship between industry value added and inflation, GDP deflator and shows the linear relationship between both variables because R value(R sq quadratic-R sq linear) less then Pvalue (0.03 > 0.05). They are negative relationship between industry value added and final consumption in figure 3. They are linear relationship between both variables because R value(R sq quadratic-R sq linear) less then P-value (0.005 > 0.05). They are also positive relationship between industry value added and exports of goods and services in figure 4. But they are not linear relationship between both variables because R value (R sq quadratic-R sq linear) is equal to P-value (0.05 = 0.05). These results have been confirmed by the table of correlations.

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Table 3.2 Correlations

Final consumption Inflation, expenditure, GDP deflator etc. (% of (annual %) GDP) .405** .006 45 .405** .006 45 -.387** .009 45 .387** .009 45 45 .004 .981 45 -.004 .981 45 45 -1.000** .000 45 45 45 1 -.387** .009 45 .004 .981 45 1 Gross domestic savings (% of GDP) .387** .009 45 -.004 .981 45 -1.000** .000 45 1

Industry, value added (% of GDP) Industry, value added (% of Pearson Correlation GDP) Sig. (2-tailed) Inflation, GDP deflator (annual %) N Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) 1

Final consumption expenditure, etc. (% of GDP)

N Gross domestic savings (% Pearson Correlation of GDP) Sig. (2-tailed) N

Explanation:
Table 3.2 represents the table of correlations. They are linear relationship between variables and all assumption fulfills the Pearson correlation but one variable is not relationship. This table reflects two variables inflation, GDP deflator (% of GDP) and gross domestic savings are positively correlated to industrial worth (r= .405, p = .006, and r= .387, p= .009, respectively). Final consumption is negatively correlated to the industrial worth (r= -.387, p = .009). They are made the hypothesis and reject the null hypothesis because they are relationship between the variables. The magnitudes of the above discussed correlations are greater than 0.4 in the absolute terms, which shows the moderate correlations between the said pairs of the

12 variables. All the above correlations are statistically significant at less than five percent level of significant.

Table 3.2.1 Correlations

Industry, value Exports of goods added (% of GDP) Spearman's rho Industry, value added (% of GDP) Correlation Coefficient Sig. (2-tailed) N Exports of goods and services (% of GDP) Correlation Coefficient Sig. (2-tailed) N 1.000 . 45 .505
**

and services (% of GDP) .505

**

.000 45 1.000 . 45

.000 45

Explanation:
Table 3.2.1 also represents the table of correlations. One variable is not fulfilling the assumptions of Pearson correlation. So he apply spearman test to check the significant level of variable and strength of variable. This table reflects the two variables industry value added and exports of goods and services are positively correlating the industrial worth. They are made the hypothesis and reject the null hypothesis. They are relationship between the variables because significant value is less than P value (0.00>0.05). The magnitudes of the above discussed correlation value is 0.51 in the absolute term which show the moderate relationship between the variables. The correlation of the variables is statistically significant at less than five level of significant.

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Table 3.3 Regression Dependent variable: industry value added (% of GDP)

Variables Coefficients Std. Error t-test Sig. Level

Constant Exports of goods and services (%of GDP) Inflation, GDP deflator (annual %) Gross domestic savings (%of GDP)

17.258

1.955

8.827

.000

.163 .139 .205

.068 .054 .128

2.395 2.575 1.597

.021 .014 .118

Regression equation:
IVAt = 0 + 1EXRt + 2INFt + 3FCEt + 4GDSt + Ut IVAt = 17.258 + 0.1631 + 0.1392 + 03 + 0.2054

Explanation:
Table 3.3 presents the results of the regression analysis. The results show that all of the independent variables except final consumption as shown by the values of the t-statistic and the corresponding P-values. T-test is used to test the significance of the individual partial regression coefficients. Null hypothesis in this test is set as the partial regression coefficient is zero. They are one excluded independent variable that final consumption. Final consumption result in SPSS not shows that show the excluded variable in multiple regression result. This test shows that the coefficients of all the predictors except gross domestic savings and final consumption are statistically significant at less than five percent level of significance. All of the significant coefficients have the positive signs. The magnitude of the partial regression coefficient of the

14 exports of goods and services is 0.163, reflects the change of 0.163 units in industrial worth due to one unit change in the growth rate of exports. The partial regression coefficient of inflation on industrial worth is 0.139 which represents that, given no change in other factors; an increase of one unit in inflation would reduce the industrial growth by 0.139 units. Though it is interpret the value of the constant term in our regression analysis, its value is positive which shows that in the absence of all the predictors used in this study the industrial worth would be positive.

Table 3.4 Necessary statistics

Coefficient of Determination (R2) .399 Adjusted Coefficient of Determination (Adj. R2) .355 Durbin-Watson Statistic .644 F-Statistic 9.067 Sig. (F-Stat) .000

Explanation:
Necessary statistics have been shown in table 3.4. The value of the coefficient of determination (R2) is 0.399. This shows that the correlation between the observed values of industrial growth and the fitted values of the industrial growth is thirty seven percent. The adjusted coefficient of determination (adj. R2) shows is adjusted for the degrees of freedom. The value of the adjusted coefficient of determination (adj. R2) is not affected by the inclusion of the irrelevant variables. The value of the adjusted coefficient of determination (adj. R2) is 0.255, which shows that twenty six percent variations in industrial growth are explained by the variations in independent variables. The value of F-statistic is statistically significant at less than five percent which exhibits that in the estimated model at least one of the partial regression coefficients is different from zero. The value of Durbin-Watson statistic is 0.644 which is very much supportive and reveals that there is no serial correlation in the error term. Independent variables are jointly effect on industrial worth. Model of regression is good fit while null hypothesis is rejected.

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4. Summary and Conclusion:

This study has investigated the determinants of industrial worth for the period 1965-2009 in the case of Sri Lanka. After observing the scatter plot and the correlations ordinary least square method of multiple-regression has been used for this purpose. The industrial value added as percentage of GDP has been used as dependent variable as the representative of industrial worth. The study could not find any impact of gross domestic savings on industrial worth. The impacts of exports of goods and services as a percentage of GDP and inflation, GDP deflator as percentage of annual are found to be positive and statistically significant. The transition to a free market economy based on a liberalized trade and exchange rate regime has brought benefits to the Sri Lankan economy. Unemployment, a problem for decades, has reduced significantly, and remains at historically low levels (8 percent in 2000). Nonetheless, the high levels of inflation , fueled by the sharp deterioration of the Sri Lankan currency, combined with the mounting cost of civil war has raised the cost of living to very high levels. The soaring cost of living has made many Sri Lankans struggle to satisfy their basic needs. Over 45 percent of the population depends on benefits under the income supplement programs initiated by the government. The balance of payments problem remains unresolved. The persistent trade deficit has led to increased reliance on foreign aid to meet the country's import requirements, leading to an inevitably mounting foreign debt. Foreign debt as a percentage of the gross domestic product, which accounted for 21 percent in 1975, grew to 75 percent in 1994, and amounted to 59 percent in 1999.

The coefficients of all the other two statistically significant coefficients are positive as they were expected. The impact of gross domestic savings on industrial worth of Sri Lanka is not statistically significant. This shows that on average gross domestic savings has been not a problem in Sri Lanka during the period under study. Positive and significant impact of exports of goods and services on industrial worth suggests that Sri Lanka should focus on export expansion. Partial regression coefficients of inflation on industrial worth are statistically significant suggested that Sri Lanka should worked and make low price of the products. They are low imports of the products and increase the exports of goods.

16 Although this study has included many important determinants in the analysis on the basis of theoretical narrations, yet in future studies it would be useful to include some other variables in the analysis as well. Inclusion of other variables e.g. technical change and human efforts, latest machinery etc may improve the value of the coefficient of determination.

5. References:
http://databank.worldbank.org/ddp/home.do?Step=2&id=4&hActiveDimensionId=W DI_Series http://www.tradechakra.com/economy/sri-lanka/industry-in-sri-lanka-350.php http://en.wikipedia.org/wiki/Economy_of_Sri_Lanka http://www.nationsencyclopedia.com/Asia-and-Oceania/Sri-LankaINDUSTRY.html#ixzz1JmX61j85 http://en.wikipedia.org/wiki/Economy_of_Sri_Lanka. Sri Lanka Overview of economy, Information about Overview of economy in Sri Lanka http://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/Sri-LankaOVERVIEW-OF-ECONOMY.html#ixzz1QXx2Mvoo