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MN 3042

BUSINESS ECONOMICS

GROUP ASSIGNMENT

SRI LANKAN MACRO-ECONOMIC VARIABLES


AND THE IMPORTANCE OF ITS BEHAVIOR
TO PRACTICING ENGINEERS

GROUP:

74

GROUP MEMBERS:

Ranasinghe R. A. R. A.
Rathanayaka P. K. H.
Rathnayake R. M. M. R.
Rupasinghe R. A. D. K.
Samarathunga S. C. J.

DEPARTMENT:

Electrical Engineering

DATE OF SUBMISSION:

28-08-2013

100439E
100455A
100457G
100465E
100473C

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BUSINESS ECONOMICS

CONTENTS

PAGE

Introduction

03

Objectives an Instruments of Macroeconomics

03

Macroeconomic Variables

03

Aggregate Supply and Demand

04

Engineering and Economy

05

Output

07

Gross Domestic Product and Related Factors

07

Sri Lankan GDP

08

The Importance to Practicing Engineers

10

Employment and Unemployment

12

Measuring Unemployment

12

Sources of Unemployment

12

Unemployment in Sri Lanka

14

Importance to Practicing Engineers

15

Prices and Inflation

16

Different Types of Inflation

16

Inflation in Sri Lankan Economy

17

The Importance to Practicing Engineers

18

Foreign trade

19

International Trade Balance


Need and Importance of Trade Balance
Factors That Affects the Balance of Trade
Foreign Trade Balance in Sri Lankan Economy
Importance of Trade Balance to Practicing Engineers

19
19
20
21
22

Conclusions

23

References

24

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INTRODUCTION
Macroeconomics is the study of the behavior of the economy as a whole. It examines
the forces that affect many firms, consumers, and workers at the same time. In contrast with
microeconomics which studies individual prices, quantities and markets. Macroeconomics
runs through two major paths. One is the short term fluctuations in output, employment and
prices. The second is the long term trends in output and living standards. The development of
macroeconomics was one of the major breakthroughs in 20th century economics, leading to
much better understanding of how to combat periodic economic crises and how to stimulate
long term economic growth.
Objectives and Instruments of Macroeconomics
The major macroeconomic goals are high level and rapid growth of output, low
unemployment and stable prices. We can identify three objectives of macroeconomic policy.
Output: high level and rapid growth of output. Employment: high level of employment with
low involuntary unemployment. And price level stability. There are two major instruments or
policy measures available to modern economics. Monetary policy: controlling the money
supply to determine interest rates. Fiscal policy: government expenditure and taxation.
No nation is an island unto itself. All nations participate in the world economy and are
linked together through trade and finance. Nations keep a close watch on their foreign trade
flows. As the costs of transportation and communication have declined, international linkages
have become tighter than ever before. As economies become more closely linked,
policymakers devote increasing attention to international economy policy. The study national
and regional economy policies become far important at these points. Then macroeconomics
plays a major role in there.
Macroeconomic Variables
We have selected four key macroeconomic variables to study in this report. The first
one would be the output. The most comprehensive measure of total output in an economy is
the gross domestic product (GDP). It is a measure of the market value of all final goods and
services produced in a country during a year.
The second key variable we wish to study is the employment. Of all the
macroeconomic indicators, employment and unemployment are most directly felt by
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individuals. The unemployment rate is an indicator of labor force that is unemployed. The
unemployment rate tends to reflect the state of the business cycle.
The third key variable is price stability. Maintaining price stability means that the
overall price level is either unchanged or rising very slowly. To track prices, government
conducts rice indexes, or measures the overall price level. An important example is the
consumer price index (CPI) which measures the average price of goods and services bought
by consumers. Economists measure price stability by looking at inflation rate. It is the
percentage change in overall level of prices from one year to the next.
And as the fourth, we have studied the Sri Lankan foreign trade. Net export and trade
balance are two indicators that give information on a countrys foreign trade. Since no
country is any more isolated it is very important to study and understand foreign trade.
Aggregate Supply and Demand
The economic history of nations can be seen in their macroeconomic performance.
Aggregate supply and demand analysis help explain the major trends in output prices.
Aggregate supply refers to the total quantity of goods and services that nations businesses
willingly produce and sell in a given period. Aggregate supply (AS) depends upon the price
level, the productivity capacity of the economy and the level of costs.
National output and the overall price levels are determined by the twin blades of the
scissors of aggregate supply and demand. Aggregate demand refers to the total amount that
different sectors in the economy willingly spend in a given period. Aggregate demand (AD)
is the sum of consumers, businesses, and governments, and it depends on the level of prices,
as well as monetary policy, fiscal policy and other factors.
Aggregate supply and demand determine the major macroeconomic variables. The
chief outcomes as shown if the figure below is: output, employment, the price level and
international trade.

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Figure 01
Aggregate Supply and Demand Determine the Major Macroeconomic Variables

Engineering and Economics


Before 20th century, engineers were mainly concerned with the design, construction,
and operation of machines, structures and processes. Focusing mainly on their field of
expertise they gave less attention to the human resources and the physical resources, which
produced the final products. Many factors have since developed to expansion of engineering
responsibilities and concerns. Besides the traditional work engineers today are expected not
only to come up with novel technological solutions but also to make skillful financial
analyses of the effects of implementation. In todays close relationship among industry, the
public and government, cost and value analyses are more important than ever before. Without
proper financial analysis an entire project can easily become more of a burden than a benefit.
The relation of engineering to economics is somewhat similar to that of engineering to
physics. Scientists discover and explain natures law through physics, and engineers translate
the scientists work into practical applications and make them reality by actually
implementing and building things never before thought possible. Economics obvious
application to the production and utilization of scarce resources ensures positive outcomes of
engineering applications in todays business oriented world.
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Practicing engineers today cannot isolate themselves from countrys economy and its
trends. Not only the countrys, itis also favorable to study about regional and world
economies as well to get a proper understanding about the surrounding potential market. For
this we can use macroeconomic concepts. By looking at the changes in the countys
macroeconomic variables we can get a clear picture about the countrys economy.
Therefore we have selected a few Sri Lankan macroeconomic variables and studied its
behavior. It shows how Sri Lankan economy has changed in the past years and how it will
behave in the future. As practicing engineers this is a study of utmost importance. In the next
few pages we have analyzed the above mentioned macroeconomic variables and studied its
behavior. And we have come to study the importance of each variables behavior in industry
for practicing engineer for production and various other reasons.

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OUTPUT
Gross Domestic Production (GDP) and Related Factors
Gross Domestic Production is the sum of all monetary values of all the finished goods and
services produced within the country in a specific time period. Usually it is calculated on
annual basis. GDP is used as an indicator for the economic strength of the country. And it
also indicates the countrys standard of living.
When GDP is calculated without considering the effects of inflation or deflation it is called
Nominal GDP. When economist needs to compare GDP values of several years Nominal
GDP cant be used. When GDP is calculated with considering the change of value of money
it is called Real GDP. Real GDP is calculated with respect to a base year. A factor called
GPD deflator is used to convert the Nominal GDP to Real GDP.

The deflator is the measurement of inflation since the base year.


For example Sri Lankan Nominal GDP in 2012 is 7,582,336 million rupees and the Real
GDP is 3,047,277 million rupees. The based year for these values is 2002.
To measure the how much the countrys production and services have been increased Real
GDP growth rate is calculated.

For an example Sri Lanka GDP values for year 2010 and 2011 are respectively 2,645,542 and
2,863,715 million rupees.
(

GDP growth rate is a very important indicator of the economy since by knowing it
economists can predict about the other economic indicators. For an example lets consider the
unemployment. If the GDP growth rate is high that means production of the country has been
increased. It implies number of workers required for the production processes have been
increased. As a result of that unemployment should has been decreased.
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When analyzing the countrys economic strength and standard of living population growth is
highly combined with the GDP. For an example if the GDP has doubled and the population
has tripled within a giving period, average person is producing less than the previous value.
So GDP per capita is calculated to account the population growth into GDP.

For an example in 2011 Sri Lanka GDP is 59.17 billion USD and the population is 20.87
million. There for,
(

This is considered as an indicator for the standard of living of a country. But it has many
drawbacks. Unequal income distribution is a one drawback.
Sri Lankan Gross Domestic Product (GDP)
When we analyze the Sri Lankan GDP we can divide origins of GDP into three major parts.
They are agriculture, industry and services. Values of Real GDP are shown in the following
graph in million rupees.

2009

2010

925,335

1,704,605

2011

338,625

838,932

Services

320,178

760,334

315,610

1,452,988
701,129

295,097

1,406,813
672,791

285,897

2008

Industry
1,569,598

Agriculture

1,783,318

GROSS DOMESTIC PRODUCT BY


ORIGIN

2012

Figure 02
Gross Domestic Product by Origin

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According to above figures we can see that service sector contribution to the GDP is very
high. In year 2012 its contribution is 52.52%. Service sector includes wholesale and retail
sale, hotel and restaurants, transport and communication, banking and insurance, government
services and private services. After the end of the civil war, countrys economy expanded
especially in service sector. Transport and communication services could be spread in to the
areas where the war had been. For example cellular phone subscribers have been increased
from 83% from 2009 to 2012. After the war number of tourist arrivals increased. Arrival of
tourist is increased from 125% from 2009 to 2012 Because of that hotel and restaurant
services could be expanded.
Industrial sector contribution is 30.34%. It includes mining and quarrying, manufacturing,
Electricity gas and water and construction. Although Sri Lanka is considered as an
agricultural country, agriculture contributes the GDP only by 11.11%. Paddy, tea and coconut
are the most important crops in agriculture GDP. Less enrolment of young generation to
agriculture, unavailability of proper pricing system on vegetables, less improvements in
research facilities and changes in weather conditions for last years may be the reasons for this
less contribution.
As Sri Lanka administration has been divided in to nine provinces we can also analyze the
provincial contribution to the national GDP. Vales in million rupees are shown on the
following figure.

Provintial GDP Contribution


3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0

2009

2010

2011

Figure 03
Provincial GDP Contribution

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We can see that western province contribution to the national GDP is high. It is 44.4%.
Reason for this is majority of manufacturing industries and trade has been concentrated to the
Western province.
Following table shows the GDP growth of each province in year 2011.

Western

GDP
Growth %
(2011)

15.6

Central

Southern

Northern

Eastern

North
Western

North
Central

14.5
21.4
27.1
12.4
21.9
12.4
Table 01-GDP growth of each province in year 2011

Uva

15.5

S'gamuwa

15.7

Northern Province has recorded the highest GDP growth in 2011 as a 27.1%. Expansion in
agriculture, fishing, transportation and financial services after the war is the reason for that.
High growth rate of the Southern province is due to high growth of the construction sector.
North Central province mainly contributes to the GDP by agriculture. Due to the adverse
weather conditions at past years production of agricultural products decreases. There for the
GDP growth rate of North Central province is a low value. Because of long dry season in
year 2010 and 2011 rainfall to the Central Province reduced. Because of that hydro power
generation at Central province decreased. That may have affected in the low GDP growth rate
of Central province.
The Importance to Practicing Engineers
We can see that many factors have affected on the GDP value of Sri Lanka in past years. For
practicing engineers it is very important identify trends GDP changes and causes for those
changes for many reasons.
Engineers are mainly involved in industry and service sectors. Lets consider about the
contribution to the GDP by construction, manufacturing, electricity and telecommunication.
First three belongs in the industry and telecommunication belongs to the services. Following
graphs illustrates the contribution to the Real GDP from these sectors. Value is indicated in
million rupees.

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Contribution to GDP
600000
500000
400000
300000
200000
100000
0
2008
Manfaucring

2009

2010

Contruction

Electricity

2011

2012

Telecommuniation

Figure 04 Contribution to GDP

We can observe that all for categories contribution to GDP is increasing. Manufacturing
industry is the highest contributor. Because of that more money circulates at manufacturing
industries. That means industrial production has been increased. There for job opportunities
related to manufacturing processes for engineers have been increased. Also we can see a
large expansion in construction sector. One of the main reasons is government policy on
infrastructure development. Mainly for road and highway development government invests
more money. There for practicing engineers there are more opportunities in construction
sector. Due to increase in electricity generation and increase in cellular connection and
broadband connection electricity and telecommunication sector is also expanding.
For a practicing engineer GDP analyzing is very important. They can identify threats and
opportunities to their career by identifying trends.

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EMPLOYMENT AND UNEMPLOYMENT


The term unemployment can be defined as people who are not employed but are actively
looking for work or waiting to return to work. More precisely, a person is unemployed if he
or she is not working and,
o Has made specific efforts to find a job,
o Is laid off from a job and is waiting to be recalled or,
o Is waiting to report to a job in near future
Further, to be considered as unemployment person, he must do more than simply think about
work. For an example person must sending application to firms answering those
advertisements to find a job.Labour force includes all those who are either employed or
unemployed. And on the other hand Not in the labour force includes the adult population that
is going to school, keeping house , retired , two ill or disable to work or simply not looking
for work . Finally, some people may have given up their job search in frustration. These so
called discouraged workers, in effect, dropped out of the labour force and so are not counted
as unemployment.
Measuring Unemployment
Typically unemployment rate which,along with the current account figures, is perhaps the
most widely reported measure of the nations economic condition. The unemployment rate
measures the percentage of these in the labour force who are unemployed. In other words, the
unemployment rate is the number of people unemployed divided by the number in the labour
force.

Sources of Unemployment
Consider all the ways in which people can become unemployed. They may resign or be
sacked from their jobs. They may be looking for their first job after having left school or
graduated. Or they may be trying to re- enter the labour force after an absence.
Pick up any week end newspaper and thumb through the classified pages, the employment
section may run for more than ten pages and include thousands of jobs, from accountant to
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zoologists.To understand paradox we must take a closer look at the reasons behind
unemployment statistics. Based on the sources of unemployment, we distinguished four basic
types. There are frictional, structural, seasonal and cyclical unemployment.
Fictional Unemployment
Similar as employees do not often hire the first applicant who comes through the
door, workers do not always accept their first job after. Both employers and job applicants
need time to explore the job market. During the time taken to accumulate and act on all this
information job vacancies remain unfilled. The time required to bring together labour
suppliers and labor demanders results in frictional unemployment. Frictional unemployment
does not last long and results in better between workers and jobs, so ensuring a more efficient
economy.
Structural Unemployment
Structural unemployment occurs because changing demand and changing technology
reduce the demand for certain skills and increase the demand for other skills. Whereas most
frictional unemployment is short term and voluntary, structural, unemployment is usually in
voluntary and can last long time.
Seasonal Unemployment
Unemployment caused by seasonal shifts in labour supply and demand during the
year is called seasonal unemployment. It occurs in industries such as Agriculture, Tourism
and Fisheries. Agriculture and Fisheries industries experience peak demand for labour during
the season when harvesting occur. Those employed in seasonal occupations know they will
probably be unemployed during particular months.
Cyclical Unemployment
Cyclical Unemployment exists when the overall demand for labour is low. It occurs
because of the general decline in output during a recession, most firms reduce their demand
for inputs, including labour .The distinction between cyclical and other kinds of joblessness
helps economists to diagnose the general health of the labour market.

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Unemployment in Sri Lanka


We can see above mentioned all the unemployment types exist in Sri Lankan
economy. According to Central Bank Report,
The unemployment rate declined to 4 percent in 2012 from 4.2 per cent in 2011
indicating the continuation of the declining trend observed over the past few years. The
total number ofunemployed persons decreased to 0.336 million in 2012 from 0.358 million
recorded in 2011, in linewith the expansion of economic activities in all three sectors of the
economy. Unemployment amongfemales declined to 6.2 per cent in 2012 from 7 percent in
2011 while unemployment among maleswas significantly lower at 2.8 per cent in 2012
although recording a marginal increase from 2.7per cent in 2011.

The decline in unemployment among educated persons was an encouraging


development. The unemployment rate of persons with GCE (A/L) and higher qualifications
declinedto 7.5 per cent in 2012 from 9 per cent in 2011. However, the highest rate of
unemployment wasreported for this category followed by those with GCE (O/L)
qualifications which increased to 6 percent in 2012 from 5.2 per cent in 2011.

Youth unemployment remained high although it declined for some age categories in
2012. The unemployment rate for the age group 20-29 years declined to 11.3 per cent in 2012
from12.3 per cent in 2011. Continued focus on technical, vocational and ITbased training will
further improve the employability of the young population. The unemployment ratefor the
30-39 year and over 40 year categories was lower at 2.5 per cent and 0.8 per cent,
respectively,than the national average in 2012.

In terms of employment status, the numberand share of employed population engaged


in the private sector, public sector and self-employment increased. The number of
employees in the public sectorincreased by 4.3 per cent to 1.230 million and itsshare of total
employment rose to 15.1 per cent in2012. The number of persons in selfemploymentactivities increased marginally to 2.592 million and its share in total employment
increased to 31.9 percent in 2012. The number of employers declined by 1.4 per cent to
231,087 and unpaid family workers719,970 and their respective shares also decreased to 2.8
per cent and 8.9 per cent. The decline in the unpaid family workers was mainly due to the
decrease in females engaged in agriculture activities in the rural sector.
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According to the Public Sector Employment Survey carried out by the Central Bank,
the number of employees in both government and semi-government increased. The
increase in the number of employees in the government sector was primarily due to an
increase in casual and contract employees in the secondary and primary level. New
recruitments to the Sri Lanka Navy, Department of Civil Security and the Sri Lanka Air
Force mainly contributed to this increase. Employment in semi-government increased
marginally in almost all levels.

The Importance to Practicing Engineers


The economic environment is very turbulent and it changes very rapidly. In the world
, there are some countries that experience rapid growth in comes over the past century while
others stay mired in poverty, some countries have high rate of inflation while others maintain
stable prices and all the countries experience recessions and depressions. To examine these
various types of situations, it is necessary to study the economy as wholes.
Inflation, unemployment and economic growth are more important macroeconomic
issues. So when we are moving with economic activities it is very important to understanding
about these concepts. Because not as a engineers but as people who are dealing with those
issues in practical world should be know how these issues arise, grows and impact of those to
our society and how to properly dealing with them.Also macroeconomic issues may be
relevant to the world politics, and deals with the job of making economic policies and
macroeconomic analysis helps to predict the future course of economic events while
providing a great deal of knowledge about how the economy works.Also this deals with the
major economic issues and problems of the day.
Basically, unemployment is just one aspect of economics that is interconnected with
an entire economic sphere. When unemployment is high, there are problems with the
economy. Interestingly enough, it's actually completely normal and healthy for economies to
have a small amount of unemployment at all times. That being said, unemployment is
probably made into one of the more important economic issues because its the one aspect of
economics most closely tied to the individual's well-being.So it is really important to having
better knowledge regarding unemployment as a major macroeconomic issue that is exists in
every country.

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PRICES AND INFLATION


In economics inflation means, a rise in general level of prices of goods and services in
an economy over a period of time. When the general price level rises, each unit of currency
buys fewer goods and services. Thus, inflation results in loss of value of money. Another
popular way of looking at inflation is "too much money chasing too few goods".

The last

definition attributes the cause of inflation to monetary growth relative to the output /
availability of goods and services in the economy. In case the price of say only one
commodity rise sharply but prices of other commodities falls, it will not be termed as
inflation. Similarly, in case due to rumors if the price of a commodity rises during the day
itself, it will not be termed as inflation.
Different types of inflation
(a) Demand - Pull Inflation - In this type of inflation prices increase results from an excess
of demand over supply for the economy as a whole. Demand inflation occurs when supply
cannot expand any more to meet demand.
(b) Cost - Push Inflation - This type of inflation occurs when general price levels rise owing
to rising input costs. In general, there are three factors that could contribute to Cost-Push
inflation, rising wages, increases in corporate taxes, and imported inflation.
(c)Wage Push Inflation - Rising wages tend to cause inflation. In effect this is a combination
of demand pull and cost push inflation. Rising wages increase cost for firms and so these are
passed onto consumers in the form of higher prices.
(d) Imported Inflation - Depreciation in the exchange rate will make imports more expensive.
Therefore, the prices will increase solely due to this exchange rate effect. A depreciation will
also make exports more competitive so will increase demand.
Inflation rate can be calculated using,

i yeart

price level yeart price level yeart 1


price level yeart 1

The Consumer Price Index (CPI) is a measure of the overall cost of the goods and services
bought by a typical consumer. It is used to monitor changes in the cost of living over time.

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Inflation in Sri Lankan Economy


Year-on-year headline inflation, as measured by the Colombo Consumers Price Index
(CCPI), declined to a low level of 2.7 per cent in February 2012.

Figure 05 Year on Year Inflation


Sri Lanka has demonstrated a strong commitment to maintain inflation at low levels
for the last four years despite severe supply side shocks, thus, anchoring inflation
expectations and yielding a positive return on medium and long term financial savings.
Accordingly, the market determined real positive interest rates are expected to mobilize
existing resources from savers and channel them to productive investments, while lower
inflation will lead to higher real wages and growth in labour productivity. These
improvements will result in increased labour utilization and labour productivity, thus
providing greater impetus for economic growth.
Inflation is expected to moderate in 2013 with the easing of demand driven
inflationary pressures and favorable supply side developments. Maintaining price stability is
important for investor and consumer confidence as well as to maintain macroeconomic
stability. Going forward, monetary policy will be carefully calibrated to balance between
maintaining inflation at a low and stable level and stimulating growth towards its full
potential. In this respect, the continued fiscal consolidation process and the implementation of
appropriate policies to address supply side bottlenecks that increase the volatility of prices are
expected to provide the required space for the smooth implementation of monetary policy.

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Importance to Practicing Engineers


All engineering activities are involved with the cost and justification of any work or
project. This means the engineer needs to be aware of what costs are important and how to
determine the optimum way of doing things from an economic standpoint. Inflation is a
major factor that practicing engineers have to consider while commissioning or designing a
project. Especially when we have to design a long term projects estimating the future
inflation rate is a must.

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FOREIGN TRADE
International Trade Balance
When the foreign trade is considered, we can see there are three types of trades. They are,
Import Trade: Import trade refers to purchase of goods by one country from another country
or inflow of goods and services from foreign country to home country.
Export Trade: Export trade refers to the sale of goods by one country to another country or
outflow of goods from home country to foreign country.
Entrepot Trade: Entrepot trade is also known as Re-export. It refers to purchase of goods
from one country and then selling them to another country after some processing operations
Need and Importance of Foreign Trade

Helps to sharing of labour and specialization:Foreign trade leads to division of labour and
specialisation at the world level. Some countries have abundant natural resources. They
should export raw materials and import finished goods from countries which are advanced in
skilled manpower. This gives benefits to all the countries and thereby leading to division of
labour and specialisation.
Optimum allocation and utilization of resources: Due to specialization, unproductive lines
can be eliminated and wastage of resources avoided. In other words, resources are
channelized for the production of only those goods which would give highest returns. Thus
there is rational allocation and utilization of resources at the international level due to foreign
trade.
Equality of prices: Prices can be stabilised by foreign trade. It helps to keep the demand and
supply position stable, which in turn stabilises the prices, making allowances for transport
and other marketing expenses.
Making available more choices: Foreign trade helps in providing a better choice to the
consumers. It helps in making available new varieties to consumers all over the world.
Improves quality and standard goods: Foreign trade is highly competitive. To maintain and
increase the demand for goods, the exporting countries have to keep up the quality of goods.
Thus quality and standardised goods are produced.

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Raises standard of living of the people: Imports can improve standard of living of the people
of any country. This is because people can have a choice of new and better types of goods
and services. By consuming new and better varieties of goods, people can improve their
standard of living.
Generating employment opportunities: Foreign trade helps in generating employment
opportunities, by increasing the mobility of labour and resources. It generates direct
employment in import sector and indirect employment in other sector of the economy such as
Industry, Service Sector (insurance, banking, transport, and communication).
Helps to economic development: Imports help to economic development of a nation. This is
because with the import of capital goods and technology, a country can generate growth in all
sectors of the economy, such as agriculture, industry and service sector.

Net export
Net export is defined as value of a country's total exports minus the value of its total imports.
In other words, net exports is the amount by which foreign spending on a home country's
goods and services exceeds the home country's spending on foreign goods and services.
It is used to calculate a country's aggregate expenditures, or GDP, in an open economy.

Trade balance
The trade balance is the difference in value over a period of time of a country's imports and
exports of merchandise; a nation's balance of trade is favorable when its exports exceed its
imports.
Factors That Can Affect the Balance Of Trade

The cost of production (land, labor, capital, taxes, incentives, etc.) in the exporting
economy vise-versa those in the importing economy.

The cost and availability of raw materials, intermediate goods and other inputs.

Exchange rate movements.

Multilateral, bilateral and unilateral taxes or restrictions on trade.

Non-tariff barriers such as environmental, health or safety standards.

The availability of adequate foreign exchange with which to pay for imports.

Prices of goods manufactured at home (influenced by the responsiveness of supply)

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Foreign TradeBehavior in Sri Lankan Economy

Sri Lanka Exports Commodities

Sri Lanka Imports Commodities:

The major export commodities of Sri


Lanka are:

The major import commodities of Sri


Lanka are:

Textiles and apparel

Textile fabrics

Tea and spices

Mineral products

Diamonds

Petroleum

Emeralds

Foodstuffs

Rubies

Machinery

Coconut products

Rubber manufactures

Fish

and

transportation

equipment

Year

Total Exports

Total Imports

Balance of Trade

Total Trade

2003

3519.90

4656.00

-1136.10

8175.90

2004

5612.40

7925.90

-2313.50

13538.30

2005

6164.15

8313.54

-2149.39

14477.69

2006

6829.46

9867.68

-3038.23

16697.14

2007

7675.16

11400.99

-3725.82

19076.15

2008

8179.45

14191.05

-6011.60

22370.50

2009

7118.14

9766.51

-2648.36

16884.65

2010

8293.73

12340.34

-4046.61

20634.07

2011

10017.63

19703.02

-9685.39

29720.64

2012

9180.54

17888.65

-8708.11

27069.19

Table 02 - Total Exports/ Total Imports/ Bal. of Trade/ Total Trade for past 10 Years
(US $ M)

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In early period of the decade following 1950, nearly 90 per cent of exports from Sri
Lanka consisted of tea, rubber and coconut while rice accounted for 25 per cent of imports.
The import of rice and other food imports were necessary to maintain the food subsidy
scheme promoted by the country. Imports of those items continued to grow faster rate than
exports as a result of population growth.
The situation was further worsened by the continuing decline of terms of trade. The
net result was imports into Sri Lanka were always higher than exports. The period since 1977
can be classified as a more liberal period when all restrictions on trade and transactions were
abolished.
During this period, imports have continued to grow at a faster rate than exports, and
trade balance has always been in deficit. However, with the composition of exports shifting to
more industrial exports, this has reduced the dependence on the traditional exports of tea,
rubber and coconut.
Importance of Trade Balance to Practicing Engineers
Trade balance is important to practicing engineers. it gives the picture about assets
which are purchased by foreigners from us and assets which are purchased from them.
International trade balance is the difference between exports & imports,
NX = X M.
If exports > imports, a trade surplus, NX > 0.
If exports < imports, a trade deficit, NX < 0.
So, if the trade balance is negative we will have to improve exports. So we should produce
our products to meet international requirements and standards. We have to widen existing
exporting products and always try to improve their quality. Further we have to identify more
products and services which can be exported by us.
If the trade balance is negative we have a good trade balance. So we have to maintain the
quality of products and services and also we should try to improve them further. We should
also identify the future trends and also hat are the treats can be affected to our products. So
we can see the international trade balance is very important to practicing engineers.

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CONCLUSIONS
We made a thorough analysis of key macroeconomic variables and its behavior in Sri
Lankan economy. Its changes are of vital importance to practicing engineers in an economic
point of view. These are the conclusions we came to at the end of our study.
When measuring the countrys economic strength GDP acts a major role. There are
many sub-indices which are related to the GDP. When analyzing Sri Lanka GDP we can
identify that service sector has the highest contribution to the national GDP. For the growth
of Sri Lanka GDP factors like end of war have been affected. Provincial contribution to the
national GDP has a vast variety. Environmental and social factors are the reasons for that. In
past few years there is an increase in the contribution to the national GDP by manufacturing,
construction, electricity and telecommunication sectors. Practicing engineers can identify
those trends and develop their professional skills and qualifications according to them.
Unemployment is a major macroeconomic issue exists in most of economies. so in the
case of unemployment, potential output is going to waste , and it is therefore clear why the
reduction of unemployment is desirable. But when economists talk about full employment
they do not mean zero unemployment. In an ever-changing economy where entrepreneurs are
continually introducing new products shifts in demand and technology alter the supply of
demand introduce new products for existing products. If unemployment rates are high as
engineers we can come to a conclusion that the production is low and employment chances
are less. This could be an indicator for practicing engineers to start new production and
finding employees to the said new production line would be easy.
When the current trade balance of Sri Lanka is being considered, we can see it is a
negative. So, there is a trade deficit. So we should improve our exports and try to reduce
unnecessary imports.
So government should get some decisions,
i.
ii.

Export subsidies
Investment tax allowances to encourage increased research and development etc.

If this trade deficit is continued, situation will be further worsened.

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REFERENCES

Central Bank of Sri Lanka. (2012) Annual report 2012. Retrieved from
http://www.parliament.lk/papers_presented/07052013/annual_report_central_bank_of_srilank
a_2012.pdf

Central Bank of Sri Lanka Communications Department (2012, August). Press Release:
Provincial Gross Domestic Product 2011. Retrieved from Central Bank of Sri Lanka Press
Releases and Speeches online: http://www.cbsl.gov.lk/htm/english/02_prs/p_1.asp?yr=2012

Central Bank of Sri Lanka Communications Department (2013, July). Press release: Inflation
declines further in July 2013. Retrieved from Central Bank of Sri Lanka Press Releases and
Speeches online: http://www.cbsl.gov.lk/htm/english/02_prs/p_1.asp?yr=2013

Nordhaus, W.D., &Samuelson, P. A., (2006) Economics(18th ed.). Delhi, India: Tata
McGraw-Hill

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