Abstract:
Gross Domestic Product (GDP) is one of the major keys in measuring countries development.
Development does not stand only for financial prosperity. Among number of facts that make
impact on GDP and its growth over years, education and health can be considered as important
factors. This study has been carried out to analyse how the expenditure on education and health,
as a share of national expenditure have been behaving throughout past 59(1962-2020) years on
GDP growth in Sri Lanka. Since three data series were not representing stationarity, values were
log transformed and tested for stationarity. According to the results lgdp, ledu and lhealth were
unit root non-stationary, therefore first difference of data taken and then all three variables
Δlgdp, Δledu and Δlhealth were stationary. Thus, the requirement for VAR modelling was
satisfied. AIC, BIC and HQ criteria have been conducted to find the VAR order as 3. VAR(3)
model satisfies the accuracy condition of non-cross correlated residuals. Granger causality
could be identified in the direction GDP to both Education and Health expenditure. GDP was
not granger caused from both variables. This one-way causality is common for mid and lowincome
countries. Per capita income arises when GDP grows, then people have money to be
spent on education and health while it helps to grow the GDP growth rate. According to model
VAR(3) which has short term of 3 lags, GDP growth rate is having positive impact on both
education and health in second and third lag. According to the results GDP growth rate cannot
by developed only by education, it needs all other economic sector improvements. Making
investments in other economics sectors will automatically increase the development in health
and education. Health and education are having positive impact on each other. Johansen
cointegration test was performed for unit-root non-stationary data according to the results, it
could be concluded that there is no cointegrating relationships among variables. That implies
there exists no long running or stable equilibrium among three variables. In 2021, 1.29% GDP
growth rate could be predicted using VAR(3) model. However, the Covid-19 impact can make
changes in the results as the impact was partially touched by the pandemic.
