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Econometric Investigation of Short-run and Long-run Relationships Between Gdp and Agricultural Gdp of Bangladesh

Md. Humayun Kabir
Deputy Chief
Ministry of Labour and Employment, Bangladesh Secretariat, Dhaka, Bangladesh

Abstract/ Executive Summary:

The study is an attempt to investigate long-run and short-run relationships between gross domestic product (GDP) and agricultural GDP of Bangladesh applying the Vector Error Correction Model (VECM). The data published by the BBS for the period 1972-73 to 2015-16 was used. As preconditions of VECM, the stationarity of the time series data and co-integration of the variables were tested. The GDP and agricultural GDP in logarithm forms were found integrated of the order one (d=1) and co-integration of rank one (r=1). The coefficient (beta) of the estimated long-run equilibrium equation was positive and significant implying a long-run equilibrium relationship between GDP and agricultural GDP. A positive and significant time trend was also observed in the co-integrating equation. Both coefficients (alpha) of the error correction terms (ECTs) in the VECM, which indicate the rates of short-run adjustments towards the long-run equilibrium, were negative and significant confirming consistency with the theory. Since both ECTs were negative and significant, there was a long-run bi-directional causality running from agricultural GDP to GDP and vice-versa. Responding to a positive shock in agricultural GDP, the GDP gradually increases while due to shock in GDP, the agricultural GDP decreases in the initial stage and increases gradually thereafter. Various post-estimation specification tests were performed and the estimated parameters of the model were found consistent and efficient.

Keywords: GDP, Agricultural GDP, VECM, Bangladesh

Location: In Bangladesh

Start Date: 00-00-2005

End Date: 00-00-2006

Program Area: Comparative study

Commodity: Labor, Socioeconomic, Income generation, Micro-finance

Objectives:

The specific objectives are: (I) To investigate long-run and short-run relationships between real GDP and real agricultural GDP of Bangladesh; and (II) To test consistency and efficiency of the parameter estimates.

Methodology:

The article is based on time series data of real gross domestic product (GDP) and real agricultural GDP for the period from 1972-73 to 2015-16 fiscal years (July to June) published by the Bangladesh Bureau of Statistics (BBS). The data covered for the base years of 2005-06, 1995-96 and 1984-85. Due to incompatibility, the data of real GDP and real agricultural GDP for the period from 1972-73 to 1994-95 were generated through back-calculation using available latest constant growth rates of GDP and agricultural GDP. The minor variations that are observed in constant growth rates due to changes in base year were ignored assuming that it will not distort the attributes of the data and the inference to be generated from the analysis. In fact, the historical constant GDP growth rates are widely used by economists and policymakers in interpreting the economic development of a country. The data of real GDP and real agricultural GDP respectively are used as proxies to the economic and agricultural development of Bangladesh. During the period 1972-73 to 2015-16, the average annual real GDP was Taka 3,469.16 billion with a minimum of Taka 1,226.08 billion and a maximum of Taka 8,835.39 billion, the standard deviation being Taka 2,106.39 billion. On the other hand, the recorded average annual real agricultural GDP was Taka 672.24 billion with a minimum of Taka 358.59 billion, a maximum of Taka 1,301.78 billion and a standard deviation of Taka 281.18 billion. Due to the high standard deviations, natural logarithm forms of data were used for analysis. The historical trends of real GDP and real agricultural GDP in logarithm forms are presented. This time series analysis technique is applied in this study to investigate the contribution of the agricultural sector to the economic growth of Bangladesh. The analytical methods deal with test of the degree of stationary, test of co-integration, estimation of the vector error correction model (VECM) for short-run and long-run relationships between the variables and validation. The analysis was performed with the help of STATA 13.0 software. Although the time series data is generally non-stationary the model requires time series that is stationary. There are several procedures to investigate stationary of any given time series. In this study, the two most commonly applied tests, the Augmented Dickey-Fuller (Dickey and Fuller, 1981) test and the Phillips-Peron (Phillips and Peron, 1988) test are used. A time series may be individually non-stationary but a linear combination between two or more time series can be stationary which is confirmed through the co-integration test. There exists an equilibrium or long-run relationship between the time series if all the variables are integrated of the same order (Engle and Granger, 1987). Once the integration of the same order is established, the existence of a long-run co-integration relationship of the chosen time series can be examined. Co-integration tests recommended by Engle and Granger (1987), Johansen (1988) and, Johansen and Juselius (1990) etc. are used to empirically confirm the presence of potential long-run equilibrium relationship between two variables. In this study, Johansen’s technique was used in order to establish how many co-integration equations exist between the variables, ln GDP and ln AGDP. Johansen method indicates the maximum likelihood procedure to identify the existence of co-integrating vectors for chosen non-stationary time series data. The Johansen methods allow us to determine the number of co-integrating vectors (s). Appropriate lag lengths are selected according to the different Information Criterion methods.

Source of Information: Bangladesh Journal of Agricultural Economics, XXXIX 1&2 (2018): 1–16

Article Link (Online Journal):

Funding Source:

Budget:

Total Budget (Tk.) :

Achievement/Findings:

The obtained estimates of short-run parameters of the lagged variables are not very informative since those are not significant. The consistency and efficiency of the model were examined by employing various post-estimation specification tests which confirmed that the model was rightly specified and therefore, the estimated parameters were found suitable for forecasting. The impulse response functions revealed that responding to a positive shock in agricultural GDP, the GDP gradually increases while due to shock in GDP, the agricultural GDP decreases in the initial stage and thereafter increases gradually. The findings confirm that although the share of agriculture in GDP shows gradual decline it played a key role in the economic development of Bangladesh during 1972-73 to 2015-16. Considering the sub-sectoral GDP contribution as well as strong forward and backward linkage and spillover effects of agriculture with the rest of the sectors of the economy and within the agricultural sub-sectors, Bangladesh needs to adopt a conducive policy toward high-value agriculture, including horticulture, livestock, poultry and fisheries supported by human resource development, product innovation and diversification, and quality research and extension services. This would certainly help to foster future growth and further poverty reduction and thereby to contribute the smooth transition of Bangladesh towards a middle-income country by 2021 and a developed country by 2041.

Knowledge Management: Journal