Gross Domestic Product and Energy Elasticity

Gross Domestic Product (GDP) refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living.

The energy consumptionGDP relationship is amongst the most popular relationships examined in the energy economics literature. When the gross domestic product increases the standard of living in the country will increase. Therefore the people tend to use more energy to sophisticate their life. Since the era basic energy sources such as dung, crop waste, wood and charcoal are diminishing with the increase of income of the people, they more preferred to use electricity as their main energy source; the following figure 1 gives a clear idea about income Vs the energy source.

Figure 1 Schematic diagram of the energy ladder

Therefore the when the GDP increase the more electricity appliance will be purchased and that requires more electricity. The following two graphs shows Sri Lankas per capita electricity demand by Household with year and per capita Real GDP with year.

From above graphs it can be conclude that there is a positive relationship between the energy and the real GDP since the currently the major energy source is electricity. From the literatures it is said that 60% of the world countries having positive relationship between the GDP and energy. This is due to insignificant of positive relationship showed on the statistical data.

Consumptions of more electricity will also increase the GDP. This is because of extra use of electricity cause increase in production. In Sri Lanka every MWh increase in electricity supply will contribute to an extra production output worth approximately US$ 11201740. Amarawickrama and Hunt (2008)

The long-run elasticity of demand in Sri Lanka is 0.78. This means that a 1% increase in GDP will lead to a 0.78% increase in electricity consumption. If economic growth is persistent and if income doubles in the next 1020 years, then an increase in income will result in an 80% increase in the demand for electricity amongst households.