The relationship between construction sector and the national economy of Sri Lanka Thanuja Ramachandra 1 , James Olabode Bamidele Rotimi 2 , Raufdeen Rameezdeen 3 Abstract: The causal relationship between construction and a country’s economy has received much attention in the past. However, the results provide contrasting views on the nature of this relationship. This paper therefore investigates the direction of the causal relationship between construction and the economy of a developing country, Sri Lanka. It uses empirical data for selected economic and construction indicators for the period 1990 to 2009. The pattern of the causal relationship was determined using Granger causality test. The findings reveal that for all indicators except construction investment, national economic activities precede that of construction. The study therefore concludes and strengthens the body of knowledge on Sri Lanka that the causal relationship between its construction sector and national economy tend towards a uni-directional relationship with the national economy inducing growth in the construction sector and not vice versa. 1. Background The construction industry encompasses a variety of activities and is a vital sector in any economy [1,2]. Construction has a strong linkage with most of the other economic activities of a country [3,4,5]. It is considered to be an important partner in economic growth and mirrors the stage of economic development [3,6,7]. There are opposing views with regard to the relationships between construction and the economy of a country. One view is that construction causes the economy to grow as it creates physical facilities that are needed in the development of other productive activities [2,8,9,10]. The opposing view holds that GDP causes the construction output growth [11,12,13]. Interestingly some other studies suggest a bi-directional relationship between different sub-sectors of the construction industry and the national economy [3,14,15,16]. This paper believes that a better understanding of this lead/lag relationship requires more evidence from other countries. It is particularly necessary for developing countries because most of the previous studies used data from developed countries. This paper presents a test on the link between construction and