An Econometric Analysis on the Relationship between Tourism and Economic Growth: Empirical Evidence from Nepal

Abstract

A sector potential to carry Nepal in a new economic dimension is tourism. To ensure this to happen, this study tries to examine the relationship between tourism earning and economic growth during the period 1974-2012. Econometric tools such as unit root, co-integration, and error correction are used to examine the equilibrium position. In spite of the low contribution in economic growth, a share of 2% only is a present status; empirical findings reveal a robust fact that a unit change in tourism income will change the gross domestic product by 8.79 units with tourism income elasticity coefficient of 0.2. The causality analysis suggests that there is no short run causality running from either way. However unidirectional causality exists running from gross domestic product to tourism earning in the long run. This study has single implication which advises policy makers of Nepal that they should devise strategies to attain the causality running from tourism to economic growth. It ensures to attain the tourism led-economic growth. In addition, it indicates the speed of adjustment of previous level disequilibrium. The system would correct this at the speed of 39% annually to come at the steady state. These are the self-evident fact that tourism sector has a large potentiality to contribute to economic growth.