Tourism industry and economic growth: an income elasticity approach from Sri Lankan evidence

Abstract

Recently, Sri Lanka identified the tourism industry as an income factor for foreign exchange which impacts on economic growth of Sri Lanka by income elasticity compared with other income sources. But the income elasticity of tourism in Sri Lanka was econometrically not studied. So, this study filled this research gap, the aim of this study was to measure the income elasticity of tourism earnings in Sri Lankan economy during the sample periods. In this study, to achieve this objective the time series data were annually considered and the earnings of tourism were used as independent variable and the gross domestic product was considered as dependant variable. The simple regression model was used to test the coefficient of tourism and the equation of income elasticity was employed to test the income elasticity of tourism industry during the period of 1970 to 2015. According to the analytical results, the R- squared of estimated model was 61 percent and the coefficient of tourism industry was 17.35 (0.000) which was significant at one percent level. The mean value of tourism industry was 1.449 and the mean value of the gross domestic product was 152.78. Therefore, when this study calculated the income elasticity of tourism using the coefficient of tourism industry, the mean values of tourism industry and the gross domestic product of Sri Lanka, the value of income elasticity of tourism was 0.16, this means that if the tourism industry was changed by 1 unit, the gross domestic product had been changed by 16unit. It indicated that, additional increased in the tourism earnings of Sri Lanka by hundred million rupees, the economic growth of Sri Lanka had been increased by 16 million rupees. Therefore, this study recommends that if Sri Lankan economy has to be achieved the high economic growth as fast as possible it should have to focus on the specialization of tourism industry.