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Vector Error Correction Model Approach on Nepal’s GDP from Tourism
Tourism provides significant contribution to national income and considerable job opportunity in Nepal.
By Basanta Dhakal, Prof.Dr. Azaya Bikram Sthapit and Prof.Dr. Shankar Prasad Khanal
Nov. 1, 2016

Tourism provides significant contribution to national income and considerable job opportunity in Nepal.

In recent paper by Dhakal, Sthapit and Khanal examine the long-run and short-run relationship between expenditure per visitor and foreign exchange earnings from tourism towards its contribution in Gross Domestic Product (GDP) by using Vector Error Correction Model (VECM) approach.

“The coefficient of GDP elasticity with respect to average expenditure per visitor is more elastic as compared to coefficient of GDP elasticity vis-a-vis foreign exchange earnings from tourism.” Authors mentioned in the paper.

Nepal is the homeland of people from diverse caste/ethnic and religious groups living in harmony for centuries. Here, cultures, festivals, food habit, clothing and languages differ from place to place. It is incredibly rich in terms of arts, architecture, flora and fauna as well as picturesque views of the Himalayas including the highest peak of the world, Mount Everest. It is also the holy land for Hindus and Buddhists (the birth place of Lord Buddha). So, Nepal holds immense potentials for tourism of different kinds.

The authors, in the paper, by applying the Granger Causality test, reveal that there is bidirectional causal relationship between GDP and expenditure per visitor. Similarly, they assert that there is unidirectional relationship between GDP and foreign exchange earnings.

Vector Error Correction Model (VECM) tests the presence of co-integrating relationship among the non-stationary variables. It also explains the forecasting system of interrelated time series data and dynamic impact of random disturbances on the system of variables. Moreover, it elaborates that there exists long-term relationship among the share of gross domestic product from tourism, foreign exchange earnings and expenditure per visitor. Authors further suggest that there is need for an effort to take into account the significant contribution of foreign exchange earnings from tourism in the GDP of Nepal. As such, focus need not only be on the number of tourist arrivals in the country, but also on upgrading the infrastructure and other facilities directly related to tourism such as hotel and restaurants, tourist resorts, entrainment centers, transportation services, sales outlet of curios, handicraft, amusement parks, cultural activities, etc. for increasing the expenditure per visitor in order to increase foreign exchange earnings from tourism.


Basanta Dhakal, Prof.Dr. Azaya Bikram Sthapit and Prof.Dr. Shankar Prasad Khanal, Central Department of Statistics, Tribhuvan University, Kathmandu, Nepal.

A paper about the study appeared recently in American Journal of Theoretical and Applied Statistics

Paper link:

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