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The relationship between tourism and economic growth among BRICS countries: a panel cointegration analysis

• Haroon Rasool   ORCID: orcid.org/0000-0002-0083-4553 1 ,
• Shafat Maqbool 2 &
• Md. Tarique 1  

Future Business Journal volume  7 , Article number:  1 ( 2021 ) Cite this article

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Tourism has become the world’s third-largest export industry after fuels and chemicals, and ahead of food and automotive products. From last few years, there has been a great surge in international tourism, culminates to 7% share of World’s total exports in 2016. To this end, the study attempts to examine the relationship between inbound tourism, financial development and economic growth by using the panel data over the period 1995–2015 for five BRICS (Brazil, Russia, India, China and South Africa) countries. The results of panel ARDL cointegration test indicate that tourism, financial development and economic growth are cointegrated in the long run. Further, the Granger causality analysis demonstrates that the causality between inbound tourism and economic growth is bi-directional, thus validates the ‘feedback-hypothesis’ in BRICS countries. The study suggests that BRICS countries should promote favorable tourism policies to push up the economic growth and in turn economic growth will positively contribute to international tourism.

Introduction

World Tourism Day 2015 was celebrated around the theme ‘One Billion Tourists; One Billion Opportunities’ highlighting the transformative potential of one billion tourists. With more than one billion tourists traveling to an international destination every year, tourism has become a leading economic sector, contributing 9.8% of global GDP and represents 7% of the world’s total exports [ 59 ]. According to the World Tourism Organization, the year 2013 saw more than 1.087 billion Foreign Tourist Arrivals and US $1075 billion foreign tourism receipts. The contribution of travel and tourism to gross domestic product (GDP) is expected to reach 10.8% at the end of 2026 [ 61 ]. Representing more than just economic strength, these figures exemplify the vast potential of tourism, to address some of the world´s most pressing challenges, including socio-economic growth and inclusive development.

Developing countries are emerging as the important players, and increasingly aware of their economic potential. Once essentially excluded from the tourism industry, the developing world has now become its major growth area. These countries majorly rely on tourism for their foreign exchange reserves. For the world’s forty poorest countries, tourism is the second-most important source of foreign exchange after oil [ 37 ].

The BRICS (Brazil, Russia, India, China and South Africa) countries have emerged as a potential bloc in the developing countries which caters the major tourists from developed countries. Tourism becomes major focus at BRICS Xiamen Summit 2017 held in China. These countries have robust growth rate, and are focal destinations for global tourists. During 1990 to 2014, these countries stride from 11% of the world’s GDP to almost 30% [ 17 ]. Among BRICS countries, China is ranked as an important destination followed by Brazil, Russia, India and South Africa [ 60 ].

The importance of inbound tourism has grown exponentially, because of its growing contribution to the economic growth in the long run. It enhances economic growth by augmenting the foreign exchange reserves [ 38 ], stimulating investments in new infrastructure, human capital and increases competition [ 9 ], promoting industrial development [ 34 ], creates jobs and hence to increase income [ 34 ], inbound tourism also generates positive externalities [ 1 , 14 ] and finally, as economy grows, one can argue that growth in GDP could lead to further increase in international tourism [ 11 ].

The tourism-led growth hypothesis (TLGH) proposed by Balaguer and Cantavella-Jorda [ 3 ], states that expansion of international tourism activities exerts economic growth, hence offering a theoretical and empirical link between inbound tourism and economic growth. Theoretically, the TLGH was directly derived from the export-led growth hypothesis (ELGH) that postulates that economic growth can be generated not only by increasing the amount of labor and capital within the economy, but also by expanding exports.

The ‘new growth theory,’ developed by Balassa [ 4 ], suggests that export expansion can trigger economic growth, because it promotes specialization and raises factors productivity by increasing competition, creating positive externalities by advancing the dispersal of specialized information and abilities. Exports also enhance economic growth by increasing the level of investment. International tourism is considered as a non-standard type of export, as it indicates a source of receipts and consumption in situ. Given the difficulties in measuring tourism activity, the economic literature tends to focus on primary and manufactured product exports, hence neglecting this economic sector. Analogous to the ELGH, the TLGH analyses the possible temporal relationship between tourism and economic growth, both in the short and long run. The question is whether tourism activity leads to economic growth or, alternatively, economic expansion drives tourism growth, or indeed a bi-directional relationship exists between the two variables.

To further substantiate the nexus, the study will investigate the plausible linkages between economic growth and international tourism while considering the relative importance of financial development in the context of BRICS nations. Financial markets are considered a key factor in producing strong economic growth, because they contribute to economic efficiency by diverting financial funds from unproductive to productive uses. The origin of this role of financial development may is traced back to the seminal work of Schumpeter [ 50 ]. In his study, Schumpeter points out that the banking system is the crucial factor for economic growth due to its role in the allocation of savings, the encouragement of innovation, and the funding of productive investments. Early works, such as Goldsmith [ 18 ], McKinnon [ 39 ] and Shaw [ 51 ] put forward considerable evidence that financial development enhances growth performance of countries. The importance of financial development in BRICS economies is reflected by the establishment of the ‘New Development Bank’ aimed at financing infrastructure and sustainable development projects in these and other developing countries. To the best of the authors’ knowledge, no attempt has been made so far to investigate the long-run relationship Footnote 1 between tourism, financial development and economic growth in case of BRICS countries. Hence, the present study is an attempt to fill the gap in the existing literature.

Review of past studies

From last few decades there has been a surge in the research related to tourism-growth nexus. The importance of growth and development and its determinants has been studied extensively both in developed and developing countries. Extant literature has recognized tourism as an important determinant of economic growth. The importance of tourism has grown exponentially, courtesy to its manifold advantages in form of employment, foreign exchange production household income and government revenues through multiplier effects, improvements in the balance of payments and growth in the number of tourism-promoted government policies [ 21 , 41 , 53 ]. Empirical findings on tourism and economic development have produced mixed finding and sometimes conflicting results despite the common choice of time series techniques as a research methodology. On empirical grounds, four hypotheses have been explored to determine the link between tourism and economic growth [ 12 ]. The first two hypotheses present an account on the unidirectional causality between the two variables, either from tourism to economic growth (Tourism-led economic growth hypothesis-TLGH) or its reserve (economic-driven tourism growth hypothesis-EDTH). The other two hypotheses support the existence of bi-directional hypothesis, (bi-directional causality hypothesis-BC) or that there is no relationship at all (no causality hypothesis-NC), respectively. According to TLEG hypothesis, tourism creates an array of benefits which spillover though multiple routes to promote the economic growth [ 55 ]. In particular, it is believed that tourism (1) increases foreign exchange earnings, which in turn can be used to finance imports [ 38 ], (2) it encourages investment and drives local firms toward greater efficiency due to the increased competition [ 3 , 31 ], (3) it alleviates unemployment, since tourism activities are heavily based on human capital [ 10 ] and (4) it leads to positive economies of scale thus, decreasing production costs for local businesses [ 1 , 14 ]. Other recent studies which find evidence in favor of the TLGH hypothesis include [ 44 , 52 ]. Even though literature is dominated by TLGH, few studies produce a result in support of EDTH [ 40 , 41 , 45 ]. Payne and Mervar [ 45 ] posit that tourism growth of a country is mobilized by the stability of well-designed economic policies, governance structures and investments in both physical and human capital. This positive and vibrant environment creates a series of development activities which proliferate and flourish the tourism. Pertaining to the readily available information, bi-directional causality could also exist between tourism income and economic growth [ 34 , 49 ]. From a policy view, a reciprocal tourism–economic growth relationship implies that government agendas should cater for promoting both areas simultaneously. Finally, there are some studies that do not offer support to any of the aforementioned hypotheses, suggesting that the impact between tourism and economic growth is insignificant [ 25 , 47 , 57 ]. There is a vast literature examining the relationship between tourism and growth as a result, only a selective literature review will be presented here.

Banday and Ismail [ 5 ] used ARDL cointegration model to test the relationship between tourism revenue and economic growth in BRICS countries from the time period of (1995–2013). The study validates the tourism-led growth hypothesis for BRICS countries, which evinces that tourism has positive influence on economic growth.

Savaş et al. [ 54 ] evaluated the tourism-led growth hypothesis in the context of Turkey. The study employed gross domestic product, real exchange rate, real total expenditure and international tourism arrivals to sketch out the causality among variables. The result reveals a unidirectional relationship between tourism and real exchange rate. The findings suggest that tourism is the driving force for economic growth, which in turn helps turkey to culminate its current account deficit.

Dhungel [ 15 ] made an effort to investigate causality between tourism and economic growth, In Nepal for the period of (1974–2012), by using Johansen’s cointegration and Error correction model. The result states that unidirectional causality exists in the long run, while in short run no causality exists between two constructs. The study emphasized that strategies should be devised to attain causality running from tourism to economic growth.

Mallick et al. [ 36 ] analyzed the nexus between economic growth and tourism in 23 Indian states over a period of 14 years (1997–2011). Using panel autoregressive distributed lag model based on three alternative estimators such as mean group estimator, pooled mean group and dynamic fixed effects, Research found that tourism exerts positive influence on economic growth in the long run.

Belloumi [ 8 ] examines the causal relationship between international tourism receipts and economic growth in Tunisia by using annual time series data for the period 1970–2007. The study uses the Johansen’s cointegration methodology to analyze the long-run relationship among the concerned variables. Granger causality based Vector error correction mechanism approach indicates that the revenues generated from tourism have a positive impact on economic growth of Tunisia. Thus, the study supports the hypothesis of tourism-driven economic growth, which is specific to developing countries that base their foreign exchange earnings on the existence of a comparative advantage in certain sectors of the economy.

Tang et al. [ 58 ] explored the dynamic Inter-relationships among tourism, economic growth and energy consumption in India for the period 1971–2012. The study employed Bounds testing approach to cointegration and generalized variance decomposition methods to analyze the relationship. The bounds testing and the Gregory-Hansen test for cointegration with structural breaks consistently reveals that energy consumption, tourism and economic growth in India are cointegrated. The study demonstrated that tourism and economic growth have positive impact on energy consumption, while tourism and economic growth are interrelated; with tourism exert significant influence on economic growth. Consequently, this study validates the tourism-led growth hypothesis in the Indian context.

Kadir and Karim [ 24 ]) examined the causal nexus between tourism and economic growth in Malaysia by applying panel time series approach for the period 1998–2005. By applying Padroni’s panel cointegration test and panel Granger causality test, the result indicated both short and long-run relationship. Further, the panel causality shows unidirectional causality directing from tourism receipts to economic growth. The result provides evidence of the significant contribution of tourism industry to Malaysia’s economic growth, thereby justifying the necessity of public intervention in providing tourism infrastructure and facilities.

Antonakakis et al. [ 2 ] test the linkage between tourism and economic growth in Europe by using a newly introduced spillover index approach. Based on monthly data for 10 European countries over the period 1995–2012, the findings suggested that the tourism–economic growth relationship is not stable over time in terms of both magnitude and direction, indicating that the tourism-led economic growth (TLEG) and the economic-driven tourism growth (EDTG) hypotheses are time-dependent. Thus, the findings of the study suggest that the same country can experience tourism-led economic growth or economic-driven tourism growth at different economic events.

Oh [ 41 ] verifies the contribution of tourism development to economic growth in the Korean economy by applying Engle and Granger two-stage approach and a bivariate Vector Autoregression model. He claimed that economic expansion lures tourists in the short run only, while there is no such long-run stable relationship between international tourism and economic development in Korea.

Empirical studies have pronouncedly focused on the literature that tourism promotes economic growth. To further substantiate the nexus, the study will investigate the plausible linkages between economic growth and international tourism while considering the relative importance of financial development in the context of BRICS nations. The inclusion of financial development in the examination of tourism-growth nexus is a unique feature of this study, which have an influencing role in economic growth as financial development has been theoretically and empirically recognized as source of comparative advantage [ 22 ].

This study employs panel ARDL cointegration approach to verify the existence of long-run association among the variables. Further, study estimated the long-run and short-run coefficients of the ARDL model. Subsequently, Dumitrescu and Hurlin [ 16 ] panel Granger causality test has been employed to check the direction of causality between tourism, financial development and economic growth among BRICS countries.

Database and methodology

Data and variables.

The study is analytical and empirical in nature, which intends to establish the relationship between economic growth and inbound tourism in BRICS countries. For the BRICS countries, limited studies have been conducted depicting the present scenario. Therefore, present study tries to verify the relevance of tourism in economic growth to further enhance the understanding of economic dynamics in BRICS countries. The data used in the study are annual figures for the period stretching from 1995 to 2015, consisting of one endogenous variable (GDP per capita, a proxy for economic growth) and two exogenous variables (international tourism receipts per capita and financial development). The variables employed in the study are based on the economic growth theory, proposed by Balassa [ 4 ], which states that export expansion has a relevant contribution in economic growth. Further, this study incorporates financial development in the model to reduce model misspecification as it is considered to have an influencing role in economic growth both theoretically and empirically [ 22 , 33 ].

The annual data for all the variables have been collected from the World Development Indicators (WDI, 2016) database. The variables used in the study includes gross domestic product per capita (GDP) in constant ($US2010) used as a proxy for economic growth (EG), international tourism receipts per capita (TR) in current US$ as it is widely accepted that the most adequate proxy of inbound tourism in a country is tourism expenditure normally expressed in terms of tourism receipts [ 32 ] and financial development (FD). In line with a recent study on the relationship between financial development and economic growth by Hassan et al. [ 19 ], financial development is surrogated by the ratio of the broad money (M3) to real GDP for all BRICS countries. Here we use the broadest definition of money (M3) as a proportion of GDP– to measure the liquid liabilities of the banking system in the economy. We use M3 as a financial depth indicator, because monetary aggregates, such as M2 or M1, may be a poor proxy in economies with underdeveloped financial systems, because they ‘are more related to the ability of the financial system to provide transaction services than to the ability to channel funds from savers to borrowers’ [ 26 ]. A higher liquidity ratio means higher intensity in the banking system. The assumption here is that the size of the financial sector is positively associated with financial services [ 29 ]. All the variables have been taken into log form.

Unit root test

To verify the long-run relationship between tourism and economic growth through Bounds testing approach, it is necessary to test for stationarity of the variables. The stationarity of all the variables can be assessed by different unit root tests. The study utilizes panel unit root test proposed by Levin et al. [ 35 ] henceforth LLC and Im et al. [ 23 ] henceforth IPS based on traditional augmented Dickey–Fuller (ADF) test. The LLC allows for heterogeneity of the intercepts across members of the panel under the null hypothesis of presence of unit root, while IPS allows for heterogeneity in intercepts as well as in the slope coefficients [ 48 ].

Panel ARDL approach to Cointegration

After checking the stationarity of the variables the study employs panel ARDL technique for Cointegration developed by Pesaran et al. [ 23 ]. Pesaran et al. [ 23 ] have introduced the pooled mean group (PMG) approach in the panel ARDL framework. According to Pesaran et al. [ 23 ], the homogeneity in the long-run relationship can be attributed to several factors such as arbitration condition, common technologies, or the institutional development which was covered by all groups. The panel ARDL bounds test [ 46 ] is more appropriate by comparing other cointegration techniques, because it is flexible regarding unit root properties of variables. This technique is more suitable when variables are integrated at different orders but not I (2). Haug [ 20 ] has argued that panel ARDL approach to cointegration provides better results for small sample data set such as in our case. The ARDL approach to cointegration estimates both long and short-run parameters and can be applied independently of variable order integration (independent of whether repressors are purely I (0), purely I(1) or combination of both. The ARDL bounds test approach used in this study is specified as follows:

where Δ is the first-difference operator, \(\alpha_{0}\) stands for constant, t is time element, \(\omega_{1} , \omega_{2} \;\;{\text{and}}\;\; \omega_{3}\) represent the short-run parameters of the model, \(\emptyset_{1} , \emptyset_{2} ,and \emptyset_{3}\) are long-run coefficients, while \(V_{it}\) is white noise error term and lastly, it represents country at a particular time period. In the ARDL model, the bounds test is applied to determine whether the variables are cointegrated or not.

This test is based on the joint significance of F -statistic and the χ 2 statistic of the Wald test. The null hypothesis of no cointegration among the variables under study is examined by testing the joint significance of the F -statistic of \(\omega_{1} , \omega_{2} ,\omega_{3}\) .

In case series variables are cointegrated, an error correction mechanism (ECM) can be developed as Eq. ( 2 ), to assess the short-run influence of international tourism and financial development on economic growth.

where ECT is the error correction term, and \(\varPhi\) is its coefficient which shows how fast the variables attain long-term equilibrium if there is any deviation in the short run. The error correction term further confirms the existence of a stable long-run relationship among the variables.

Panel granger causality test

To examine the direction of causality Dumitrescu and Hurlin [ 16 ] test is employed. Instead of pooled causality, Dumitrescu and Hurlin [ 16 ] proposed a causality based on the individual Wald statistic of Granger non-causality averaged across the cross section units. Dumitrescu and Hurlin [ 16 ] assert that traditional test allows for homogeneous analysis across all panel sets, thereby neglecting the specific causality across different units.

This approach allows heterogeneity in coefficients across cross section panels. The two statistics Wbar-statistics and Zbar-statistics provides standardized version of the statistics and is easier to compute. Wbar-statistic, takes an average of the test statistics, while the Zbar-statistic shows a standard (asymptotic) normal distribution.

They proposed an average Wald statistic that tests the null hypothesis of no causality in a panel subgroup against an alternative hypothesis of causality in at least one panel. Following equations will be used to check the direction of causality between the variables.

Estimation, results and Discussion

Descriptive statistics.

Table  1 presents descriptive statistics of variables selected for the period 1995–2015. The variable set includes GDP, FD and TR for all BRICS countries. Brazil tops the list with GDP per capita of 4.18, while India lagging behind all BRICS nations. In the recent economic survey by International Monetary Fund (IMF report 2016), India was ranked 126 for its per capita GDP. India’s GDP per capita went up to $7170 against all other BRICS countries which were placed in the above $10,000 bracket. China has the highest tourism receipts in comparison to other BRICS countries. China is a very popular country for foreign tourists, which ranks third after France and USA. In 2014, China invested $136.8 billion into its tourist infrastructure, a figure second only to the United States ($144.3 billion). Tourism, based on direct, indirect, and induced impact, accounted for near 10% in the GDP of China (WTTC report 2017).

Stationarity results

Primarily, we employed LLC and IPS unit root test to assess the integrated properties of the series. The results of IPS and PP tests are presented in Table  2 . Panel unit root test result evinces that FD and TR are stationary at level, while GDP per capita is integrated variable of order 1. The result exemplifies that GDP per capita, Tourism receipts and Financial Development are integrated at 1(0) and 1(1). Consequently, the panel ARDL approach to cointegration can be applied.

Cointegration test results

In view of the above results with a mixture of order integration, the panel ARDL approach to cointegration is the most appropriate technique to investigate whether there exists a long-run relationship among the variables [ 42 ]. Table  3 illustrates that the estimated value of F-statistics, which is higher than the lower and upper limit of the bound value, when InEG is used as a dependent variable. Hence, we reject the null hypothesis of no cointegration \(H_{0 } : \emptyset_{1} = \emptyset_{2} = \emptyset_{3} = 0\) of Eq. ( 1 ). Therefore, the result asserts that international tourism, financial development and economic growth are significantly cointegrated over the period (1995–2015).

Subsequently, the study investigates the long-run and short-run impact of international tourism and financial development on economic growth. Lag length is selected on the principle of minimum Bayesian information criterion (SBC) value, which is 2 in our case. The long-run coefficients of financial development and tourism receipts with respect to economic growth in Table  4 indicate that tourism growth and financial development exerts positive influence on economic growth in the long run. In other words, an increase in volume of tourism receipts per capita and financial depth spurs economic growth and both the coefficients are statistically significant in case of BRICS nations in the long run. The results are interpreted in detail as below:

The elasticity coefficient of economic growth with respect to tourism shows that 1% rise in international tourism receipts per capita would imply an estimated increase of almost 0.31% domestic real income in the long run, all else remaining the same. Thus, the earnings in the form of foreign exchange from international tourism affect growth performance of BRICS nations positively. This finding of our study is in consonance with the empirical results of Kreishan for Jordan [ 30 ], Balaguer and Cantavella-Jordá [ 3 ] for Spain and Ohlan [ 43 ] for India.

Further our finding lend support to the wide applicability of the new growth theory proposed by Balassa which states that export expansion promote growth performance of nations. Thus, validates TLGH coined by Balaguer and Cantavell-Jorda [ 3 ] which states that inbound tourism acts a long-run economic growth factor. The so called tourism-led growth hypothesis suggests that the development of a country’s tourism industry will eventually lead to higher economic growth and, by extension, further economic development via spillovers and other multiplier effects.

Likewise, financial development as expected is found to be positively associated with economic growth. The coefficient of financial development states that 1% improvement in financial development will push up economic growth by 0.22% in the long run, keeping all other variables constant. The empirical results are consistent with the finding of Hassan et al. [ 19 ] for a panel of South Asian countries. Well-regulated and properly functioning financial development enhances domestic production through savings, borrowings & investment activities and boosts economic growth. Further, it promotes economic growth by increasing efficiency [ 7 ]. Levine [ 33 ] believes that financial intermediaries enhance economic efficiency, and ultimately growth, by helping allocation of capital to its best use. Modern growth theory identifies two specific channels through which the financial sector might affect long-run growth; through its impact on capital accumulation and through its impact on the rate of technological progress. The sub-prime crisis which depressed the economic growth worldwide in 2007 further substantiates the growth-financial development nexus.

In the third and final step of the bounds testing procedure, we estimate short-run dynamics of variables by estimating an error correction model associated with long-run estimates. The empirical finding indicates that the coefficient of error correction term (ECT) with one period lag is negative as well as statistically significant. This finding further substantiates the earlier cointegration results between tourism, financial development and economic growth, and indicates the speed of adjustment from the short-run toward long-run equilibrium path. The coefficient of ECT reveals that the short-run divergences in economic growth from long-run equilibrium are adjusted by 43% every year following a short-run shock.

The short-run parameters in Table  5 demonstrates that tourism and financial development acts as an engine of economic growth in the short run as well. The coefficient of both tourism receipts per capita and financial development with one period lag is also found to be progressive and significant in the short run. These results highlight the role of earnings from international tourism and financial stability as an important driving force of economic growth in BRICS nations in the short run as well.

Further, a comparison between short-run and long-run elasticity coefficients evince that long-run responsiveness of economic growth with respect to tourism and financial development is higher than that of short run. It exemplifies that over time higher international tourism receipts and well-regulated financial system in BRICS nations give more boost to economic growth.

Analysis of causality

At this stage, we investigate the causality between tourism, financial development and economic growth presented in Table  6 . The result shows bi-directional causal relationship between tourism and economic growth, thereby validates ‘feedback hypothesis’ and consequently supported both the tourism-led growth hypothesis (TLGH) and its reciprocal, the economic-driven tourism growth hypothesis (EDTH). The bi-directional causality between inbound tourism and GDP, which directs the level of economic activity and tourism growth, mutually influences each other in that a high volume of tourism growth leads to a high level of economic development and reverse also holds true. These results replicate the findings of Banday and Ismail [ 5 ] in the context of BRICS countries, Yazdi et al. [ 27 ] for Iran and Kim et al. [ 28 ] for Taiwan. One of the channels through which tourism spurs economic growth is through the use of receipts earned in the form of foreign currency. Thus, growth in foreign earnings may allow the import of technologically advances goods that will favor economic growth and vice versa. Thus, results demonstrate that international tourism promotes growth and in turn economic expansion is necessary for tourism development in case of BRICS countries. With respect to policy context, this finding suggests that the BRICS nations should focus on economic policies to promote tourism as a potential source of economic growth which in turn will further promote tourism growth.

Similarly, in case of economic growth and financial development, the findings demonstrate the presence of bi-directional causality between two constructs. The findings validate thus both ‘demand following’ and supply leading’ hypothesis. The findings suggests that indeed financial development plays a crucial role in promoting economic activity and thus generating economic growth for these countries and reverse also holds. Our findings are in line with Pradhan [ 48 ] in case of BRICS countries and Hassan et al. [ 19 ] for low and middle-income countries. This suggests that finance development can be used as a policy variable to foster economic growth in the five BRICS countries and vice versa. The study emphasizes that the current economic policies should recognize the finance-growth nexus in BRICS in order to maintain sustainable economic development in the economy. The empirical results in this paper are in line with expectations, confirming that the emerging economies of the BRICS are benefiting from their finance sectors.

Finally, two-sided causal relationship is found between tourism receipts and financial development. That is, tourism might contribute to financial development and, in return, financial development may positively contribute to tourism. This means that financial depth and tourism in BRICS have a reinforcing interaction. The positive impact of tourism on financial development can be attributed to the fact that inflows of foreign exchange via international tourism not only increases income levels but also leads to rise in official reserves of central banks. This in turn enables central banks to adapt expansionary monetary policy. The positive contribution of financial sector to tourism is further characterized by supply leading hypothesis. Further, better financial and market conditions will attract tourism entrepreneurship, because firms will be able to use more capital instead of being forced to use leveraging [ 13 ]. Hence, any shocks in money supply could adversely affect tourism industry in these countries. Song and Lin [ 56 ] found that global financial crisis had a negative impact on both inbound and outbound tourism in Asia. This result is in consistent with Başarir and Çakir [ 6 ] for Turkey and four European countries.

Stability tests

In addition, to test the stability of parameters estimated and any structural break in the model CUSUM and CUSUMSQ tests are employed. Figs.  1 and 2 show blue line does not transcend red lines in both the tests, thus provides strong evidence that our estimated model is fit and valid policy implications can be drawn from the results.

Plot of CUSUM

Plot of CUSUMQ

Summary and concluding remarks

A rigorous study of the relationship between tourism and economic growth, through the tourism-led growth hypothesis (TLGH) perspective has remained a debatable issue in the economic growth literature. This study aims to empirically investigate the relationship between inbound tourism, financial development and economic growth in BRICS countries by utilizing the panel data over the period 1995–2015. The study employs the panel ARDL approach to cointegration and Dumitrescu-Hurlin panel Granger causality test to detect the direction of causation.

To the best of authors’ knowledge, this is the first study which explored the relationship between economic growth and tourism while considering the relative importance of financial development in the context of BRICS nations. The empirical results of ARDL model posits that in BRICS countries inbound tourism, financial development and economic growth are significantly cointegrated, i.e., variables have stable long-run relationship. This methodology has allowed obtaining elasticities of economic growth with respect to tourism and financial development both in the long run and short run. The result reveals that international tourism growth and financial development positively affects economic growth both in the long run and short run. The coefficient of tourism indicates that with a 1% rise in tourism receipts per capita, GDP per capita of BRICS economies will go up by 0.31% in the long run. This finding lends support to TLGH coined by Balaguer and Cantavell-Jorda [ 3 ] which states that inbound tourism acts a long-run economic growth factor. The so called tourism-led growth hypothesis suggests that the development of a country’s tourism industry will eventually lead to higher economic growth and, by extension, further economic development via spillovers and other multiplier effects.

Likewise, 1% improvement in financial development, on average, will increase economic growth in BRICS countries by 0.22% in the long run. The result seems logical as modern growth theory identifies two channels through which the financial sector might affect long-run growth: first, through its impact on capital accumulation and secondly, through its impact on the rate of technological progress. The sub-prime crisis which hit the economic growth Worldwide in 2007 further substantiates the growth-financial development nexus.

The negative and statistically significant coefficient of lagged error correction term (ECT) further substantiates the long-run equilibrium relationship among variables. The negative coefficient of ECT also shows the speed of adjustment toward long-run equilibrium is 43% per annum if there is any short-run deviation. The estimates of parameters are found to be stable by applying CUSUM and CUSUMQ for the time period under consideration. Therefore, inbound tourism earnings and financial institutions can be used as a channel to increase economic growth in BRICS economies.

Further, Granger causality test result indicates the bi-directional causation in all cases. Hence, the causal relationship between international tourism and economic growth is bi-directional. And, consequently this empirical finding lends support to both the tourism-led growth hypothesis (TLGH) and its reciprocal, the economic-driven tourism growth hypothesis (EDTH). This means that tourism is not only an engine for economic growth, but the economic outcome on itself can play an important role in providing growth potential to tourism sector.

The Granger causality findings provide useful information to governments to examine their economic policy, to adjust priorities regarding economic investment, and boost their economic growth with the given limited resources. Thus, it is suggested that more resources should be allocated to tourism industry and tourism-related industries if the tourism-led growth hypothesis holds true. On the other side, if economic-driven tourism growth is supported then more resources should be diverted to leading industries rather than the travel and tourism sector, and the tourism industry will in turn benefit from the resulting overall economic growth. And, when bi-directional causality is detected, a balanced allocation of economic resources for the travel and tourism sector and other industries is important and necessary. The policy implication is that resource allocation supporting both the tourism and tourism-related industries could benefit both tourism development and economic growth.

To sum up, the major finding of this study lends support to wide applicability of the tourism-led growth hypothesis in case of BRICS countries. Thus, in the Policy context, significant impact of tourism on BRICS economy rationalizes the need of encouraging tourism. Tourism can spur economic prosperity in these countries and for this reason; policymakers should give serious consideration toward encouraging tourism industry or inbound tourism. BRICS countries should focus more on tourism infrastructure, such as, convenient transportation, alluring destinations, suitable tax incentives, viable hostels and proper security arrangements to attract the potential tourists. Most of these countries are devoid of rich facilities and popular tourist incentives, to get promoted as important destination and in the long-run promotes economic growth. Further, they need a staunch support from all sections of authorities, non-government organizations (NGOs), and private and allied industries, in the endeavor to attain sustainable growth in tourism. Both state and non-state actors must recognize this growing industry and its positive implication on economy.

For future research, we suggest that researchers should consider the nonlinear factor in the dynamic relationship of tourism and economic growth in case of BRICS countries. Further one can go for comparative study to examine the TLGH in BRICS countries.

Availability of data and materials

Data used in the study can be provided by the corresponding author on request.

There are no fixed definitions of short, medium and long run and generally in macroeconomics, short run can be viewed as 1 to 2 or 3 years, medium up to 5 years and long run from 5 years to 20 or 25 years.

Abbreviations

autoregressive distributed lag model

Brazil, Russia, India, China and South-Africa

United Nations World Tourism Organization

World Travel & Tourism Council

gross domestic product

world development indicators

tourism-led growth hypothesis

export-led growth hypothesis

economic-driven tourism hypothesis

augmented Dickey–Fuller test

error correction model

error correction term

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Rasool, H., Maqbool, S. & Tarique, M. The relationship between tourism and economic growth among BRICS countries: a panel cointegration analysis. Futur Bus J 7 , 1 (2021). https://doi.org/10.1186/s43093-020-00048-3

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What Is Gross Domestic Product (GDP)?

Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health.

Though GDP is typically calculated on an annual basis, it is sometimes calculated on a quarterly basis as well. In the U.S., for example, the government releases an annualized GDP estimate for each fiscal quarter and also for the calendar year. The individual data sets included in this report are given in real terms, so the data is adjusted for price changes and is, therefore, net of inflation .

Key Takeaways

• Gross domestic product is the monetary value of all finished goods and services made within a country during a specific period.
• GDP provides an economic snapshot of a country, used to estimate the size of an economy and its growth rate.
• GDP can be calculated in three ways, using expenditures, production, or incomes and it can be adjusted for inflation and population to provide deeper insights.
• Real GDP takes into account the effects of inflation while nominal GDP does not.
• Though it has limitations, GDP is a key tool to guide policymakers, investors, and businesses in strategic decision-making.

Investopedia / Zoe Hansen

Understanding Gross Domestic Product (GDP)

The calculation of a country’s GDP encompasses all private and public consumption, government outlays, investments, additions to private inventories, paid-in construction costs, and the foreign balance of trade . Exports are added to the value and imports are subtracted.

Of all the components that make up a country’s GDP, the foreign balance of trade is especially important. The GDP of a country tends to increase when the total value of goods and services that domestic producers sell to foreign countries exceeds the total value of foreign goods and services that domestic consumers buy. When this situation occurs, a country is said to have a trade surplus .

If the opposite situation occurs—that is, if the amount that domestic consumers spend on foreign products is greater than the total sum of what domestic producers are able to sell to foreign consumers—it is called a trade deficit . In this situation, the GDP of a country tends to decrease.

GDP can be computed on a nominal basis or a real basis, the latter accounting for inflation. Overall, real GDP is a better method for expressing long-term national economic performance since it uses constant dollars .

Let's say one country had a nominal GDP of $100 billion in 2012. By 2022, its nominal GDP grew to $150 billion. Prices also rose by 100% over the same period. In this example, if you looked solely at its nominal GDP, the country's economy appears to be performing well. However, the real GDP (expressed in 2012 dollars) would only be $75 billion, revealing that an overall decline in real economic performance actually occurred during this time.

A country's GDP represents the final market value of all the products and services that a country produces in a single year. Another way to measure GDP is as the sum of four factors: consumer spending, government spending, net exports, and total investment.

In the United States, GDP is calculated every three months by the Bureau of Economic Analysis. The BEA makes its estimate based on price estimates, survey data, and other information collected by other agencies, such as the Census Bureau , Federal Reserve , Department of the Treasury , and the Bureau of Labor Statistics .

Types of GDP

GDP can be reported in several ways, each of which provides slightly different information.

Nominal GDP

Nominal GDP is an assessment of economic production in an economy that includes current prices in its calculation. In other words, it doesn’t strip out inflation or the pace of rising prices, which can inflate the growth figure.

All goods and services counted in nominal GDP are valued at the prices that those goods and services are actually sold for in that year. Nominal GDP is evaluated in either the local currency or U.S. dollars at currency market exchange rates to compare countries’ GDPs in purely financial terms.

Nominal GDP is used when comparing different quarters of output within the same year. When comparing the GDP of two or more years, real GDP is used. This is because, in effect, the removal of the influence of inflation allows the comparison of the different years to focus solely on volume.

Real GDP is an inflation-adjusted measure that reflects the number of goods and services produced by an economy in a given year, with prices held constant from year to year to separate out the impact of inflation or deflation from the trend in output over time. Since GDP is based on the monetary value of goods and services, it is subject to inflation.

Rising prices tend to increase a country’s GDP, but this does not necessarily reflect any change in the quantity or quality of goods and services produced. Thus, by looking just at an economy’s nominal GDP, it can be difficult to tell whether the figure has risen because of a real expansion in production or simply because prices rose.

Economists use a process that adjusts for inflation to arrive at an economy’s real GDP. By adjusting the output in any given year for the price levels that prevailed in a reference year, called the base year , economists can adjust for inflation’s impact. This way, it is possible to compare a country’s GDP from one year to another and see if there is any real growth.

Real GDP is calculated using a GDP price deflator , which is the difference in prices between the current year and the base year. For example, if prices rose by 5% since the base year, then the deflator would be 1.05. Nominal GDP is divided by this deflator, yielding real GDP. Nominal GDP is usually higher than real GDP because inflation is typically a positive number.

Real GDP accounts for changes in market value and thus narrows the difference between output figures from year to year. If there is a large discrepancy between a nation’s real GDP and nominal GDP, this may be an indicator of significant inflation or deflation in its economy.

GDP Per Capita

GDP per capita is a measurement of the GDP per person in a country’s population. It indicates that the amount of output or income per person in an economy can indicate average productivity or average living standards. GDP per capita can be stated in nominal, real (inflation-adjusted), or purchasing power parity (PPP) terms.

At a basic interpretation, per-capita GDP shows how much economic production value can be attributed to each individual citizen. This also translates to a measure of overall national wealth since GDP market value per person also readily serves as a prosperity measure.

Per-capita GDP is often analyzed alongside more traditional measures of GDP. Economists use this metric for insight into their own country’s domestic productivity and the productivity of other countries. Per-capita GDP considers both a country’s GDP and its population. Therefore, it can be important to understand how each factor contributes to the overall result and is affecting per-capita GDP growth.

If a country’s per-capita GDP is growing with a stable population level, for example, it could be the result of technological progressions that are producing more with the same population level. Some countries may have a high per-capita GDP but a small population, which usually means they have built up a self-sufficient economy based on an abundance of special resources.

The GDP growth rate compares the year-over-year (or quarterly) change in a country’s economic output to measure how fast an economy is growing. Usually expressed as a percentage rate, this measure is popular for economic policymakers because GDP growth is thought to be closely connected to key policy targets such as inflation and unemployment rates.

If GDP growth rates accelerate, it may be a signal that the economy is overheating and the central bank may seek to raise interest rates. Conversely, central banks see a shrinking (or negative) GDP growth rate (i.e., a recession ) as a signal that rates should be lowered and that stimulus may be necessary.

GDP Purchasing Power Parity (PPP)

While not directly a measure of GDP, economists look at PPP to see how one country’s GDP measures up in international dollars using a method that adjusts for differences in local prices and costs of living to make cross-country comparisons of real output, real income, and living standards .

The annual rate of increase for U.S. GDP in the first quarter of 2024. U.S. GDP recorded a 3.4% increase during the fourth quarter of 2023.

GDP Formula

GDP can be determined via three primary methods. All three methods should yield the same figure when correctly calculated. These three approaches are often termed the expenditure approach, the output (or production) approach, and the income approach.

The Expenditure Approach

The expenditure approach, also known as the spending approach, calculates spending by the different groups that participate in the economy. The U.S. GDP is primarily measured based on the expenditure approach. This approach can be calculated using the following formula:

GDP = C + G + I + NX where: C = Consumption G = Government spending I = Investment NX = Net exports \begin{aligned}&\text{GDP} = \text{C} + \text{G} + \text{I} + \text{NX} \\&\textbf{where:} \\&\text{C} = \text{Consumption} \\&\text{G} = \text{Government spending} \\&\text{I} = \text{Investment} \\&\text{NX} = \text{Net exports} \\\end{aligned} ​ GDP = C + G + I + NX where: C = Consumption G = Government spending I = Investment NX = Net exports ​

All of these activities contribute to the GDP of a country. Consumption refers to private consumption expenditures or consumer spending . Consumers spend money to acquire goods and services, such as groceries and haircuts. Consumer spending is the biggest component of GDP, accounting for more than two-thirds of the U.S. GDP.

Consumer confidence , therefore, has a very significant bearing on economic growth . A high confidence level indicates that consumers are willing to spend, while a low confidence level reflects uncertainty about the future and an unwillingness to spend.

Government spending represents government consumption expenditure and gross investment. Governments spend money on equipment, infrastructure , and payroll. Government spending may become more important relative to other components of a country’s GDP when consumer spending and business investment both decline sharply. (This may occur in the wake of a recession, for example.)

Investment refers to private domestic investment or capital expenditures . Businesses spend money to invest in their business activities. For example, a business may buy machinery. Business investment is a critical component of GDP since it increases the productive capacity of an economy and boosts employment levels.

The net exports formula subtracts total exports from total imports (NX = Exports - Imports). The goods and services that an economy makes that are exported to other countries, less the imports that are purchased by domestic consumers, represent a country’s net exports. All expenditures by companies located in a given country, even if they are foreign companies, are included in this calculation.

The Production (Output) Approach

The production approach is essentially the reverse of the expenditure approach. Instead of measuring the input costs that contribute to economic activity, the production approach estimates the total value of economic output and deducts the cost of intermediate goods  that are consumed in the process (like those of materials and services). Whereas the expenditure approach projects forward from costs, the production approach looks backward from the vantage point of a state of completed economic activity.

The Income Approach

The income approach represents a kind of middle ground between the two other approaches to calculating GDP. The income approach calculates the income earned by all the factors of production in an economy, including the wages paid to labor, the rent earned by land, the return on capital in the form of interest, and corporate profits. 

The income approach factors in some adjustments for those items that are not considered payments made to factors of production. For one, there are some taxes, such as sales taxes and property taxes , that are classified as indirect business taxes.

In addition, depreciation , which is a reserve that businesses set aside to account for the replacement of equipment that tends to wear down with use, is also added to the national income. All of this together constitutes a nation’s income.

Although GDP is a widely used metric, there are other ways of measuring the economic growth of a country. While GDP measures the economic activity within the physical borders of a country (whether the producers are native to that country or foreign-owned entities), gross national product (GNP) is a measurement of the overall production of people or corporations native to a country, including those based abroad. GNP excludes domestic production by foreigners.

Gross national income (GNI) is another measure of economic growth. It is the sum of all income earned by citizens or nationals of a country (regardless of whether the underlying economic activity takes place domestically or abroad). The relationship between GNP and GNI is similar to the relationship between the production (output) approach and the income approach used to calculate GDP.

GNP uses the production approach, while GNI uses the income approach. With GNI, the income of a country is calculated as its domestic income, plus its indirect business taxes and depreciation (as well as its net foreign factor income ). The figure for net foreign factor income is calculated by subtracting all payments made to foreign companies and individuals from all payments made to domestic businesses.

In an increasingly global economy, GNI has been put forward as a potentially better metric for overall economic health than GDP. Because certain countries have most of their income withdrawn abroad by foreign corporations and individuals, their GDP figure is much higher than the figure that represents their GNI.

For example, in 2019, Luxembourg had a significant difference between its GDP and GNI, mainly due to large payments made to the rest of the world via foreign corporations that did business in Luxembourg, attracted by the tiny nation’s favorable tax laws. On the contrary, GNI and GDP in the U.S. do not differ substantially. U.S. GDP was $28.25 trillion as of Q1-2024 while its GNI was about $25.98 trillion at the end of 2022.

A number of adjustments can be made to a country’s GDP to improve the usefulness of this figure. For economists, a country’s GDP reveals the size of the economy but provides little information about the standard of living in that country. Part of the reason for this is that population size and cost of living are not consistent around the world. Economists can use tax-to-GDP to get a better understanding of how a nation's tax revenue impacts its economy and its people.

For example, comparing the nominal GDP of China to the nominal GDP of Ireland would not provide much meaningful information about the realities of living in those countries because China has approximately 300 times the population of Ireland.

To help solve this problem, statisticians sometimes compare GDP per capita between countries. GDP per capita is calculated by dividing a country’s total GDP by its population, and this figure is frequently cited to assess the nation’s standard of living. Even so, the measure is still imperfect.

Suppose China has a GDP per capita of $1,500, while Ireland has a GDP per capita of $15,000. This doesn’t necessarily mean that the average Irish person is 10 times better off than the average Chinese person. GDP per capita doesn’t account for how expensive it is to live in a country.

PPP attempts to solve this problem by comparing how many goods and services an exchange-rate-adjusted unit of money can purchase in different countries—comparing the price of an item, or basket of items, in two countries after adjusting for the exchange rate between the two, in effect.

Real per-capita GDP, adjusted for purchasing power parity, is a heavily refined statistic to measure true income, which is an important element of well-being. An individual in Ireland might make $100,000 a year, while an individual in China might make $50,000 a year. In nominal terms, the worker in Ireland is better off. But if a year’s worth of food, clothing, and other items costs three times as much in Ireland as in China, however, then the worker in China has a higher real income .

Most nations release GDP data every month and quarter. In the U.S., the Bureau of Economic Analysis (BEA) publishes an advance release of quarterly GDP four weeks after the quarter ends, and a final release three months after the quarter ends. The BEA releases are exhaustive and contain a wealth of detail, enabling economists and investors to obtain information and insights on various aspects of the economy.

GDP’s market impact is generally limited since it is backward-looking, and a substantial amount of time has already elapsed between the quarter-end and GDP data release. However, GDP data can have an impact on markets if the actual numbers differ considerably from expectations.

Because GDP provides a direct indication of the health and growth of the economy, businesses can use GDP as a guide to their business strategy. Government entities, such as the Fed in the U.S., use the growth rate and other GDP stats as part of their decision process in determining what type of monetary policies to implement.

If the growth rate is slowing, they might implement an expansionary monetary policy to try to boost the economy. If the growth rate is robust, they might use monetary policy to slow things down to try to ward off inflation.

Real GDP is the indicator that says the most about the health of the economy. It is widely followed and discussed by economists, analysts, investors, and policymakers. The advance release of the latest data will almost always move markets, although that impact can be limited, as noted above.

Investors watch GDP since it provides a framework for decision-making. The corporate profits and inventory data in the GDP report are a great resource for equity investors, as both categories show total growth during the period; corporate profits data also displays pre-tax profits, operating cash flows , and breakdowns for all major sectors of the economy.

Comparing the GDP growth rates of different countries can play a part in asset allocation, aiding decisions about whether to invest in fast-growing economies abroad and if so, which ones.

One interesting metric that investors can use to get a sense of the valuation of an equity market is the ratio of total market capitalization to GDP , expressed as a percentage. The closest equivalent to this in terms of stock valuation is a company’s market cap to total sales (or revenues), which in per-share terms is the well-known price-to-sales ratio .

Just as stocks in different sectors trade at widely divergent price-to-sales ratios, different nations trade at market-cap-to-GDP ratios that are all over the map. For example, according to the World Bank , the U.S. had a market-cap-to-GDP ratio of 197.4% for 2020, while China had a ratio of just over 83.6% and Hong Kong had a ratio of 1,777.2%.

However, the utility of this ratio lies in comparing it to historical norms for a particular nation. As an example, the U.S. had a market-cap-to-GDP ratio of 141.6% at the end of 2006, which dropped to 78.5% by the end of 2008. In retrospect, these represented zones of substantial overvaluation and undervaluation, respectively, for U.S. equities.

The biggest downside of this data is its lack of timeliness; investors only get one update per quarter, and revisions can be large enough to significantly alter the percentage change in GDP.

History of GDP

The concept of GDP was first proposed in 1937 in a report to the U.S. Congress in response to the Great Depression, conceived of and presented by an economist at the National Bureau of Economic Research (NBER) , Simon Kuznets.

At the time, the preeminent system of measurement was GNP. After the Bretton Woods conference in 1944, GDP was widely adopted as the standard means for measuring national economies; however, the U.S. continued to use GNP as its official measure of economic welfare until 1991, after which it switched to GDP.

Beginning in the 1950s, however, some economists and policymakers began to question GDP. Some observed, for example, a tendency to accept GDP as an absolute indicator of a nation’s failure or success, despite its failure to account for health, happiness, (in)equality, and other constituent factors of public welfare. In other words, these critics drew attention to a distinction between economic progress and social progress.

Most authorities, like Arthur Okun , an economist for President John F. Kennedy’s Council of Economic Advisers, held firm to the belief that GDP is an absolute indicator of economic success, claiming that for every increase in GDP, there would be a corresponding drop in unemployment.

Criticisms of GDP

There are, of course, drawbacks to using GDP as an indicator. In addition to the lack of timeliness, some criticisms of GDP as a measure are:

• It ignores the value of informal or unrecorded economic activity. GDP relies on recorded transactions and official data, so it does not take into account the extent of informal economic activity. GDP fails to account for the value of under-the-table employment, underground market activity, or unremunerated volunteer work, which can all be significant in some nations and cannot account for the value of leisure time or household production, which are ubiquitous conditions of human life in all societies.
• It is geographically limited in a globally open economy. GDP does not take into account profits earned in a nation by overseas companies that are remitted back to foreign investors. This can overstate a country’s actual economic output. For example, Ireland had a GDP of $533.14 billion and GNI of $382.87 billion in 2022, which is a difference of about $150.27 billion (or over 28% of GDP) largely being due to profit repatriation by foreign companies based in Ireland.
• It emphasizes material output without considering overall well-being. GDP growth alone cannot measure a nation’s development or its citizens’ well-being, as noted above. For instance, a nation may be experiencing rapid GDP growth, but this may impose a significant cost to society in terms of environmental impact and an increase in income disparity.
• It ignores business-to-business activity. GDP considers only final goods production and new capital investment and deliberately nets out intermediate spending and transactions between businesses. By doing so, GDP overstates the importance of consumption relative to production in the economy and is less sensitive as an indicator of economic fluctuations compared to metrics that include business-to-business activity.
• It counts costs and waste as economic benefits. GDP counts all final private and government spending as additions to income and output for society, regardless of whether they are productive or profitable. This means that obviously unproductive or even destructive activities are routinely counted as economic output and contribute to growth in GDP. For example, this includes spending directed toward extracting or transferring wealth between members of society rather than producing wealth (such as the administrative costs of taxation or money spent on lobbying and rent-seeking ); spending on investment projects for which the necessary complementary goods and labor are not available or for which actual consumer demand does not exist (such as the construction of empty ghost cities or bridges to nowhere, unconnected to any road network); and spending on goods and services that are either themselves destructive or only necessary to offset other destructive activities, rather than to create new wealth (such as the production of weapons of war or spending on policing and anti-crime measures).

Global Sources for Country GDP Data

The World Bank hosts one of the most reliable web-based databases. It has one of the best and most comprehensive lists of countries for which it tracks GDP data. The International Money Fund (IMF) also provides GDP data through its multiple databases, such as World Economic Outlook and International Financial Statistics.

Another highly reliable source of GDP data is the Organization for Economic Cooperation and Development (OECD) . The OECD not only provides historical data but also forecasts GDP growth. The disadvantage of using the OECD database is that it tracks only OECD member countries and a few nonmember countries.

In the U.S., the Fed collects data from multiple sources, including a country’s statistical agencies and The World Bank. The only drawback to using a Fed database is a lack of updating in GDP data and an absence of data for certain countries.

The BEA is a division of the U.S. Department of Commerce . It issues its own analysis document with each GDP release, which is a great investor tool for analyzing figures and trends and reading highlights of the very lengthy full release.

What Is a Simple Definition of GDP?

Gross domestic product is a measurement that seeks to capture a country’s economic output. Countries with larger GDPs will have a greater amount of goods and services generated within them, and will generally have a higher standard of living. For this reason, many citizens and political leaders see GDP growth as an important measure of national success, often referring to GDP growth and economic growth interchangeably. Due to various limitations, however, many economists have argued that GDP should not be used as a proxy for overall economic success, much less the success of a society.

Which Country Has the Highest GDP?

The countries with the two highest GDPs in the world are the United States and China. However, their ranking differs depending on how you measure GDP. Using nominal GDP, the United States comes in first with a GDP of $25.44 trillion as of 2022, compared to $17.96 trillion in China.

Many economists argue that it is more accurate to use purchasing power parity GDP as a measure of national wealth. By this metric, China is the world leader with a 2022 PPP GDP of $31.77 trillion, followed by $25.44 trillion in the United States.

Is a High GDP Good?

Most people perceive a higher GDP to be a good thing because it is associated with greater economic opportunities and an improved standard of material well-being. It is possible, however, for a country to have a high GDP and still be an unattractive place to live, so it is important to also consider other measurements.

For example, a country could have a high GDP and a low per-capita GDP, suggesting that significant wealth exists but is concentrated in the hands of very few people. One way to address this is to look at GDP alongside another measure of economic development, such as the Human Development Index (HDI) .

In their seminal textbook Economics , Paul Samuelson and William Nordhaus neatly sum up the importance of the national accounts and GDP. They liken the ability of GDP to give an overall picture of the state of the economy to that of a satellite in space that can survey the weather across an entire continent.

GDP enables policymakers and central banks to judge whether the economy is contracting or expanding, whether it needs a boost or restraint, and if a threat such as a recession or inflation looms on the horizon. Like any measure, GDP has its imperfections. In recent decades, governments have created various nuanced modifications in attempts to increase GDP accuracy and specificity. Means of calculating GDP have also evolved continually since its conception to keep up with evolving measurements of industry activity and the generation and consumption of new, emerging forms of intangible assets.

U.S. Bureau of Economic Analysis. " What is GDP? ," Page 2.

OpenStax, Rice University. " Principles of Economics 3e: 19.2 Adjusting Nominal Values to Real Values ."

Bureau of Economic Analysis. " GDP in Brief ."

FocusEconomics. " GDP per Capita (USD) ."

Iowa State University, Department of Economics. " How is the GDP Growth Rate Measured? "

PressBooks. " Core Principles of International Marketing: 5.2 Classifying World Economies ."

U.S. Bureau of Economic Analysis. “ Gross Domestic Product, First Quarter 2024 (Second Estimate) and Corporate Profits (Preliminary) ." Page 1.

Harvard Business School. " What Is GDP & Why Is It Important? "

Federal Reserve Bank of St. Louis, FRED. " Shares of Gross Domestic Product: Personal Consumption Expenditures ."

Statistics Canada. " Gross Domestic Product by Production Approach ."

LibreTexts, Social Sciences. " Economics (Boundless): 19.1: Measuring Output Using GDP ."

U.S. Bureau of Economic Analysis. “ Gross Domestic Product as a Measure of U.S. Production .”

Organisation for Economic Co-operation and Development. " Gross National Income ."

Organisation for Economic Co-Operation and Development. " OECD Economic Surveys - Luxembourg ," Page 37.

Federal Reserve Bank of St. Louis, FRED. " Gross Domestic Product ."

Federal Reserve Bank of St. Louis, FRED. " Gross National Income for United States ."

The World Bank. " Population, Total - China, Ireland ."

U.S. Bureau of Economic Analysis. " Gross Domestic Product ."

The World Bank. " Market Capitalization of Listed Domestic Companies - United States, Hong Kong SAR, China, China ."

U.S. Bureau of Economic Analysis. " GDP: One of the Great Inventions of the 20th Century ," Page 7.

U.S. Bureau of Economic Analysis. " The Changeover from GNP to GDP: A Milestone in BEA History ."

World Economic Forum. " A Brief History of GDP - And What Could Come Next ."

Board of Governors of the Federal Reserve System. " Speech: Recent Developments in the Labor Market ."

The World Bank. " GDP (Current US$) — Ireland ."

The World Bank. " GNI (Current US$) — Ireland ."

International Monetary Fund. " World Economic Outlook ."

International Monetary Fund. " International Financial Statistics ."

Organisation for Economic Co-operation and Development. " Gross Domestic Product (GDP) ."

Federal Reserve Bank of St. Louis, FRED. " 2022 Gross Domestic Product by Nation (Current U.S. Dollars) ."

The World Bank. " GDP (Current US$) - United States, China ."

The World Bank. " GDP, PPP (Current International $) - United States, China ."

Paul Samuelson and William Nordhaus. "Economics," Page 386. McGraw-Hill, 1992.

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Economic Contribution and SDG

As UN custodian, the UN Tourism Department of Statistics compiles data on the Sustainable Development Goals indicators 8.9.1 and 12.b.1, included in the Global Indicator Framework . Data collection started in 2019 and provides data from 2008 onwards, the latest update took place on 29 April 2024.   

Tourism direct GDP as a proportion of total GDP (indicator 8.9.1) 

Indicator 8.9.1 on Tourism Direct GDP helps to monitor Target 8.9 which calls on countries “to promote sustainable tourism” under Goal 8 on decent Work and Economic Growth.

* Source : Data compiled from countries by UNWTO through annual statistical questionnaires. ** The boundaries and names shown and the designations used on this map do not imply official endorsement or acceptance by the UNWTO.

Implementation of standards accounting tools to monitor the economic and environmental aspects of tourism sustainability (indicator 12.b.1)

Indicator 12.b.1 shows the preparedness of countries to “develop and implement tools to monitor sustainable development impacts for sustainable tourism” called for in target 12.b under Goal 12 on Sustainable Consumption and Production. More specifically, it tracks the implementation of the most relevant Tourism Satellite Account (TSA) and System of Environmental Economic Accounting (SEEA) tables.

In the past, the UNWTO has conducted studies on the implementation of the TSA:RMF 2008, the latest being available here .

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• Gross Domestic Product (GDP) and Tourism
• By: Cristi Frent
• In: The SAGE International Encyclopedia of Travel and Tourism
• Chapter DOI: https:// doi. org/10.4135/9781483368924
• Subject: Hospitality, Travel & Tourism Management
• Keywords: consumption ; expenditure ; foreign tourism ; gross domestic product ; international standards ; tourism ; tourism statistics
• Show page numbers Hide page numbers

As an economic activity, tourism is also factor in a country’s gross domestic product (GDP). In fact, tourism might be seen in various components of GDP: (a) the expenditures made by tourists either as part of exports (in the case of foreign tourists) or as part of household consumption (for domestic tourism); (b) investments made by businesses for building up tourism facilities and purchasing machinery or equipment to be used in providing goods and services to tourists as part of investments, which might also include government investment in tourism-related infrastructure; and, (c) expenditures incurred by government for tourism promotion and subsidies allocated by government to support health cures in medical tourism (e.g., subsidized treatment tickets in some European countries), both of which are considered part of governmental consumption.

Several factors that might be broadly classified as demand-side factors and supply-side factors affect the size of tourism in GDP. However, for a reference country (i.e., a given country), the supply-side factors are more likely to influence its contribution of tourism to GDP. An important issue is calculating tourism contribution to GDP, an issue that more and more countries are dealing with through the popular method of Tourism Satellite Account (TSA), a tool for economic measurement of tourism developed by the World Tourism Organization. The direct contribution of tourism to GDP ranges from 1.5% to 7.7% in several countries that have developed TSA estimates. If indirect effects are added, the total contribution of tourism to GDP can reach between 2.4% and 10.9%.

Tourism as Part of GDP

Usually, the total value of all goods and services produced in an economy in a certain period (e.g., year or quarter) is defined as GDP. It is the most common measurement of the performances of a national economy.

There are three different approaches of calculating GDP. First, GDP is derived from the concept of value-added, which is the difference between output (goods and services produced) and intermediate consumption (the inputs or the value of products consumed in the production process) of all resident entities within the economy. So GDP is equal to the sum of gross value-added, plus total taxes on products less subsidies on those products; one can call this as production approach .

Second, GDP is defined as a sum of the elements called “final uses” of goods and services less the value of imports. In essence, these final uses refer to consumption (both of households and government), investments, and exports; this is the expenditure approach . Finally, GDP is expressed as a sum of primary incomes (e.g., wages, interests, profits) distributed by resident entities; this is called income approach .

Tourism is part of GDP because it is a component of the economic activities that take place in a country. The expenditure made by tourists is in fact seen as consumption of the households, if the trip takes place in their own country of residence or there are domestic elements of an outbound trip (e.g., an air ticket for a trip abroad purchased by a resident from a national airline). One can speak about an export in the case of expenditures made by foreign tourists in a reference country and the reverse situation of import, when the residents of the reference country spend money abroad in a tourism trip.

Moreover, when businesses pay the travel costs for their employees (most likely for business trips), this expenditure is considered intermediate consumption of the businesses according to the international standards for GDP calculation. On the other hand, expenditures made by a business to purchase equipment, machinery, or buildings to provide goods and services to tourists are seen as investments. There are also expenditures incurred by the government to build tourism infrastructure or for tourism promotion, and the latter is part of government consumption. In a similar manner, in some countries (commonly in Europe), the government subsidizes health cures within some health tourism specialized programs; in this case, this is also government consumption.

Also, there is the special case of owners of vacation homes: The accommodation expenditures owners have when staying in a vacation [Page 549] home have to be indirectly estimated (as they are considered tourism consumption), whereas purchasing or building vacation homes is considered an investment. By the same token, when private cars are used in tourism trips, there is no indirect estimation of the cost of the usage (except for gasoline consumption and repairs that might happen during the tourism trips, these being considered tourism expenditures). All these are in accordance with international standards in tourism statistics.

Factors That Affect Tourism Contribution to GDP

Different factors might affect the contribution tourism makes to GDP. One can classify these factors as demand-side factors and supply-side factors. It has to be admitted that tourism can be seen as any other economic sector having its own ability to expand within an economy, which can depend more on supply-side factors.

One of the demand-side factors is the consuming patterns and habits of tourists. If people tend to travel more, this greatly influences the tourism demand for both domestic tourism and outbound tourism where national carriers and national travel agencies are involved in the tourism distribution chain. Tourism demand is also influenced by social and political factors; for instance, it is unlikely that people will want to visit a destination where there are conflicts.

Supply-side factors include the tourism resources, the services provided, the labor force and its qualifications, the capital of local enterprises, the use of technologies, and not the least, investments, which can be significant in fields such as infrastructure, accommodation, or passenger transportation. Within the presentation of factors affecting tourism’s contribution to GDP, Adrian Bull has classified these factors in five major categories: the stock of resources, the state of technical knowledge, social and political stability, attitudes and habits and investment.

Estimating the Tourism Contribution to GDP

The economic role of tourism can be easily shown by its share in GDP. In a practical manner, the economic importance of the tourism is expressed as a percentage of GDP. In absolute terms, a “tourism GDP” can also be computed according to international standards in tourism statistics. The ratio between tourism GDP and the GDP in the reference economy mathematically gives the tourism contribution to GDP.

In addition to tourism’s direct and indirect effects in the economy, to some extent there are also induced effects, all of which can be figured into tourism’s total contribution to GDP. In absolute terms, there is tourism direct GDP, tourism indirect GDP, and the sum of these two given by tourism total GDP.

TSA is a worldwide method of measuring direct contribution of tourism to GDP. TSA represents at the same time an international standard in tourism statistics endorsed by the United Nations and other international organizations in a document released in 2008 titled “Tourism Satellite Account: Recommended Methodological Framework” (TSA:RMF, 2008). All the countries that wish to develop their TSAs must conform to TSA:RMF, 2008 in order to have international comparability of their data.

According to TSA:RMF, 2008, tourism direct GDP is defined as the sum of gross value-added generated by all the industries in the economy as a consequence of internal tourism consumption plus net taxes on products and imports at purchasers’ prices. The definition of tourism GDP follows exactly the production approach for calculating the general GDP.

For estimating indirect and/or induced effects of tourism, three methods are used: input-output analysis, computable general equilibrium (CGE) models, and multipliers. In fact, estimating these kinds of effects is made only through economic modeling. This is opposed to the direct contribution of tourism estimated through a statistical instrument (i.e., TSA), which is not an economic model.

As part of his primer on TSA, Douglas C. Frechtling clearly points out the major difference between TSA and the economic models: Whereas models simulate the impact of tourism expenditure, TSA is based only on organized statistical information in the form of accounts. However, more than 15 years ago, before using TSA as an official method to measure direct contribution of [Page 550] tourism within the economy, some reports did use input-output analysis as a method to estimate the direct contribution to GDP.

How Big Is Tourism’s Contribution to GDP?

The size of tourism’s contribution depends heavily on what kind of effects are considered. In a conservative approach, only direct contribution should be envisaged and this should follow as strictly as possible TSA:RMF, 2008. Some results from the T.20 countries (representing the major economies of the world cooperating in tourism) that produced TSA will be exemplified here.

The tourism’s direct contribution to GDP varies in T.20 countries from 1.5% to 7.7%. Some countries have higher shares (Mexico 7.7%, Spain 6.4%, and France 6.2%), and others report lower values (Republic of Korea 1.5% and both Japan and Canada with 1.9%). Only several T.20 countries also include indirect effects to estimate the tourism contribution to GDP. Thus, a total contribution to GDP that include both direct and indirect effects can be calculated. For example, tourism contributed directly and indirectly to 10.9% of Spain’s GDP, whereas for the Republic of Korea this share was only 2.4%.

It is worth mentioning also the World Travel and Tourism Council (WTTC), an organization representing the private sector that every year presents data on travel and tourism contributions to GDP both at the worldwide level and separately for 184 countries. It was estimated that in 2015, the travel and tourism industry contributed directly with 3.0% of the global GDP, which is double that of automotive manufacturing.

Moreover, if indirect and induced effects are added, it was estimated that tourism contributed with 9.8% at the global GDP. Regarding the estimates for each individual country, caution should be taken as WTTC has its own standardized methodology, which cannot substitute under any circumstance to a country’s TSA. Nevertheless, in some cases (for instance, in countries that do not produce TSA data), the WTTC figures on tourism’s direct contribution to GDP can be used at least as a benchmark.

Cristi Frent

See also Economics of Tourism ; Tourism Expenditures and Receipts ; Travel and Tourism Satellite Account

Further Readings

Bull, A. (1995). The economics of travel and tourism (2nd ed.). Melbourne, Victoria, Australia: Longman.

Frechtling, D. (2010). The tourism satellite account. A primer. Annals of Tourism Research, 37 (1), 136–153.

U.N. Statistics Division, Statistical Office of the European Communities Eurostat, World Tourism Organization, Organization for Economic Co-operation and Development. (2010). Tourism satellite account: Recommended methodological framework 2008 . New York, NY: United Nations.

World Tourism Organization. (2000). General guidelines for developing tourism satellite account (TSA): Measuring tourism supply . Madrid, Spain: Author.

World Tourism Organization. (2010, October 11–13). Positioning tourism in economic policy: Evidence and some proposals . Paper presented at the 2nd T20 Ministers Meeting Republic of Korea. Retrieved from http://statistics.unwto.org/sites/all/files/docpdf/t20.pdf

World Travel and Tourism Council. (2016). Travel & tourism economic impact 2016: World. Retrieved from http://www.wttc.org/-/media/files/reports/economic-impact-research/regions-2016/world2016.pdf

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• Gross Domestic Product (GDP)

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on November 27, 2023

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Table of contents, what is gdp.

A country's Gross Domestic Product, or GDP, is the total monetary or market value of all the goods and services produced within that country's borders during a specified period of time.

GDP is usually calculated annually, but it can be calculated per quarter as well.

The US government, for example, releases both a GDP estimate for each quarter as well as the entire year.

Because GDP provides a broad measurement of a country's production, it is often thought of as being a scorecard for a country's economic health.

When GDP is growing, especially if inflation is not a major concern, workers can find jobs, businesses can sell more, and the country is generally prospering.

Conversely, when it contracts, it can be a sign of economic downturn, indicating potential troubles for the labor market and businesses.

Types of GDP

There are a few different types of GDP measurements:

Nominal GDP is the simplest representation of GDP. This is just the raw data before any adjustments.

GDP per Capita measures the GDP per person in a country. This metric approximates the level of prosperity in a country. A high GDP per capita generally correlates with a high standard of living.

Real GDP takes into account inflation to allow for more accurate comparisons of production over time.

GDP Growth Rate is the increase or decrease in GDP from quarter to quarter.

Components of GDP

Consumption.

Consumption is the total value of goods and services consumed by households. It encompasses expenditures on durable goods (like cars and appliances), nondurable goods (such as food and clothing), and services.

Being the largest component of GDP in many economies, consumption provides insights into consumer behavior and prevailing economic conditions, as confident consumers tend to spend more.

Investment in the GDP context refers to the spending on capital goods that will be used in future production. This includes business investments in equipment and structures, residential construction, and changes in business inventories.

A rise in investment often signals confidence in future economic growth , while a decline can indicate pessimism toward future demand.

Government Spending

This component encompasses all government expenditures on goods and services. It excludes transfer payments like pensions and unemployment benefits, as these are not payments for goods or services.

Instead, it covers things like salaries of public servants, purchase of weapons for the military, or any investment expenditure by a government.

High government spending can be an instrument to combat economic downturns, but if not managed sustainably, it could lead to long-term economic challenges.

Net Exports

Net exports represent the difference between what a country sells to the rest of the world (exports) and what it buys (imports).

If a country exports more than it imports, it has a trade surplus; if it imports more than it exports, it has a trade deficit .

This component of GDP reflects a country's external economic interactions and the competitiveness of its goods and services on the global stage.

Uses of Gross Domestic Product (GDP)

Economic performance assessment.

Economists, policymakers, and investors closely monitor GDP figures to assess the health of an economy. It provides a comprehensive snapshot, revealing whether the economy is expanding or contracting.

Trends in GDP can indicate the direction of economic travel, providing valuable information to everyone from government agencies to private businesses.

Policy Formulation and Implementation

When GDP growth is sluggish or negative, governments might implement expansionary fiscal policies , like tax cuts or increased public spending, to stimulate economic activity.

Conversely, if the economy is overheating, contractionary policies might be applied. The cyclical nature of economies requires timely and informed decisions, with GDP being a primary indicator guiding these choices.

International Comparative Analysis

GDP figures are pivotal in comparing the economic performance of different countries. By assessing GDP on a per capita basis (dividing GDP by the population of a country), we gain insights into the relative economic prosperity of nations.

This kind of international comparative analysis helps in understanding global economic dynamics, trade relationships, and competitive positioning.

Limitations of GDP as an Economic Indicator

Exclusion of non-market activities.

While GDP measures the monetary value of goods and services produced within a country, it doesn't account for non-market activities.

Activities such as household chores, volunteering, or childcare, which do not have a market transaction, are not reflected in the GDP.

This can lead to an underrepresentation of economic activity, especially in economies with substantial informal sectors or where family roles dominate certain activities.

Quality of Life and Well-Being Considerations

GDP quantifies economic production but does not necessarily reflect the well-being or quality of life of citizens. A country might have a high GDP but significant disparities in income distribution, leading to social inequality.

Similarly, nations with strong GDP growth might face issues like pollution or deteriorating mental health, which the GDP figure does not capture.

Environmental and Sustainability Concerns

The pursuit of GDP growth often comes with environmental costs. GDP does not account for the depletion of natural resources or environmental degradation resulting from economic activity.

As the global discourse shifts toward sustainable development, the limitations of GDP in this realm become more evident.

A country might register robust GDP growth while causing irreversible environmental damage, prompting concerns about the true 'progress' being made.

Balance of Trade & GDP

Balance of trade is a key element in the GDP formula.

When a country sells more domestic products to foreign nations than it buys, its GDP increases.

When it buys more products from foreign nations than it sells (called a trade deficit), GDP decreases.

The balance of trade refers to the difference between the value of a nation's exports and imports of goods over a specific period. This balance can have a notable influence on a country's GDP and overall economic performance.

Trade Surplus and GDP Growth

A trade surplus occurs when a country exports more goods than it imports. This surplus has a positive impact on the GDP.

When a country is able to sell more of its domestic products to foreign nations, it generates additional revenue, which contributes to the increase in GDP.

The revenue earned from exports directly adds to the economy's output and, consequently, the GDP.

This additional income can lead to increased investment and consumption within the domestic economy, further stimulating economic growth.

Trade Deficit and GDP Contraction

Conversely, a trade deficit occurs when a country imports more goods than it exports. This situation can have a negative effect on the GDP.

When a country buys more products from foreign nations than it sells, it results in a net outflow of money, which can reduce the GDP.

The reduction in GDP occurs because the money spent on imports does not directly contribute to the domestic economy's production.

A persistent trade deficit can lead to decreased economic growth as money leaves the country, potentially affecting domestic industries and employment.

Interplay With Aggregate Demand

The balance of trade is closely connected to a nation's aggregate demand—the total demand for goods and services in an economy.

A trade surplus can contribute to higher aggregate demand as it adds to domestic production and income .

This can lead to increased economic activity and potential GDP growth. On the other hand, a trade deficit can impact aggregate demand negatively by draining money from the economy, potentially causing economic slowdowns.

Trade Policies and Economic Strategy

Governments often consider the balance of trade when formulating economic policies and trade strategies. A trade deficit might lead to policy adjustments aimed at boosting exports or reducing imports.

These policies can influence economic growth and impact the overall GDP.

For instance, a government might implement measures to enhance domestic industries, encourage innovation, or negotiate trade agreements to improve the trade balance and consequently contribute to GDP growth.

Gross Domestic Product is a fundamental measure of a country's economic activity, reflecting the total market value of goods and services produced within its borders.

GDP not only functions as an economic scorecard but also provides valuable insights into a nation's well-being and progress.

Components of GDP, including consumption, investment, government spending, and net exports, collectively shape economic trends and guide policy decisions.

However, GDP has its limitations. It excludes non-market activities, overlooks quality of life indicators, and sidesteps environmental considerations.

Its nexus with the balance of trade underscores how international interactions influence economic health.

GDP informs policy formulation, helping governments navigate expansion or contraction, and enables cross-country comparisons.

Gross Domestic Product (GDP) FAQs

What does gdp stand for.

GDP is an acronym for Gross Domestic Product.

What is GDP?

A country’s Gross Domestic Product, or GDP, is the total monetary or market value of all the goods and services produced within that country’s borders during a specified period of time.

What is the purpose of calculating a country's GDP?

Because GDP provides a broad measurement of a country’s production, it is often thought of as being a scorecard for a country’s economic health.

What's one way a country can increase its GDP?

Balance of trade is a key element in the GDP formula. When a country sells more domestic products to foreign nations than it buys, its GDP increases.

What are the different types of GDP?

The different types of GDP measurements are Nominal GDP, GDP per capita, real GDP, and GDP growth rate.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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