Contribution of Tourism Development to Economic Growth in Mexico

One of the major sectors that have been experiencing rapidly increasing economic growth in Mexico is the Tourism sector. This research study aims to inquire into the contribution of tourism development on economic growth in Mexico, where number of tourist arrivals is dependent on exchange rate and GDP per capita. To make this research study more precise, we use the GDP per capita of Brazil, Canada, Colombia and United States of America separately which are among the top 10 tourist countries who visits Mexico for tourism (WTO, 2014). After running the stationarity test, we ran the Johansen cointegration test to know if there is a long run relationship among the three variables. We found out that all the results for the four countries indicate two cointegration vectors using the trace test. After knowing the cointegration of the vectors, we ran the VECM to investigate the long run causality of the series. The Error Correction Term shows that there is a long run causality running from exchange rate and GDP per capita of USA to the number of tourist arrivals in Mexico while the Error Correction Term shows that there is no long run causality running from exchange rate and the GDP per capita of Brazil, Canada and Colombia to the number of tourist arrivals in Mexico. After knowing the causality of the variables, we ran the residual diagnostic test of autocorrelation, heteroscedasticity and histogram and normality where we found out the absence of autocorrelation, heteroscedasticity and residuals were normal distributed for all the countries and variables. Keywords: Tourism, Economic growth, Johansen Cointegration, VECM, Residual diagnostics test.