e method, if the assumptions of the classical linear regression model are fulfilled. As such,
GDPt* = C + β1 INVt* + β2 TRPt* + β3 CPIt* + β4 EXPt* + εt
where GDPt* = ln GDPt, INVt* = ln INVt, TRPt* = ln TRPt, CPIt* = ln CPIt, EXPt* = ln EXPt
The coefficient of each of the four explanatory variables measures the partial elasticity of the dependent variable GDP with respect to that variable. As such, each of the partial regression coefficient β1, β2, β3 and β4 are the partial elasticities of GDP with respect to variables INV, TRP, CPI and EXP respectively.
4.4 Explanation of Variables
4.4.1Gross Domestic Product (GDP)
Gross Domestic Product is used to assess the market value of all final goods and services produced during a given period of time within an economy. It also measures the total income of an economy and as such, it is often correlated with standard of living. GDP is used as a reference variable in order to assess the impact of tourism on economic growth in Mauritius. GDP is an important factor used to analyse the development of the tourism sector. As such, in case the tourism sector brings huge foreign earnings, there will be an increase in GDP, suggesting that the economy is flourishing. The GDP figures that are used for the regression have been adjusted for inflation using the GDP deflator.
4.4.2 Investment (INV)
Investment, which is a major component of the gross domestic product of an economy, refers to the acquisition of new capital goods. A positive change in investment may lead to a positive change in income and output of an economy in the short run. Higher level of investment may contribute to aggregate demand while higher level of income may indirectly impact on consumer demand. Investment, which is an injection in the circular flow of income, is a useful tool to analyse the impact of tourism on the economy of Mauritius.
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Investment is expected to have the same impact on economic growth as propounded by empirical literature, such as Sargent and James (1997) who found a positive impact of physical capital and investment on growth in Canada over the period from 1947 to 1995.
4.4.3 Tourism Receipts (TRP)
Tourism receipt is a major indicator of the contribution of the tourism sector to the local economy. Tourism receipt represents an inflow of foreign currency in the economy. Such receipts account for a major contribution to the gross domestic product of the Mauritian economy. As such, an increase in tourism earning is expected to have a positive impact on GDP.
Most governments in developing countries encourage international tourism because such tourists bring capital to the country. Earnings of currencies permit governments to finance, at least in part, their development efforts.
Tourism receipt is expected to impact positively on economic growth as postulated by Balaguer and Cantavella-Jorda (2002) or Dritsakis (2004) who claimed that economic growth and tourism are interrelated and established tourism as a driver of economic growth.
4.4.4 Inflation (CPI)
Inflation is defined in economics as a rise in the general level of prices of goods and services in an economy over a period of time. As such, it is a sustained increase in the price level and it may be the consequence either of constant falls in aggregate supply or recurring increases in aggregate demand. As a result, inflation erodes the purchasing power of money, that is, there is a loss of real value in the internal medium of exchange and unit of account in the economy.
An important measure of price inflation is the inflation rate, which can be calculated by taking the annualised percentage change in a general price index over time. This is referred to as the Consumer Price Index (CPI). In Mauritius, the Consumer Price Index is measured by computing the average change over time in the cost of a fixed basket of consumer goods and services