Economic Analysis in Tourism Industry

Dr. Fred KUDepartment of Decision Sciences & Managerial Economics

CUHK Business School

June 2012

CONTRIBUTIONS OF TOURISM TO THE ECONOMY

The macro side:

TOURISM IN HONG KONG

Over the past three decades, Hong Kong has attracted numerous international tourists.

World Economic Forum report (2007) HK ranked sixth in the world in terms of competitiveness as an

international destination HK has the most attractive travel and tourism environment in Asia.

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TOURISM IN HONG KONG

International tourist arrivals in Hong Kong 6.79 million in 1991 37.77 million in 2011 an average annual growth rate of about 9%.

By the end of 2011, the average occupancy rate of hotels was 89%, and the average length of overnight stays was 3.6 nights.

Total tourist expenditures accounted for around 10.5% of Hong Kong’s gross domestic product (GDP) in 2008 (Hong Kong Tourism Board, 2008).

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TOURISM IN HONG KONG

The Individual Visit Scheme, which makes it easier for tourists from mainland China to visit Hong Kong, began in Jul 2003.

According to the Hong Kong Tourism Board: These tourists accounted for more than 50% of those visiting in

2005, followed by Taiwan (9.1%), Japan (5.2%) and the U.S. (4.9%). The mainland’s market share increased to around 67% in 2011. Mainland visitor accounted for more than 56% of visitor total

spending in 2008.

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TOURISM IN HONG KONG

Tourism 1974

1984

1994 2004 2008 Annual Growth

Tourism receipts (billion HK$)

2.8 13.8 64.3 92.0 159 13..5%

GDP nominal (billion HK$)

46.9 257.5

1,029.8

1,282.0

1677 11.8%

Receipts / GDP 6.0% 5.4% 6.2% 7.2% 9.5%

Visitor arrivals (million)

1.3 3.3 9.3 21.8 29.5 10.2%

Population (million) 4.3 5.4 6.1 7.0 7 1.5%

Visitor/population 30.2%

61.1%

152.5%

311.4%

421.43%

Tourism receipts grow faster than GDP

Source: Hong Kong tourism board and the Hong Kong SAR Government's Census

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TOURISM IN HONG KONG

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SRAS

AD

LRAS

Real GDP

Price Level

CONTRIBUTIONS OF TOURISM

Inbound tourism has substantial direct effects on economic growth.

Findings by Jin 2011: Increased tourism has raised the growth rate of the domestic

economy in Hong Kong over short time horizons. Tourism growth leads to:

GDP

Capital (including tech & management skills)

Employment

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CONTRIBUTIONS OF TOURISM

Data shows that tourism and capital are ‘complements in production’

Tourism and labor are ‘complements in production’ as well.

Source: Jin 2011

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CONTRIBUTIONS OF TOURISM

雷鼎鳴 ( 信報 2012)

… 以最新的 2010  年的數字看來，外地來港遊客總共為港創造了十九萬五千個職位，現在相信已遠超二十萬個職位了。

此外，入境旅遊在 2010  年共為香港賺取了五百九十二億元的 GDP 。 大部分到港遊客都是內地人，若他們全部不來，這二十萬個職位中

起碼一半便要消失掉。 此種情況一旦出現，與旅遊業有關的工人的工資無可避免地要下降；

這可對失業問題稍作紓緩，不見得立時便有十萬人因此而失業，但額外七、八萬人左右的就業，恐怕保不了。

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DEMAND IN TOURISMThe micro side:

THE TOURISM PRODUCT

“The tourism “product” is not the tourist destination, but it is about experiences of that place and what happens there.”

Composite product involving transport, accommodation, catering, natural recourse, entertainment, and others.

In short: satisfying trips.

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ECONOMIC DETERMINANTS

Economic Determinants of Demand: Price Income

How to quantify the impacts of price and income on the demand for tourism?

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ELASTICITY

Basic idea: Elasticity measures how much one variable responds to changes in another variable.

Price elasticity of demand measures how much Qd responds to a change in P. E.g. how much quantity demanded for your tutoring service

will fall if you raise your price.

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PRICE ELASTICITY OF DEMAND

Loosely speaking, it measures the price-sensitivity of buyers’ demand.

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PRICE ELASTICITY OF DEMAND

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Product Estimated demand elasticity

DVDs (Amazon)

-3.10

Automobiles -1.95

Coca-cola -1.22

Restaurant Meals

-0.67

Beer -0.23

Cigarettes -0.25

Source: Mankiw 2012

PRICE ELASTICITY IN TOURISM

A study conducted by Deloitte & Touche (1995) estimated that price elasticity in tourism in UK is as high as -2.5.

This estimate appears high compared with the study by Hiemstra and Ismail in the USA which calculated an average elasticity of -0.44.

Why such big difference?

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PRICE ELASTICITY IN TOURISM

One possible reason: the UK is more dependent on individual / family tourism than corporate travelers.

The logic is similar to ‘luxury vs. necessity’.

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SOME PRICE ELASTICITY IN TOURISM - HK

Originating Country Price Elasticity

Australia -0.56

Japan -0.50

Korea -0.41

Singapore -0.35

China (0.37)

U.K. (0.07)

U.S. -0.11

Mean -0.10

Source: Song, Kim and Yang 2010

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More elasticMore elastic

Less elasticLess elastic

INCOME ELASTICITY Income elasticity of demand: measures the response of

Qd to a change in consumer income

An increase in income causes an increase in demand for a normal good.

Hence, for normal goods, income elasticity > 0.

For inferior goods, income elasticity < 0.

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SOME ESTIMATED INCOME ELASTICITIES

Goods or Services Income Elasticity

Automobiles 2.46

Furniture 1.48

Restaurant meals 1.40

Water 1.02

Gasoline and oil 0.48

Electricity 0.20

Public Transport -0.36

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Source: Mankiw 2012

INCOME ELASTICITY IN TOURISM

Witt, Brooke, and Buckley (1995) For Americans, most foreign holidays, except travel to Canada

and Italy, are luxuries with high income elasticities of demand.

Australian Tourism Marketing Expenditure Elasticity Estimates (2006)

Most income elasticities of international tourism to Australia are high (>1).

International tourism is a luxury item. Highly influenced by the tourist origin country’s economic growth cyclical

pattern.

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INCOME ELASTICITY IN TOURISM – HK

Originating Country Income Elasticity

China 1.89

Japan 1.35

Korea 1.35

U.K. 2.08

U.S. 1.19

Australia 1.35

Taiwan 0.62

Singapore 1.01

Philippines 0.48

Mean 1.32

Source: Song, Kim and Yang 2010

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Less elasticLess elastic

DEMAND ELASTICITIES IN INTERNATIONAL TOURISM

Elasticities vary by countries.

International travel is a luxury (for most countries).

Generally sensitive to transport cost and currency exchange rates, but not very sensitive to destination prices

Not very responsive to promotional or marketing expenditures of tourist offices

Source: Crouch 1995 24

EXTERNALITIES IN TOURISMThe micro side:

EXTERNALITIES

Externalities – the uncompensated impact of one person’s actions on the well-being of a bystander.

Classic examples: Pollution Secondhand smoking Education Knowledge spillover

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POSITIVE EXTERNALITIES IN TOURISM More jobs in service sector

More jobs in infrastructure

Environmental benefits Countries can use tourism as a reason to conserve the environment.

E.g. , national parks, heritage sites

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NEGATIVE EXTERNALITIES IN TOURISM Worsened inequalities in the country

Usually only those who speak foreign languages and live near tourist sites can benefit

Environmental negatives Air travel producing more greenhouse gases Vehicle travel impacting wildlife and the ecosystem

Higher local prices Case of HK?

Crime!

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NEGATIVE EXTERNALITIES - CRIME Empirical research:

Campaniello (2011): 1990 Football World Cup in Italy led to a significant increase in property crimes

Biagi and Detotto (2012): Positive relationship between tourism and pick-pocketing at cities level,

Why does crime increase with the presence of visitors? Tourists carry valuable objects The attitude of holidaymakers is more imprudent Tourists are ‘safer’ target – rarely report crime to police

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TOURISM TAXThe micro side:

TOURISM TAX- TAX ON ‘OUTSIDERS’? Tourist taxes have become an important source of

revenue for many tourist destinations. Taxes on accommodation are upheld by their proponents

as a way of shifting the local tax burden on to non-residents.

However, the travel industry claims that these levies do significant damage to their level of competitiveness.

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IMPACTS OF ROOM TAXES

The average rate of total room taxes of the US is 9.8% The room taxes result in a 5% drop in room rented. The impacts are more than proportionately larger for the

higher rate properties, as shown by the higher elasticity.

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THE SHORT-TERM PRICE EFFECT OF A TOURIST TAX

What’s the impact of a tourist tax in Spain? Consider tourists from four nationalities (United Kingdom,

Germany, France and the Netherlands). 1€ (euro) tax on tourism will lead to a drop in the demand

for tourism for the four nationalities of 117,660 tourists. a figure that represents 1.44% of the year 2000’s tourist arrivals for

the said four nationalities in Spain.

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END