Economic Analysis in
Tourism Industry
Dr. Fred KU
Department of Decision Sciences & Managerial Economics
CUHK Business School
June 2012
The macro side:
CONTRIBUTIONS OF TOURISM TO
THE ECONOMY
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 receipts grow
faster than GDP
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%
Source: Hong Kong tourism board and the Hong Kong SAR Government's Census
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TOURISM IN HONG KONG
Price Level
LRAS
SRAS
AD
Real GDP
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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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The micro side:
DEMAND IN TOURISM
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
Price elasticity of
demand
=
Percentage change in Qd
Percentage change in P
 Loosely speaking, it measures the price-sensitivity of buyers’ demand.
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PRICE ELASTICITY OF DEMAND
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
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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
More elastic
Less elastic
Source: Song, Kim and Yang 2010
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INCOME ELASTICITY
 Income elasticity of demand: measures the response of Qd to a change
in consumer income
Income elasticity of
demand
=
Percent change in Qd
Percent change in 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
Source: Mankiw 2012
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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
Less elastic
Source: Song, Kim and Yang 2010
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DEMAND ELASTICITIES IN
INTERNATIONAL TOURISM
Income
Exchange Transport
Rates
Costs
Marketing
Price
Region
 Elasticities vary by countries.
OF ORIGIN
N. Europe
2.06
-0.37
-1.57
-0.86
0.31
S. Europe/Mediterranean
1.67
-0.54
-1.41
-1.3
0.23
N. America
1.74
-0.58
-1.51
-1.52
0.59
Oceania
2.55
-0.73 -
-1.46
0.2
Latin America
0.28
-0.84 -
-1.26
0.61
Asia(developing)
-
Asia(developed)
Middle East
4.45
-
-0.74
-
-0.51
-
-0.62
-
0.28
-
OF DESTINATION
N. Europe
1.79
-1.73
-0.44
-1.54 -
S. Europe/Mediterranean
2.34
-0.64
-1.34
0.11
N. America
2.06
-1.42
-1.54
-1.89 -
Oceania
3.35
-0.74 -
-0.98
0.23
Latin America
1.76
-0.58 -
-1.28
0.67
Asia(developing)
4.1
-0.56
Asia(developed)
1.17
-1.18 -
Middle East
2.47
-0.24 -
0.27
0.39
 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
-0.44 -1.61 -
0.16
Source: Crouch 1995
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The micro side:
EXTERNALITIES IN TOURISM
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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The micro side:
TOURISM TAX
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