Tourism Social Science

Economics and Tourism:

Demand and Impact

Prof Gang Li
Outline
• Introduction to tourism economics
• Microeconomics: Tourism demand
– Elasticity analysis
– Economic characteristics
– Economic determinants
– Modelling and forecasting
• Macroeconomics: Tourism impact
– Characteristics
– Measurements
– Issues and problems
Introduction to Tourism Economics

• “Tourism is an economic activity…, a social science to

be analyzed, trends to be identified, and
costs/benefits to be computed” (Lundberg, et al.
1995: Tourism Economics).
• Tourism Economics is about the understanding of the
leisure and tourism economy by applying the proven
concepts and theories within the micro and macro
economics discipline.
Micro- & Macro-economics
• Micro-economics:
– Consumer behaviour, firms, demand, supply, price
– Individual market equilibrium
– Industrial economics, managerial economics, etc.
• Macro-economics
– Aggregated demand and supply, investment,
employment, etc.
– equilibrium within the whole economic system
– International economics: international trade, FDI
 Microeconomics:
Understanding Tourism
Demand
The Microeconomic-Foundation
of Tourism Demand
Definitions:
• Tourism demand for a particular destination is
defined as the quantity of the tourism product (i.e., a
combination of tourism goods and services) that
consumers are willing and able to purchase during a
specified period under a given set of conditions.
• Effective demand: demand backed by cash
• Opportunity cost: the value forgone as the result of
the acceptance of an alternative.
Price Elasticity of Demand
• Defining price elasticity of demand (Pd)

– the use of proportionate or percentage changes:

%Qd / %P

– the sign (positive or negative)

– the value (greater or less than one)

• |Pd|>1: the demand is price elastic

• |Pd|<1: the demand is price inelastic

Importance of Price Elasticity of Demand
• Price elasticity of demand and a firm’s sales revenue
(TR = P × Q)
– effects of a price change on sales revenue
• elastic demand
– TR changes in same direction as quantity
• inelastic demand
– TR changes in same direction as price
• applications to price decisions
Price Elasticity of Demand for a
Theme Park
A theme park had a promotion campaign. The
entry fee was reduced from £40 to £20 per
visitor, and the number of visitors per week
increased from 3000 to 9000.

TR0=40X3,000=120,000
TR1=20X9,000=180,000
Price Elasticity of Demand for a
Theme Park
A theme park had a promotion campaign. .The
entry feel reduced from £40 to £20 per
visitor, and the number of visitors per week
increased from 3000 to 4000.

TR0=40X3000=120,000
TR1=20X4000=80,000
Other Elasticities of Demand
• Income elasticity of demand
– Measurement: %Qd / %I
– determinants
• degree of “necessity” of the good
• level of income of consumers
– applications to business
• importance of perceptions of the product
• repositioning a product
Other Elasticities of Demand

• Cross-price elasticity of demand

– Measurement: %QA / %PB
– Determinants
• closeness of complements or substitutes
– Applications to business
• Effects of changes in competitors' pricing strategy
• Strategies to make a product less cross-price elastic
Economic Characteristics of
International Tourism Demand
• International tourism is a form of
complementary demand.
• Demand for international tourism is income-
elastic, i.e., international tourism is a luxury.
• Business Travel tends to be price inelastic.
• The relationships between tourism products
(destinations, attractions) are exchangeable
(substitutes vs complements).
Economic Characteristics of
International Tourism Demand (cont.)
• Tourism products can be divided into privately
produced goods/services and public goods.
• International tourism is a special sort of
international trade.
– Inbound tourism: tourism export
– Outbound tourism: tourism import
• Tourism is affected by business cycles in the
economy rather than determining them.
Economic Characteristics of
International Tourism Demand (cont.)
• Tourism products can be divided into privately
produced goods/services and public goods.
• International tourism is a special sort of
international trade.
– Inbound tourism: tourism export
– Outbound tourism: tourism import
• Tourism is affected by business cycles in the
economy rather than determining them.
• Seasonality
Determinants of Demand for Tourism:
Economic Factors
Monthly Tourist Arrivals: Seasonality
The Impact of Olympic
Games on Tourism Demand
 Non-resident visitor arrivals

6,000
Thousand

5,000

4,000

3,000

2,000

1,000

2004
1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2005

2006
Over- and Under Estimation
of Event Impact
Demand

D2

D1
D0 Over/under-
D0
Estimates

D3

T0 T1 Time
Over- and Under Estimation of
Event Impact

D2

Over
Estimation
D1
D0 Actual
D0 impact

T0 T1 Time
Over- and Under Estimation of Event
Impact

D2

D1
D0 Actual
impact
D0
Under-
D3 Estimation

T0 T1 Time
Possible impacts of
COVID-19 on tourism
Note: Preliminary forecasts for PATA
Possible impacts of
COVID-19 on aviation
Case study: Demand for
International Tourism in Thailand
• Seven major source markets are considered:
Australia, Japan, Korea, Malaysia, Singapore, UK
and USA.
• Neighbouring countries (Malaysia, Philippines,
Singapore and Indonesia) are included in analysis
• Focus of analysis: demand elasticities
– Income elasticity
– Own-price elasticity
– Cross-price elasticity
Findings and Analysis

• Incomes are the key determinants.

• Demand by residents from Australia, Korea, Malaysia,
Singapore and UK is highly income elastic. So…?
• Demand by Australian, Japanese and Malaysian
travellers is highly sensitive to price changes in Thailand.
So…?
• Neighbouring countries are complementary to Thailand
as seen by Korean and US tourists, and substitutes to
Thailand by other tourists. So…?
Research Development in Tourism
Demand Modelling and Forecasting
• Diversification of forecasting techniques:
– econometric, time-series, artificial intelligence
• Forecast competition, combination,
integration
• Seasonality analysis
• Events’ impact on tourism demand and
risk forecasting

Source: Song and Li (2009).

Macroeconomics:
Tourism Impact
Economic Impact of Tourism
• Interaction
• Both positive and negative impacts
• Different channels and levels of the impacts
– Direct effect
– Indirect effect
– Induced effect
• Principally on destinations, but also on tourism
generating areas.
Typical Areas of Tourism Impact on a
community
Contribution to GDP
• GDP: the total money value of all final goods and
services produced in an economy over a one-year
period.
• GDP=C+I+G+X-M
– Consumption: domestic tourism or home-provided
elements of an international trip
– Investment: by the government on infrastructure; by
businesses on buildings, equipment, etc.
– Government expenditure: on non-market T&T services and
operation
– eXports: expenditure on goods and services as well as
transportation by international visitors
– iMports: the residents’ spending abroad
WTTC Report 2019
WTTC Report 2019
WORLD TRAVEL & TOURISM
INDUSTRY/ECONOMY GDP

https://www.wttc.org/-/media/files/reports/economic-impact-research/regions-2019/world2019.pdf
WTTC Report 2019
Employment
• Features of employment in the tourism industry:
– Relative ______ intensity
– Many __________occupations
– Much _________________employment
– __________
• Types of employment generated by tourism
– Direct: resulting from visitor expenditure and directly
supporting tourism activities.
– Indirect: created within the tourism supply sector but not
directly related to tourism activities.
– Induced: created as a result of tourism expenditure as local
residents spend money earned from tourism
WTTC’s Report
Criticism

• _____________ hours
• Part-time positions taken by _________ and
___________ who are not part of working
force
• A variety of _____________between workers
Negative Impact
Balance of Payments
The balance of payments records all the
transactions that have occurred between
residents of a country and the rest of the world.
• Tourism spending in the overseas destination is
recorded as debits payments, while tourism
expenditure by international tourists is recorded as
credits receipts.
• Favourable balance of payments (surplus vs deficit)
is important particularly for developing countries.
Economic Importance of Tourism
Policies in the Balance of Payments
• Tourism can attract foreign exchanges more easily and
quickly.
• Using tourism to adjust the balance of payments can
avoid retaliatory measures from trading partners.
• Tourism is not hampered by protectionist measures.
• Examples:
– In 1966 UK government limited the currency taken on trips
abroad to £50 per day.
– Japanese government encouraged outbound travel in
1980s to reduce international trade surplus; doubled
permitted value of duty-free good brought back
The Measurement of Economic Impact
• Tourism multipliers: developed based on
Keynesian principles of recirculation of a
proportion of income by recipients into tourism
consumption spending, which then engenders
further income and employment.
• Leakage: takes revenue out of the system at each
round due to savings, taxations, expenditure
abroad or on imported products.
• Simple multiplier =
– Where MPC is the marginal propensity to consume.
The Concept of a Keynesian Multiplier

The total value=1000+500+250+125…=2000

£50
Problems in Measuring Tourism Impact
• Unpaid services:
– VFR tourists’ free accommodation and presents for
the hosts.
• Non accounted services:
– Black economy, avoiding taxation, or simply for
convenience.
• Social costs and benefits:
– social net product vs private net product
• Public goods: national parks, heritage
buildings.
The Latest Project: Economic
Impact of Accessible Tourism
in Europe
Project Background
• Accessible tourism is about making it easy for all people to enjoy
tourism experiences.
• According to the UN, an estimated 650 million people in the world
live with disabilities. Together with their families, that means
approximately 2 billion people are directly affected by disability,
representing almost a third of the world’s population.
• Many people have access needs, whether or not related to a
physical condition.
• Making tourism more accessible is a social responsibility, but also
a compelling business case to boost the competitiveness of
tourism in Europe.
Source: http://ec.europa.eu/enterprise/sectors/tourism/accessibility/index_en.htm
Key Findings

• The accessible tourism demand within the EU

generated a total economic contribution of 786
billion Euros in terms of total output and 356 billion
Euros in terms of gross value added.

• This scale is equivalent to about 3% of total GDP of

EU27 in 2012, and over one-third of the total
economic contribution of tourism in the region
according to WTTC’s (2013) report.  
Scenarios of Accessibility
Improvements

• Option A: At the destination some buildings and types of transport are made accessible, but
not all of them. The services provided by some of the hotels, restaurants and museums have
been adapted for special needs, but no other services – like wheelchairs – are available. The
staff know very little about special needs and cannot help much. Information about
accessibility is difficult to find and not reliable.
• Option B: At the destination most buildings and types of transport are made accessible. The
services provided by most of the hotels, restaurants and museums are adapted for special
needs, and some services – like wheelchairs, visual or hearing aids – are available. The staff
have basic knowledge of special needs and can help a little. Information on accessibility and
services is available when requested and is reliable.
• Option C: At the destination almost all buildings and types of transport are made accessible.
The services provided by almost all of the hotels, restaurants and museums are adapted for
special needs, and many services – like wheelchairs, visual or hearing aids, medical services,
dedicated personal assistants etc. – are available. The staff have good knowledge of special
needs and can help a lot. Information on accessibility is easy to find, reliable and indicates if a
location may be difficult to access .
Total output contribution
under different scenarios by
people with access needs
Total economic contribution of EU’s accessible tourism
under different scenarios by people with access needs
in the EU27 countries
Total output Contribution Total gross value added Total employment
Scenario
(€ million) contribution (€ million) contribution ('000 persons)

increase increase
increase against
Baseline 786,294 against 356,201 against 8,711
baseline
baseline baseline

Scenario
929,801 18.3% 420,240 18.0% 10,426 19.7%
A

Scenario
981,603 24.8% 443,380 24.5% 11,032 26.6%
B

Scenario
1,073,179 36.5% 484,476 36.0% 12,145 39.4%
C
Total employment contribution under different
scenarios by people with access needs
Case Study: Tourism Development and
Regional Income Inequality in China

Real GDP per capita distribution in China

Tourism Development and Regional
Economic Growth
• Tourism is closely related to a number of other
sectors and can thus generate positive
externalities.
• The ‘structural bonus hypotheses’ suggest that
the resource shift or structural change from
traditional sectors to new dynamic sectors can be an
extra source of aggregate productivity growth.
• Tourism development can promote the
productivities of other industries through industrial
substitution and integration, which lead to industrial
structural change (Proenca & Soukiazis, 2008).
Tourism Development and Regional
Economic Growth
• Tourism tends to distribute development away from the
industrial centres and towards undeveloped regions
(Williams and Shaw, 1991).
• Tourism development requires moderate investment
and has quick and immediate impact on regional
economic growth especially in less developed regions
(Seckelmann, 2002).
• Less developed or rural regions have more intrinsic
motivation to adjust the industrial structure:
• Wider productivity disparities between industries
• Relatively low industrial switching cost
Gini Coefficients
Of GDP per capita, Total Tourism Receipts and Number of Hotel Rooms in China
• The Gini coefficient is the most commonly used measure of inequality
Spatial Spillover Effects of Tourism Income
Sustainable Development
Sustainable Development
 References
• Book Chapters
Li, G. (2008). The Nature of Leisure Travel Demand, forthcoming in A. Papatheodorou et al, (eds.)
Aviation and Tourism: Implications for Leisure Travel, Ashgate (available on SurreyLearn).
Song, H., S.F. Witt and G. Li (2009). The Advanced Econometrics of Tourism Demand. London:
Routledge, Chapters 1-3.
Holden, A (2005). Tourism Studies and the Social Sciences, Abingdon: Routledge, Chapter 4.
Sinclair, M.T. & M. Stabler (1997). The Economics of Tourism, Routledge: London, Chapters 2&3.
Dwyer, L., Forsyth, P., & Dwyer, W. (2010). Tourism Economics and Policy. Bristol: Channel View
Publications, Chapters 2&6.
Trible, J (2005). The Economics of Leisure and Tourism, 2nd edition, Butterworth-Heinemann:
Oxford, Chapter 4.
• Journal Articles
Song, H., L. Dwyer, G. Li and Z. Cao (2012). Tourism Economics Research: A Review and
Assessment. Annals of Tourism Research, 39(3): 1653-1682.
Song, H. and G. Li (2008). Tourism Demand Modelling and Forecasting—A Review of Recent
Research, Tourism Management, 29: 203-220.
Song, H., S. F. Witt and G. Li (2003). Modelling and Forecasting the Demand for Thai Tourism.
Tourism Economics 9(4), 381-405.
Dwyer, L.P. Forsyth and R. Spurr (2004). Evaluating Tourism's Economic Effects: New and Old
Approaches, Tourism Management, 25(3), 307-317.