Economic Analysis in Tourism Industry

1. Economic Analysis in Tourism Industry Dr. Fred KU Department of Decision Sciences & Managerial Economics CUHK Business School June 2012

2. The macro side: CONTRIBUTIONS OF TOURISM TO THE ECONOMY

3. 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.

4. 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).

5. 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.

6. TOURISM IN HONG KONG Tourism receipts grow faster than GDP Source: Hong Kong tourism board and the Hong Kong SAR Government's Census

7. TOURISM IN HONG KONG LRAS Price Level SRAS AD Real GDP

8. 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

9. 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

10. 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。

11. The micro side: Demand in tourism

12. 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.

13. Economic determinants • Economic Determinants of Demand: • Price • Income • How to quantify the impacts of price and income on the demand for tourism?

14. 0 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.

15. Percentage change in Qd Price elasticity of demand = Percentage change in P 0 Price Elasticity of Demand • Loosely speaking, it measures the price-sensitivity of buyers’ demand.

16. PRICE ELASTICITY OF DEMAND Source: Mankiw 2012

17. 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?

18. 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’.

19. SOME PRICE ELASTICITY IN TOURISM - HK More elastic Less elastic Source: Song, Kim and Yang 2010

20. Percent change in Qd Income elasticity of demand = Percent change in income 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.

21. Some Estimated Income Elasticities Source: Mankiw 2012

22. 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.

23. INCOME ELASTICITY IN TOURISM – HK Less elastic Source: Song, Kim and Yang 2010

24. 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

25. The micro side: EXTERNALITIES IN TOURISM

26. 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

27. 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

28. 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!

29. 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

30. The micro side: TOURISM TAX

31. 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.

32. 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.

33. 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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