Tourism and Economic Development Issues - Tourism and Development: Concepts and Issues - page 109

purchasing power and their demand which causes a secondary inflation
effect (curve D 2 and corresponding equilibrium points A 1, A 2 or A 3). A new
balance is established at a higher price level and a larger quantity of products.
The extent to which the residents' purchasing power will increase and how
much of it will be 'eaten up' by the higher prices depends on the slope of the
supply curve, and thus on the elasticity of supply.
Higher inflation also affects both domestic and international tourism
flows. As the residents must spend more on necessities due to the higher costs
of visit, less money is then available to spend elsewhere, including travel.
Therefore, the residents may travel less within their own country and domes-
tic tourism will decline. At the same time, the country will become less com-
petitive than similar destinations due to the higher prices. The number of
international tourists will then fall, as will revenues. Yet it should be noted
that in a country with its own currency, inflation will force an adjustment of
exchange rates which will also have an additional economic and psychological
effect on tourism demand.
The effect of relative prices and exchange rates has been quantified by
many researchers in tourism demand models (Martin & Witt, 1988; Webber,
2001; Witt & Witt, 1994). Beside the factors of income and trend, the major-
ity of these models quantify the effect of relative prices, costs of living at the
destination, transport costs and exchange rates on tourism demand. The
theoretical assumption is that the price elasticity of tourism demand is nega-
tive and cross-price elasticity with the competing destinations is positive.
Higher prices in one destination country will redirect, all other things being
equal, tourist flows in the direction of a competing destination country. In
the case of lower cross-price elasticities, the change will be smaller, ceteris
paribus . Yet, it should be noted that the price elasticity of tourism demand
varies across destinations and origin markets. For example, one study for UK
outgoing tourism showed that British tourists were very sensitive to price
changes in Greece (coefficient

− 5.60) and much less to price changes in

Austria (coefficient 0.23) (Martin & Witt, 1988). The same variety has been

confirmed for exchange rate elasticity values, that ranged from insignificant
to as high as

−

12.01 for Australian tourism flows to Malaysia (Webber, 2001).
Indeed, the given values come from different models and different time peri-
ods and should thus be only regarded as illustrative to show the complexity
of price and exchange rate impacts on tourism demand. In general, it can be
argued that prices and the exchange rate influence tourism demand.
However, although a change in the exchange rate influences the final costs
of a commodity for a tourist, tourists do not necessarily connect the two.
This means that tourists take account of relative prices and exchange rates sepa-
rately in their decision-making (Stabler et al. , 2010). Exchange rates have a psy-
chological effect on tourism demand as a more favourable exchange rate
would attract tourism demand irrespective of what the real inflation rate in
the destination has been. In the short term this irrational behaviour might

−