Travel Reference
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be explained by the fact that tourists are not aware of inflation rates or price
levels in distant destinations and only take the exchange rate into consider-
ation. However, in the long term a tourist destination country will lose its
price competitiveness if the country's exchange rate does not reflect the
increase in the prices of products that tourists are buying. When these prices
rise but the export prices do not follow that increase, the exchange rate will
not compensate for the rise in tourism prices. From the tourist's perspective,
an overvalued currency will visibly increase their living costs in the destina-
tion and thus reduce visitation and spending levels.
Yet it would be wrong to conclude that tourist-generating countries are
pure exporters and destination countries are pure importers of inflation.
That conclusion would not take into account that the physical flows of inter-
national tourism in the direction of tourist-generating to destination coun-
tries do not completely equal the financial flows resulting from such travel.
Then we must take account of the fact that a portion of the money stays in
developed tourist-generating countries or leaks to them later and that a large
part of the tourist economy is becoming international, owned by foreign and
multinational corporations. Tourism's inflationary/deflationary potential
therefore depends, along with many other factors, on the quantity of money
that goes into or out of a country as a result of international tourism.
Developed countries mostly have stable economies and low inflation
while developing countries usually have stubbornly high inflation. Therefore,
inflation falls further in developed countries with a low inflation rate in
the case of prevailing tourist outflows. The developing countries have high
inflation levels even without tourism and tourist spending only exacerbates
this. A phenomenon called the 'export of inflation' may occur which fur-
ther increases the differences in inflation between highly developed and
developing countries. However, one may argue that inflation triggered by
tourism demand is conducive to a faster economic growth rate since the
excess demand and favourable market conditions might stimulate invest-
ment and expansion.
If tourism is a country's major economic activity and represents a large
share of its GDP, inflationary tensions in tourism may spill over into the
economy and contribute to a rise in general inflation. Yet several authors
argue that in many cases inflationary tourism effects are limited in terms of
time, space and the kind of products or markets. Tourism demand may cause
higher prices only during the high seasons and the pressure on prices might
be limited to the most visited places, such as particular holiday resorts, cities
or even streets. Moreover, tourists are interested in a narrow range of goods
and services such as food, accommodation, entertainment, fashion or beauty
products and, thus, the impact is limited. Although such higher prices do
affect residents, they may change their buying behaviour and move to other
points of sale and thus avoid the negative effect of the higher prices for food
and similar products.
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