Econometric analysis of tourist expenditures

Abstract

Tourism demand analysis has received considerable attention from both academics and practitioners. Accurate tourism demand modelling and forecasting can help tourism businesses to establish effective marketing and investment plans and the government to formulate appropriate policies. Different methodologies have been applied to tourism demand analysis, including advanced econometric techniques. Amongst them, the almost ideal demand system (AIDS) model, a system-of-equations approach, possesses distinct advantages over single-equation models, especially in analysing tourist expenditure allocation. This study presents the first attempt to apply the time-varying parameter (TVP) version of the error-correction AIDS model to the analysis of tourist consumption of different tourism goods and services. The AIDS model includes several equations (each of which refers to one category of tourism goods and services) that are simultaneously estimated. This allows the investigation of the interaction amongst different kinds of demand. The incorporation of the TVP technique into the AIDS model gives the model superior performance compared to its constant-parameter counterpart by allowing the examination of the evolution of tourist expenditure patterns over time. An empirical study is conducted in which the constant-parameter and TVP versions of the long-run AIDS and short-run error-correction AIDS models are employed to examine and compare tourist spending behaviour in Hong Kong. The constant-parameter AIDS model addresses average tourist consumption behaviour whereas the TVP-AIDS model explores the evolution of tourist consumption behaviour over time. Tourists from eight major source markets are examined, and the demand elasticities (i.e., expenditure and price) that are associated with each of these source markets are computed and analysed. The results provide useful information to enhance Hong Kong's competitiveness as an international tourist destination.