How Financial Factors Affecting Tourism Demand?

105 Pages Posted: 14 Sep 2022

Date Written: August 30, 2022

Abstract

Theoretically, a tourism demand model that focuses only on demand-side factors has prevailed in literature as the appropriate modelling framework to estimate international tourism demand (Crouch, 1994; Lim, 1997; Sinclair, 1998). Thus, we adopted neoclassical demand theory and focused on tourism demand-side factors, and after including the most important factors such as income and the relative price we introduced financial factors, such as financial risk, development, and wealth, that have a significant influence on inbound tourism flow. The neoclassical demand theory does not focus on the supply side of tourism flow, and neoclassical trade theories do not focus on the demand side of tourism. Lancaster’s characteristics theory, in which consumers derive utility from the characteristics of the goods and services as opposed to from the goods themselves, captures several important nuances that the neoclassical demand model is unable to do, but is also limited as it does not give appropriate attention to the tourism supply. In this study, we investigate how financial factors such as financial risk, financial wealth and financial development impact tourism. Even though the financial risk does not consist of a specific measure of tourism earnings for countries, the importance of tourism earnings and tourism development can still be traced through the financial risk premium components. Since tourism constitutes a trade in services, earnings from tourism exports are incorporated in the current account balance, which is an essential component for measuring the market value of the economy from financial theory. To construct a financial risk premium, among many other variables we have included the market value of the economy from financial theory (MVECON) rather than GDP, the market value of a country’s foreign debt using Black-Scholes (1973), a risk-adjusted rate of return on country’s debt, export, import and a risk-free rate.

Keywords: Financial risk premium, risk rating, financial development, Market value of the economy, Africa, Relative price, Tourism , Sovereign risk

JEL Classification: E64, O23, O24, G24, G32, G28, Z32, Z38

Suggested Citation

Khondoker, Md Rubel, How Financial Factors Affecting Tourism Demand? (August 30, 2022). Available at SSRN: https://ssrn.com/abstract=4204172 or http://dx.doi.org/10.2139/ssrn.4204172

Md Rubel Khondoker (Contact Author)

Birmingham City University ( email )

4 Cardigan Street, Curzon
Birmingham, B4 7BD
United Kingdom

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