A system of equations model of UK tourism demand in neighbouring countries

Abstract

This paper uses a system of equations model to examine tourism demand during periods of destination country transition and integration into the wider international community. The Almost Ideal Demand System model is applied to the UK demand for tourism in the neighbouring destinations, France, Spain and Portugal. Spain and Portugal are interesting cases as, during the period under consideration, they experienced a process of transition from economies with characteristics typical of developing countries, only entering the World Bank's industrialized countries classification in the 1980s. The paper examines the evolution of tourism demand during these countries' transition from ‘developing’ to ‘developed’ status. Consideration of France as a neighbouring destination also allows the behaviour of tourism demand to be compared between relatively rich and poor countries. The results show the extent to which the cross-country behaviour of demand becomes more or less similar over time with respect to changes in expenditure and effective prices. The expenditure elasticities are greater for Spain than France during the initial period, indicating that tourism can assist countries to ‘catch-up’ with their richer neighbours. However, this outcome is not always the case and may not persist, as Portugal had a low initial expenditure elasticity and Spain's relatively high expenditure elasticity decreased over time. Destinations' sensitivity to changes in their own and competitors' prices can also change over time, as indicated by the increases in the own- and cross-price elasticities for Spain, compared with the decreases for France and Portugal. The cross-price elasticity estimates indicate substitutability between the immediate neighbours, Portugal and Spain, and France and Spain.