Before considering the essay question, it is critical to define what price elasticity is. Price elasticity is a “simple term that economists use to describe the responsiveness of demand or supply to a change in some variable that affects them.”There are at least five variables to which tourism demand can be affected by: Income, Price, Exchange Rate, Transportation Costs and Population. The demand of foreign holidays is elastic to price fluctuation because of its highly competitive nature. The changes in price due to cost increases and higher taxation have a dramatic effect on the revenue gain from overseas visitors. When looking at taxation imposed by governments, research has proven that, main concerns with respect to incidence of the tax are that of price elasticity of demand and price elasticity of supply for hotel rooms. Firstly, if demand is elastic then consumers (tourists, guests) will react to a price increase as a result of a tax by seeking other places to stay in order to avoid payment extra tax as well as the original room rate. Therefore, in some competitive situations, hotels will find it impossible to pass on additional taxes to customers and therefore the hotelier pays the extra tax. If the demand is inelastic, then the consumers will not react to price increases by substantially changing their demand and so the hotelier will pass on the cost of the tax and the tourist will bear the burden.
In some cases attractiveness is more important for the consumer, therefore tourism demand is inelastic to price fluctuation, an example of this we have the Galapagos Islands.
Currently the U.K economy runs a GBP 15 billion tourism balance of payment deficit, from a surplus of over a decade ago. Tourism is one of the largest industries in the U.K, worth more than GBP 75.9 billion and accounting for approximately 5% of GDP. At 17.5 % Britain has one of the highest rates of VAT (value add tax) on accommodation in the European Union. Tourism supports 1.8 million jobs, 6.1% of the UK’s total workforce, and an additional job is created for every GBP 40.000 spent by visitors. The UK ranks seventh in the international tourism earning league: each year around 23.9 million overseas visitors go to Britain, spending GBP 11.7 billion.
Travel expenditure by overseas residents accounts for 16% of total exports of trade services, while expenditure in U.K residents travelling abroad accounts for around 40% of total imports. The travel deficit has grown significantly since the late 1980’s. The GBP 13.9 billion deficit in 2002 was the highest on the record, up from GBP 13.3 billion in 2001. Exports of travel services to overseas visitors to the U.K increased by 6.8% in 2002 to GBP 14 billion, while imports by the U.K residents travelling abroad grew by 5.6% to GBP 27.6 billion.
In order to assess the impact of foreign exchange fluctuations in the firms that supply foreign holidays we need to review the statistics related to trade in travel services and the behaviour of the sterling pound vs. the U.S dollars over a period of 5 years (1995-2000)
Graph:
From the previous graphs we can conclude that there is a direct correlation between the appreciation of the Sterling pound and the widening of the trade deficit in travel services. Therefore firms that supply services to the tourism industry have been impacted by the appreciation of the UK currency. British population would rather spend their holidays abroad and foreigners have looked for alternative holiday locations.
The British tourism development committee, recognises this problem and is producing a framework to help provide a basis for future dialogue with government policies affecting inbound tourism.
