Analysis of tourist expenditure using dynamic aIDS model

Econometric analysis of tourism demand has been overwhelmingly dominated by the single-equation approach. This approach, however, suffers from various theoretical and technical problems which often lead to results which are less than accurate and imperceptibly defensible. This study aims to overcome some of the basic limitations of single equation models by employing a long-run linear almost ideal demand system (AIDS) model and a short-run error correction linear AIDS model to examine the tourist expenditure patterns in Hong Kong. In particular, four expenditure categories including shopping, hotel accommodation, meals outside the hotels, and others are analysed. The homogeneity and symmetry restrictions are satisfied in both long-run and short-run models. The calculated expenditure elasticities indicate that shopping has the highest elasticity in both long-run and short-run models. It is found that the short-run expenditure elasticities are generally lower than their long-run counterparts. As for price elasticities, almost all the own-price elasticities are negative with only one exception which is consistent with the demand theory. Furthermore, the calculated positive cross-price elasticities imply that there are substitution relationships between shopping, hotel accommodation and meals outside the hotels. These findings have important implications for the pricing strategies to enhance Hong Kong's competitiveness as an international tourism destination.