1

The Balance of Tourism Payments

• 1. Balance of payments terminology

• 2. Comparative advantage in tourism

• 3. Tourism payments’ statistics

• 4. Travel receipts and payments

• 5. Tourism receipts and payments

2

1. Balance of payments terminology

• We can largely define tourism, in terms of money flow as the spending in the destination, of money earned in a generating area; internationally this means money earned in country A being used as payment for services rendered (supplied) in country B

3

1. Balance of payments terminologyTable: External accounts of a national economy

Receipts or income - less – Payments or expenditure Result Current accountExports of goods imports of goods balance of trade

-add- (visible balance)Invisible receipts invisible payments invisible balance

balance on current account -add-

Capital accountPrivate and public private and publicNet capital movementCapital inflow capital outflow

total balance of payments surplus (or deficits)

4

1. Balance of payments terminology

• Splitting the current account into visibles and invisibles is a traditional feature of national accounting to identify the goods and services provided, but this may be an increasingly fuzzy (unclear) distinction where services are frequently a corollary (argument) of goods supplied internationally.

• Capital movements are largely concerned with international investment and with international government borrowing

5

1. Balance of payments terminology

• Many countries maintain data to represent foreign accounts for specific classes of goods or services.

• Hence at the very simplest level there may be a “balance on tourism”-normally part of the invisible balance- represented by - receipts from overseas tourists visiting a country less- payments abroad by that country’s own outbound tourists

6

1. Balance of payments terminology

• Unfortunately, the net tourist expenditure result is a relatively meaningless figure, as it merely measures final payments by tourists for services and some goods in destination countries.

• To find out what tourism is really worth to a country, or really costs, we should include all international transactions, which in some way are necessary because of tourism.

• These include not only final tourism payments and travel payments, but also international payments for goods and services needed for investment in, and operation of, tourism industries. The result can be termed the travel and tourism external account

7

2. Comparative advantage in tourism

• The principle of comparative advantage, > as a basis for international trade (Ricardo,1817)> holds that trade is beneficial between any pair of countries where there is a comparative advantage in efficient production of any good by one country over another regardless of absolute advantage, > has rarely been applied theoretically to tourism services.

8

2. Comparative advantage in tourism

• possible to identify advantages for international tourism> There may be specific base resources in certain countries which are a fundamental tourist attraction, as already identified > Some countries offer all-around advantage in the production of tourism services, such as an attractive climate plus plenty of beach space and low labour costs > A destination country’s geographic location relative to mass tourism generators may be such an important “pull” factor that it pays that destination country to concentrate transferable resources into tourism, even from industries which are more efficient than they are in the generating countries

9

2. Comparative advantage in tourism

• In addition to comparative advantages, > differing tastes, > the constant desire of some types of tourist for new and foreign experiences,> and changing international constraint conditions (such as variable exchange rates) combine to provide an economic rationale for international travel and tourism

10

2. Comparative advantage in tourism

• Tourism analysis has in fact caused a reappraisal of international trade theory with respect to services, and in particular those which are not competitive with domestic services.

• Tourists sometimes visit another country because its product is entirely different from anything available domestically, rather than merely because of a price advantage. They therefore make use of specific tourism resources or factor endowments (privileges) possessed by the destination

11

3. Tourism payments’ statistics

• International tourism payments are often an important component of invisible balances

• In most cases all that is available, and used, is the simple balance of payments data on tourists receipts and payments -and frequently such data is unreliable.

• This makes international comparisons very suspect, and the best that can be hoped for is internal consistency and reliability for an individual country.

12

3. Tourism payments’ statistics

• There are three basic sources of tourism payments statistics > Direct spending totals provided by tourists themselves > Indirect data gained from multiplying tourist numbers by average length of stay and by average daily spending> Exchange figures from banks and other financial institutions

13

3. Tourism payments’ statistics

• The first two rely on surveys (either census or more likely by samples) of tourists in site or post-visit, and are therefore subject to the normal problems facing survey research methods.

> gate methods.

> Bank data is really only useful in countries with non-convertible currencies and a prohibition on import and export of their currencies.

14

3. Tourism payments’ statistics

• The real value of international tourist payments is also altered in two specific circumstances.

• Firstly, when VFR tourists travel, they are unlikely to spend much on accommodation, food and other services in their destination, these being items in the host family’s (increased) domestic budget, and therefore tourism services in major VFR destinations are likely to be undervalued.

15

3. Tourism payments’ statistics

• Secondly, the case of the real value of expenditure by tourists on inclusive tours purchased in the generating country.

• Although payments actually made directly by tour operators to destination suppliers will be evaluated, much may be channelled through multinational enterprises in third countries, or there may be contra payments. Again, tourism is often undervalued

16

4. Travel receipts and payments

• For clarity, we can now distinguish between travel payments and tourism payments in external accounts.

• travel payments: money paid for international carriage to and from destinations - primarily airfares.

• tourism payments: money spent on goods and services in destination countries: “ground” services (even if this includes domestic air transport).

17

4. Travel receipts and payments

• Travel is clearly a service, and therefore travel payments are part of invisibles.

• One of the problems, however, is that tourism destinations may receive nothing from travel.

• A tourist resident in country A and visiting country B may travel on an airline based in country A, or on one based in country B, or in many cases on one based in a third country C. On long-haul(distance) routes the tourist may indeed use more than one airline, based in more than one country. The reasons lie in bilateral air agreements, competition, and complexity of tourist itineraries

18

4. Travel receipts and payments

• Travel account policies therefore often seek to maximize foreign exchange earnings from international-visitor flows.

• A destination country will carefully examine freedoms of the air which it grants and attempt to maximize inbound use of its own airline(s)

• Generators will encourage their own outbound tourists to “fly the flag ”; other airline-operating countries in favourable intermediate geographical positions may try to get travel revenues from travellers who are not “their” tourists

19

4. Travel receipts and payments

• The end result of the situation above is that there is frequently no relationship between

> the volume of tourist flows from one country to another and

> the value, to either country, of earnings on the travel accounts between that pair of countries

20

5. Tourism receipts and payments

• On arrival in destinations, tourists purchase goods and services (“ground” content) with money presumably brought with them and exchanged. The broad categories of product bought are:

> Accommodation and food

> Domestic transport

> Tours/excursions and “entrance to attractions”

> Souvenirs and daily necessities

21

5. Tourism receipts and payments

• In many cases, multinational enterprises and organisations based in tourist generators supply or take over supply of these products.

• We therefore see a flow of foreign exchange earnings on tourism products sold in destinations to countries which themselves are not destinations, but which provide resources, particularly capital, to tourism production elsewhere

• Values of tourism payments and receipts are also influenced by exchange rates

22

5. Tourism receipts and paymentsExchange rate variations and tourism balances

Date Event Current Japanese U.S. exchange rate payment receiptsJan. Japanese tour ¥ 130 = US $1 ¥ 65.000 US $ 500 operator contracts (spot = forward) US hotel at forward rate

July Japanese tourist ¥ 120 = US $1 ¥ 90.000 US $ 750 takes IT and YEN(¥) 90.000 spending money to USA

Dec. Both countries ¥ 100 = US $1 total their tourism accounts ¥ 155.000 US $1.250 and convert to US $ …. US $1.550 US $1.250