Us<strong>in</strong>g the SUR Model <strong>of</strong> Tourism Dem<strong>and</strong> for Neighbour<strong>in</strong>g Regions <strong>in</strong> Sweden <strong>and</strong> Norway 101conditions <strong>and</strong>/or <strong>in</strong>ternational events. For example, September 11 <strong>and</strong> the first Gulf Warhad a detrimental effect on tourism dem<strong>and</strong> <strong>in</strong> both Sweden <strong>and</strong> Norway.A common model used <strong>in</strong> tourism dem<strong>and</strong> studies is a s<strong>in</strong>gle equation with dem<strong>and</strong>expla<strong>in</strong>ed by the tourist’s <strong>in</strong>come <strong>in</strong> their country <strong>of</strong> orig<strong>in</strong>, the cost <strong>of</strong> tourism <strong>in</strong> theirchosen <strong>and</strong> alternative dest<strong>in</strong>ations, <strong>and</strong> a substitute price (Witt <strong>and</strong> Mart<strong>in</strong>, 1987). To startwith, the dem<strong>and</strong> for tourism can be expressed <strong>in</strong> a variety <strong>of</strong> ways. <strong>The</strong> most appropriatevariable to represent dem<strong>and</strong> expla<strong>in</strong>ed by economic factors is consumer expenditure orreceipts (Grouch, 1992). Other measures <strong>of</strong> dem<strong>and</strong> are the nights spent by the tourist ortheir length <strong>of</strong> stay. However, due to the lack <strong>of</strong> data on monthly GDP, personal <strong>in</strong>come(GDP/Population) is not <strong>in</strong>cluded <strong>in</strong> this analysis.<strong>The</strong> tourism price <strong>in</strong>dex (the price <strong>of</strong> the holiday) is also an important determ<strong>in</strong>ant <strong>of</strong> thedecision a potential tourist makes. We can divide this <strong>in</strong>to two components: (i) the cost <strong>of</strong>liv<strong>in</strong>g for the tourist at the dest<strong>in</strong>ation, <strong>and</strong> (ii) the cost <strong>of</strong> travel or transport to thedest<strong>in</strong>ation. I divide the cost <strong>of</strong> liv<strong>in</strong>g <strong>in</strong>to two components: (i) the CPI <strong>in</strong> relative price formassum<strong>in</strong>g that tourists have the option <strong>of</strong> spend<strong>in</strong>g their vacation <strong>in</strong> either SW:6 or NWT,<strong>and</strong> (ii) tourist consumer expenditure, real consumer expenditure, real <strong>in</strong>come, <strong>and</strong> percapita <strong>in</strong>come (Salman, 2003). In this chapter, CPI represents the cost <strong>of</strong> liv<strong>in</strong>g. However, wemeasure transport costs by the weighted mean prices accord<strong>in</strong>g to the transport mode usedby tourists to reach the dest<strong>in</strong>ation. Changes <strong>in</strong> travel costs, particularly airfares, can have amajor impact on tourism dem<strong>and</strong>. Unfortunately, data on economy class airfares betweenStockholm <strong>and</strong> the capital cities <strong>of</strong> the countries <strong>of</strong> orig<strong>in</strong> were not consistently available, soI could not use these <strong>in</strong> construction <strong>of</strong> the variables. Moreover, one should also take <strong>in</strong>toaccount the small proportion <strong>of</strong> tourists who arrive <strong>in</strong> Sweden us<strong>in</strong>g charter flights dest<strong>in</strong>edfor regional airports closer to the ma<strong>in</strong> tourist resorts, as the airfares for these may differconsiderably from those to the capital city’s airport. <strong>The</strong>refore, <strong>in</strong> the absence <strong>of</strong> a suitableproxy, I exclude travel costs from our dem<strong>and</strong> system (Lathiras <strong>and</strong> Siriopoulos, 1998).In previous Sc<strong>and</strong><strong>in</strong>avian tourism dem<strong>and</strong> studies, the cost <strong>of</strong> liv<strong>in</strong>g component wasdef<strong>in</strong>ed <strong>in</strong> relative price form, assum<strong>in</strong>g that the tourists have the option <strong>of</strong> spend<strong>in</strong>g theirvacation <strong>in</strong> Sweden or at home. <strong>The</strong> probability <strong>of</strong> travel to the dest<strong>in</strong>ation decl<strong>in</strong>es if thedest<strong>in</strong>ation price level <strong>in</strong>creased faster than that <strong>of</strong> the orig<strong>in</strong> price due to a substitutioneffect, <strong>and</strong> also if the if the reserves occurred <strong>and</strong> hence the tourist’s real <strong>in</strong>come decreasedto the substitution effect .In this study, the cost <strong>of</strong> liv<strong>in</strong>g (relative price) component is def<strong>in</strong>ed as the Norwegian pricerelative to the price <strong>of</strong> a holiday <strong>in</strong> Sweden. <strong>The</strong> underly<strong>in</strong>g assumption is that for thetourists, SW: -6 <strong>in</strong> Sweden is a substitute long-haul holiday dest<strong>in</strong>ation for NWT <strong>in</strong> Norway.In recent years, SW:6 <strong>in</strong> Sweden <strong>and</strong> NWT <strong>in</strong> Norway have been compet<strong>in</strong>g with each otherto attractive more tourists. <strong>The</strong> tourists from these five countries have the option <strong>of</strong>spend<strong>in</strong>g vacations on SW:6 <strong>in</strong> Sweden or NWT <strong>in</strong> Norway, both hav<strong>in</strong>g similar mounta<strong>in</strong>s<strong>and</strong> ski<strong>in</strong>g facilities <strong>in</strong> w<strong>in</strong>ter <strong>and</strong> similar climate. Furthermore, for visitors from these fivecountries mentioned above, the travel distances to SW:- 6 <strong>in</strong> Sweden <strong>and</strong> NWT <strong>in</strong> Norwayare almost the same. <strong>The</strong>refore, for potential visitors, SW:6 is consider a substitute long-haulholiday dest<strong>in</strong>ation for the NWT <strong>and</strong> the cost <strong>of</strong> liv<strong>in</strong>g variable for the tourism dem<strong>and</strong>model is def<strong>in</strong>ed as the cost <strong>of</strong> liv<strong>in</strong>g <strong>in</strong> SW:6 relative to that for NWT <strong>in</strong> Norway .Follow<strong>in</strong>g previous research, we can specify the price <strong>of</strong> tourism at the dest<strong>in</strong>ation <strong>in</strong> avariety <strong>of</strong> ways. For <strong>in</strong>stance, we can represent prices <strong>in</strong> either absolute or relative terms. Inthis chapter, we employ the relative price as an opportunity cost. We def<strong>in</strong>e this as the ratio<strong>of</strong> the CPI <strong>of</strong> the host country (CPI SW ) to the country <strong>of</strong> orig<strong>in</strong> adjusted by the relative
102Advances <strong>in</strong> Econometrics - <strong>The</strong>ory <strong>and</strong> Applicationsexchange rate (R it ) to obta<strong>in</strong> a proxy for the real cost <strong>of</strong> liv<strong>in</strong>g (Salman, 2004). <strong>The</strong>refore, thereal cost <strong>of</strong> tourism <strong>in</strong> Sweden <strong>and</strong> Norway are the relative CPIs given by:CPI itEX ijtRp (1)jtCPI jtwhere i is the host country (Sweden or Norway), j is the visit<strong>in</strong>g (or foreign) country, <strong>and</strong> t istime. Rp it is the relative CPI for country i <strong>in</strong> time t, CPI it is the CPI for Sweden or Norway,CPI jt is the CPI for the foreign country, <strong>and</strong> EX ijt is the exchange rate between the Swedishkrona/Norwegian krone <strong>and</strong> the foreign currency.In addition to the price variable, the exchange rate is a relevant factor <strong>in</strong> determ<strong>in</strong><strong>in</strong>gtourism dem<strong>and</strong>. <strong>The</strong> rationale beh<strong>in</strong>d <strong>in</strong>corporation <strong>of</strong> the exchange rate as a separateexplanatory variable is that tourists may be more aware <strong>of</strong> the relative exchange rate thanthe specific cost <strong>of</strong> tourism at the dest<strong>in</strong>ation. A question that arises is whether the exchangerate should be <strong>in</strong>cluded <strong>in</strong> our model system as an explanatory variable together with theprice variable. In an attempt to f<strong>in</strong>d a variable to represent a tourist’s cost <strong>of</strong> liv<strong>in</strong>g, Salman,Shukur, <strong>and</strong> Bergmann-W<strong>in</strong>berg (2007) concluded that the CPI (either alone or with theexchange rate) is a reasonable proxy <strong>of</strong> the cost <strong>of</strong> tourism. And also the exchange rate <strong>and</strong>price are used <strong>in</strong> this study as proxy variables for the structural transformation <strong>in</strong> these twosmall open economies <strong>and</strong> the expansion <strong>in</strong> <strong>in</strong>ternational competitions faced by them. Wedef<strong>in</strong>e the exchange rate variable as the foreign exchange rate <strong>of</strong> the Swedish Krona orNorwegian Krona to the currency <strong>of</strong> the orig<strong>in</strong> country. This variable represents therelationship between tourism dem<strong>and</strong> <strong>and</strong> the <strong>in</strong>ternational money market <strong>and</strong><strong>in</strong>ternational economic events (<strong>in</strong>clud<strong>in</strong>g recessions <strong>and</strong> f<strong>in</strong>ancial crises) as well.As microeconomic theory suggests, the price <strong>of</strong> other goods <strong>in</strong>fluences the dem<strong>and</strong> for aparticular good. In the case <strong>of</strong> tourism, the identification <strong>and</strong> separation <strong>of</strong> substituteproducts is very difficult to achieve on an a priori basis. In our case, tourists consider NWTregion (<strong>in</strong> the North <strong>of</strong> Norway) an alternative dest<strong>in</strong>ation to the SW:6 region (<strong>in</strong> the north<strong>of</strong> Sweden). <strong>The</strong>se dest<strong>in</strong>ations are among the most popular dest<strong>in</strong>ations <strong>in</strong> Sc<strong>and</strong><strong>in</strong>avia, atleast <strong>in</strong> terms <strong>of</strong> arrivals, for tourists from the orig<strong>in</strong> countries under:Relative price <strong>of</strong> tourism for DenmarkRelative price <strong>of</strong> tourism for the UKRelative price <strong>of</strong> tourism for Switzerl<strong>and</strong>CPISweK/ EXSEK/DKK (2)CPI / EXNorNOK/DKKCPISwe/ EXSEK/GBP (3)CPI / EXNorNOK/GBPCPISwe/ EXSEK/CHF (4)CPI / EXNorNOK/CHF
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