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How Does The Exchange Rate Affect Tourism In The UK

Published: December 12, 2023

Modified: December 28, 2023

by Valeda Bowyer

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Introduction

Welcome to the United Kingdom, a country of rich history, stunning landscapes, and vibrant culture. As a popular tourist destination, the UK welcomes millions of visitors each year, contributing significantly to its economy. However, the travel industry is not immune to the fluctuations of the global economy, particularly in relation to exchange rates.

The exchange rate is the value of one currency in terms of another currency and plays a crucial role in shaping the tourism industry. It has the power to influence travel decisions, affect tourist spending patterns, and impact the overall competitiveness of a destination. Understanding the relationship between exchange rates and tourism demand is essential for both travelers and industry professionals.

In this article, we will explore the intricate relationship between exchange rates and tourism in the UK. We will delve into the economic factors that influence tourism, the significance of exchange rate fluctuations, and the effects they have on tourists’ behavior. Additionally, we will examine case studies that highlight the tangible impact of exchange rate changes on UK tourism and discuss strategies for mitigating the effects of exchange rate volatility.

Whether you are a curious traveler or a tourism industry enthusiast, this article will provide valuable insights into the fascinating world of exchange rates and their role in shaping tourism in the UK. So let’s embark on this journey together and explore the interplay between currency fluctuations and the travel industry.

Economic Factors Influencing Tourism in the UK

Before we dive into the specifics of exchange rates, it is important to understand the broader economic factors that influence tourism in the UK. The travel industry is highly sensitive to macroeconomic conditions, as travelers adjust their plans based on levels of disposable income, employment rates, and overall economic stability.

Disposable income plays a significant role in determining the extent to which individuals can afford to travel. During periods of economic prosperity, with rising incomes and low unemployment rates, people may have more discretionary funds available for vacations and travel experiences. Conversely, during economic downturns, when income levels stagnate or decline and unemployment rates rise, people tend to cut back on leisure travel and prioritize essential expenses.

Another important factor influencing tourism in the UK is the state of the global economy. The strength or weakness of major international economies can impact travel decisions and patterns. For example, if the economies of key source markets, such as the United States and European countries, are buoyant, it is likely to result in an increase in tourist arrivals to the UK. On the contrary, if these economies experience a downturn, it could lead to a decrease in visitor numbers.

Furthermore, geopolitical factors, such as wars, political instability, and natural disasters, can profoundly affect tourism. These events can lead to travel advisories, border restrictions, or a perception of unsafe travel, which can deter tourists from visiting the UK. Conversely, positive geopolitical developments and favorable international relations can boost tourism by fostering a sense of security and promoting the country as a desirable destination.

Government policies and regulations also impact tourism in the UK. Initiatives such as visa regulations, taxation policies, and marketing campaigns can shape travel trends. For instance, the implementation of visa relaxation programs or streamlined visa processes can attract more visitors by reducing barriers to entry. On the other hand, stricter visa requirements can create more hurdles for potential visitors.

Overall, a multitude of economic factors collectively influence tourism in the UK. From individual disposable incomes to global economic trends and government policies, these factors shape the demand for travel and play a crucial role in the fluctuation of tourist arrivals. Understanding these economic variables is fundamental in comprehending how exchange rates impact tourism in the UK, which we will explore in the subsequent sections.

The Exchange Rate and Its Importance

The exchange rate is the value at which one currency can be exchanged for another. It is a fundamental component of international trade and plays a crucial role in shaping the tourism industry. The exchange rate determines the cost of travel, influences tourist spending power, and affects the competitiveness of a destination in the global market.

For tourists, the exchange rate has a direct impact on the affordability of travel. When a traveler converts their home currency into the currency of their destination, they are subject to the prevailing exchange rate. A favorable exchange rate can make travel more affordable and appealing, as the amount of foreign currency they receive in exchange for their own currency is higher.

Moreover, the exchange rate influences the purchasing power of tourists. A stronger exchange rate enables tourists to buy more goods and services in the destination country, increasing their overall spending power. Conversely, a weaker exchange rate reduces purchasing power, potentially leading to a decrease in tourist spending and a shift towards more budget-conscious travel habits.

The exchange rate also affects the competitiveness of a destination within the global tourism market. A favorable exchange rate can make a country more attractive to international visitors, as it offers them better value for their money. This can lead to an increase in tourist arrivals and boost the tourism industry’s contribution to the national economy. On the other hand, an unfavorable exchange rate may make a destination less competitive, as it becomes relatively more expensive compared to other countries.

In addition to its impact on tourists, the exchange rate has implications for businesses operating in the tourism sector. Fluctuations in exchange rates can affect the costs and revenues of tourism enterprises. For example, a stronger domestic currency can increase the cost of imported goods and services, potentially impacting the profitability of tourism-related businesses that rely on such inputs. On the other hand, a weaker domestic currency can boost export-oriented tourism sectors by making their products or services more affordable in international markets.

It is worth noting that exchange rates are not fixed and can fluctuate due to various factors, including economic indicators, interest rates, inflation rates, and market speculation. These fluctuations can occur on a daily, weekly, or long-term basis, creating both challenges and opportunities for the tourism industry.

In the next section, we will examine the relationship between exchange rates and tourism demand to gain a deeper understanding of how changes in exchange rates can influence travel behavior and tourist preferences.

The Relationship between Exchange Rates and Tourism Demand

The exchange rate plays a pivotal role in shaping tourism demand, as it directly affects the cost of travel and the affordability of visiting a particular destination. Changes in exchange rates can have both positive and negative impacts on tourism demand, influencing the decision-making process of potential travelers.

When the exchange rate of a country’s currency strengthens, meaning it appreciates against other currencies, it generally leads to an increase in the number of international tourists. A stronger currency makes traveling to that country more affordable for foreigners, as they receive more local currency in exchange for their own currency. This can stimulate tourism demand, attract more visitors, and provide a boost to the local economy.

On the other hand, when the exchange rate of a country’s currency weakens, meaning it depreciates against other currencies, it can lead to a decrease in tourism demand. A weaker currency makes traveling to that country more expensive for foreigners, as they receive less local currency in exchange for their own currency. This can deter potential visitors, especially those on a tight budget, and result in a decline in tourist arrivals.

However, it is important to note that the relationship between exchange rates and tourism demand is not solely dependent on the direction of currency fluctuations. Other factors come into play, such as income levels, travel preferences, and the overall attractiveness of a destination.

For example, even if a country’s currency weakens, making it more expensive for foreign tourists, it may still experience an increase in tourism demand if other factors outweigh the impact of the exchange rate. These factors could include unique attractions, cultural experiences, safety, infrastructure, and promotional efforts. Conversely, even if a country’s currency strengthens, it may not see a substantial increase in tourism demand if other elements are not enticing enough for potential visitors.

It is also worth noting that the relationship between exchange rates and tourism demand is not always immediate or linear. Changes in travel patterns and tourist preferences may take time to adjust to fluctuations in exchange rates. Tour operators, travel agencies, and individuals may need time to assess and respond to changes in currency values. Moreover, long-term exchange rate trends and stability can also influence tourism demand, as travelers may feel more confident and secure when there is predictability in currency values.

Understanding the relationship between exchange rates and tourism demand is crucial for travel industry professionals and policymakers. It allows them to anticipate and adapt to changes in currency values, develop effective marketing strategies, and implement relevant policies to attract and retain tourists.

In the following section, we will explore the impact of exchange rate fluctuations on tourists’ behavior and spending habits to gain further insights into how changes in currency values can influence individual travel decisions.

Impact of Exchange Rate Fluctuations on Tourists’ Behavior

Exchange rate fluctuations have a significant influence on tourists’ behavior, shaping their travel decisions, spending habits, and even destination choices. These changes in currency values can create both challenges and opportunities for travelers, impacting various aspects of their travel experience.

One key impact of exchange rate fluctuations is on the affordability of travel. When a currency strengthens, making it more valuable compared to other currencies, travelers from that country will find it cheaper to visit foreign destinations. This can lead to an increase in outbound travel, as individuals take advantage of their stronger currency to explore new places or revisit favorite destinations. Conversely, when a currency weakens, it becomes more expensive for travelers from that country to go abroad, potentially leading to a decrease in outbound travel.

The changes in currency values also affect tourists’ spending power. A stronger currency means that travelers can enjoy more purchasing power in their destination country. They are likely to have more disposable income for accommodation, dining, shopping, and other activities. On the other hand, a weaker currency reduces purchasing power, forcing travelers to be more budget-conscious and potentially limit their spending. This can impact the overall tourism revenue generated by a destination and shape the type of experiences and accommodations that tourists seek.

Exchange rate fluctuations can also influence the destination choices of travelers. When a currency strengthens, it makes traveling to countries with weaker currencies more affordable and attractive. This can lead to an increase in visitors to these destinations, as they offer more value for money. Conversely, a weaker currency can deter tourists from visiting countries with stronger currencies, as they might perceive them as expensive or not offering good value. This can result in a shift in tourist flows and impact the market share of different destinations.

Moreover, exchange rate fluctuations can influence the timing and duration of trips. When a currency weakens, travelers may choose to extend their stay in a destination they have already arrived in to maximize the value of their money. On the other hand, a stronger currency might prompt tourists to reduce the duration of their stay or postpone their travel plans to a later time when the exchange rate is more favorable. These adjustments in travel behavior can have implications for businesses in the tourism industry, such as accommodations, restaurants, and attractions.

It is important to note that the impact of exchange rate fluctuations on tourists’ behavior is not uniform for all travelers. Factors such as individual budgets, travel preferences, and personal financial circumstances play a significant role in shaping how individuals respond to changes in currency values. Some travelers may be less sensitive to exchange rate fluctuations and prioritize other factors, such as safety, cultural experiences, or specific attractions, when making their travel decisions.

Understanding the impact of exchange rate fluctuations on tourists’ behavior is crucial for tourism businesses and destinations. By analyzing these effects, industry professionals can develop strategies to attract and retain visitors, tailor marketing efforts to specific target markets, and adjust pricing and offerings to align with travelers’ preferences and budgets.

In the next section, we will delve into case studies that examine the effects of exchange rate changes on UK tourism, providing real-life examples of how currency fluctuations can influence tourist behavior and industry dynamics.

Case Studies: Effects of Exchange Rate on UK Tourism

To understand the tangible impact of exchange rate changes on UK tourism, let’s explore some case studies that exemplify how currency fluctuations can influence tourist behavior and industry dynamics.

Case Study 1: The Impact of a Weaker Pound

In the aftermath of the Brexit referendum in 2016, the British pound experienced a significant depreciation against major currencies. This led to a boost in tourism to the UK, as international visitors found it more affordable to explore the country. The weakened pound made accommodations, dining, shopping, and attractions comparatively cheaper for tourists, attracting a surge in visitor numbers. As a result, the UK witnessed a notable increase in tourism revenue, benefiting various sectors of the economy.

Case Study 2: The Effect of a Stronger Pound

In contrast, when the British pound becomes stronger, it can impact the inflow of tourists to the UK. For example, during periods when the pound strengthened against the euro, UK destinations became relatively more expensive for European travelers. This led to a decline in tourist arrivals and affected the tourism industry’s contribution to the economy. To counteract this trend, tourism authorities and businesses often adjust their marketing strategies and pricing models to entice visitors and maintain competitiveness.

Case Study 3: The Influence of Exchange Rates on Travel Behavior

Exchange rate fluctuations not only affect the choice of destination but also impact travel behavior within the UK. When the pound weakens, domestic tourism may gain popularity as residents prefer to explore their own country rather than traveling abroad. This shift in behavior can benefit local destinations, attractions, and hospitality businesses, stimulating the domestic tourism market and boosting regional economies.

These case studies highlight the profound influence that exchange rate fluctuations can have on UK tourism. A weaker currency can attract more international visitors by offering better value for their money, while a stronger currency can make the UK relatively more expensive, potentially impacting tourism demand. Additionally, exchange rates can influence both outbound and domestic travel behavior, affecting the flow of tourists and revenue distribution within the tourism industry.

By examining these real-life examples, it becomes evident that monitoring and addressing exchange rate fluctuations is crucial for tourism stakeholders in the UK. Navigating the effects of currency volatility requires a thoughtful approach, including targeted marketing campaigns, pricing adjustments, and proactive industry collaboration to maintain the country’s competitiveness in the global tourism market.

In the next section, we will explore the broader implications of exchange rate fluctuations on the tourism industry in the UK and discuss strategies to mitigate the effects of currency volatility.

Implications of Exchange Rate on Tourism Industry in the UK

The exchange rate has significant implications for the tourism industry in the UK, affecting various stakeholders and shaping the overall competitiveness and profitability of the sector. Understanding these implications is crucial for industry professionals and policymakers to effectively navigate the challenges and opportunities associated with currency fluctuations.

1. Competitiveness:

The exchange rate directly impacts the competitiveness of the UK as a tourism destination. A favorable exchange rate can make the country more affordable and attractive to international visitors, leading to an increase in tourist arrivals and boosting the tourism industry’s contribution to the local economy. Conversely, an unfavorable exchange rate can make the country relatively more expensive, potentially deterring visitors and reducing market share. Maintaining a competitive exchange rate is vital in ensuring the sustainability and growth of the tourism industry in the UK.

2. Revenue Distribution:

Exchange rate fluctuations can lead to shifts in revenue distribution within the tourism industry. A weaker currency may result in an increase in domestic tourism as residents opt to explore their own country rather than travel abroad. This can benefit local destinations, attractions, and hospitality businesses. On the other hand, a stronger currency can impact the inflow of international tourists, affecting revenue generated by businesses reliant on international visitors. Finding the right balance and diversifying revenue sources can help mitigate the effects of exchange rate volatility.

3. International Collaboration and Partnerships:

Exchange rate fluctuations necessitate increased collaboration and partnerships within the tourism industry. Tourism businesses, destination management organizations, and government entities need to work together to address the challenges posed by currency volatility. This can include joint marketing efforts, pricing adjustments, and partnerships with commercial banks and foreign exchange providers to offer competitive exchange rates and minimize the impact on tourists’ spending power.

4. Investment and Business Confidence:

Exchange rate stability is crucial for attracting foreign investment in the tourism industry. A stable currency provides a predictable environment for businesses, reducing the risk associated with currency fluctuations. On the other hand, volatile exchange rates can deter investors and hinder the development of tourism infrastructure and services. By implementing policies that promote exchange rate stability and providing support to the tourism industry during periods of currency volatility, the UK can enhance business confidence and foster a favorable investment climate.

5. Industry Adaptation and Resilience:

Exchange rate fluctuations require the tourism industry to adapt and build resilience. Businesses must continually assess their pricing strategies, monitor currency trends, and develop contingency plans to navigate potential challenges. Diversifying target markets, focusing on niche segments, and offering unique experiences can reduce reliance on specific currencies and mitigate the impact of exchange rate fluctuations on business performance.

By recognizing these implications, the tourism industry in the UK can be better prepared to respond to exchange rate fluctuations and develop strategies to mitigate their effects. It requires close collaboration between businesses, industry associations, and government entities to ensure a sustainable and resilient tourism sector that can withstand currency volatility and thrive in an ever-changing global market.

In the next section, we will explore strategies for mitigating the effects of exchange rate volatility in the tourism industry and maintaining a competitive edge in the global market.

Strategies for Mitigating the Effects of Exchange Rate Volatility

Exchange rate volatility poses challenges to the tourism industry in the UK, but there are strategies that businesses and destinations can employ to mitigate its effects and maintain a competitive edge in the global market:

1. Diversify Target Markets:

Relying too heavily on a single market can leave tourism businesses vulnerable to fluctuations in that market’s currency. Diversifying target markets can help spread the risk and reduce the impact of exchange rate volatility. This involves identifying and investing in emerging markets, collaborating with travel agents and tour operators from different regions, and tailoring marketing efforts to attract a diverse range of international visitors.

2. Implement Dynamic Pricing:

Dynamic pricing allows tourism businesses to adjust prices in response to changes in exchange rates. By closely monitoring currency fluctuations, businesses can modify their pricing strategies to maintain competitiveness and attract customers. This may involve offering discounts during periods of currency appreciation or adjusting prices for different markets to maximize revenue and keep tourists engaged.

3. Offer Value-Added Experiences:

Providing unique and value-added experiences can help tourism businesses differentiate themselves and attract visitors, regardless of exchange rate fluctuations. Focusing on quality service, personalized experiences, and showcasing the unique aspects of the destination can create an emotional connection with travelers and make them more willing to spend, regardless of the exchange rate.

4. Collaborate with Financial Institutions:

Forming partnerships with commercial banks and foreign exchange providers can enable tourism businesses to provide competitive exchange rates to visitors. By offering convenient and favorable currency exchange services, businesses can enhance customers’ purchasing power and mitigate the impact of exchange rate fluctuations on their spending habits.

5. Invest in Technology and Innovation:

Utilizing advanced technology and innovative solutions can help tourism businesses streamline operations, improve efficiency, and manage costs effectively. Adopting digital payment platforms, implementing revenue management systems, and utilizing data analytics can assist in optimizing pricing strategies, forecasting demand, and identifying new market opportunities, making businesses more resilient to currency fluctuations.

6. Focus on Domestic Tourism:

During periods of currency volatility, emphasizing domestic tourism can help mitigate the effects of exchange rate fluctuations. Collaborating with local tourism boards and associations to highlight the unique attractions and experiences that can be enjoyed within the country can encourage residents to explore their own backyard, stimulating domestic tourism and reducing the reliance on international visitors.

7. Government Support and Policy Interventions:

Policies and initiatives from the government can play a crucial role in mitigating the effects of exchange rate volatility. Providing monetary incentives, tax breaks, and financial assistance to tourism businesses during periods of currency fluctuations can help cushion the impact on their operations. Additionally, collaborating with financial institutions to offer favorable loan terms and exchange rate hedging options can further support the tourism industry.

By implementing these strategies, businesses and destinations in the UK can minimize the effects of exchange rate volatility and maintain competitiveness in the global tourism market. A combination of proactive measures, innovative approaches, and supportive policies can build resilience and ensure long-term sustainability in the face of currency fluctuations.

In the final section, we will conclude our discussion on the impact of exchange rates on tourism in the UK and summarize the key insights obtained throughout this article.

Exchange rates play a significant role in shaping the tourism industry in the United Kingdom. The value of currencies impacts travel decisions, tourist spending patterns, destination competitiveness, and revenue distribution within the sector. Understanding the relationship between exchange rates and tourism demand is crucial for industry professionals and policymakers in navigating the challenges and opportunities presented by currency fluctuations.

Economic factors, geopolitical events, and government policies all contribute to fluctuations in exchange rates. These fluctuations can have both positive and negative effects on tourism demand, depending on the direction and magnitude of the currency movements. A stronger currency can attract more international visitors by making travel more affordable, while a weaker currency can impact tourism demand due to decreased purchasing power for foreign tourists.

Exchange rate fluctuations also influence tourists’ behavior, including their destination choices, spending habits, and travel duration. These changes in behavior can have implications for various tourism-related businesses and revenue distribution within the industry. Furthermore, exchange rate volatility requires businesses and destinations to adapt and develop strategies for mitigating its effects.

To mitigate the effects of exchange rate volatility, tourism businesses and destinations can diversify target markets, implement dynamic pricing strategies, offer unique experiences, collaborate with financial institutions, invest in technology and innovation, focus on domestic tourism, and seek government support and policy interventions.

By effectively addressing exchange rate fluctuations and capitalizing on the opportunities they present, the UK tourism industry can maintain competitiveness, attract visitors from diverse markets, and contribute to the country’s overall economic growth. Strategic planning, collaboration, and adaptation are essential for navigating the complexities of currency volatility and maximizing the benefits of a dynamic and ever-changing global tourism market.

In conclusion, exchange rates are not merely numbers on a screen; they are powerful variables that shape the tourism landscape. By understanding and responding to the implications of exchange rate fluctuations, the UK can harness the potential of its vibrant tourism industry and continue to enchant visitors from around the world.

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• Hospitality Industry

Exchange Rate trends, how do they impact hotel performance?

November 12, 2020 •

5 min reading

In this report we analyze how exchange rate fluctuations affect the hospitality industry. We consider the case of Switzerland, which is a small open economy located in the heart of the European monetary union.

Switzerland is a very special country because, thanks to its stability, it has always been considered a safe haven where international investors put their resources when there is economic turmoil and uncertainty in the rest of the world. The combination of these two features - a high degree of openness and a currency which has a tendency to appreciate - makes Switzerland a very interesting case study. Why? Because a strong currency reduces the ability of Switzerland to trade.

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In general, exchange rate fluctuations affect any generic sector exposed to trade with foreign countries, as follows:

In particular, Hospitality and Tourism industries fall into the category of export-oriented sectors because they export services. When we export goods, we physically move a good from the country where it has been produced to a foreign country where it is going to be consumed. In the case of services, instead, we export a service whenever the consumer (resident in a foreign country, the tourist) physically goes to the country of the producer, where he/she consumes the service. Consider for example a German resident going on holiday to the UK. Any night spent in a UK hotel is considered as an export from UK to Germany.

As explained in Table 1, a stronger Swiss franc not only reduces Germans’ incentives to go to Switzerland for their holidays, but also stimulates Swiss people to go to Germany for their vacation, given their relatively high purchasing power abroad.

Switzerland has historically been perceived as a “safe haven”. During turmoil, investors have a tendency to buy Swiss francs which produces the effect of strengthening the currency. In Figure , we show an index which represents the exchange rate between the Swiss franc and several other currencies. An increase in the index is an appreciation of the Swiss franc. As you can observe, we had strong appreciations during and after the 2008 Great Recession, as well as during the COVID-19, which was born as a health crisis, but soon turned into an economic crisis.

Figure 1: Nominal exchange rate between the Swiss franc and a set of other currencies

Figure 2: Exchange rate between CHF and Euro. How many CHF for 1 Euro.

If we focus more specifically on the exchange rate between the Swiss franc and euro and on the period between 2000 and 2018 (Figure 2), we can see that in 2000 the exchange rate between CHF and euro was 1.6 (1.6 CHF for 1 euro), while starting from the world financial crisis in 2008, we observe a progressive strengthening of the Swiss franc. During the crisis, Switzerland was perceived as a safe haven, which explains why investors started to strongly buy Swiss francs. Such a high demand increased the value of the Swiss franc, which almost reached parity with the euro (1 CHF = 1 euro) in 2011. This is why the Swiss National Bank (SNB) intervened in September 2011 introducing a limit to Swiss franc appreciations with respect to the euro. With this intervention, the SNB committed to acting on the forex market with the goal of preventing the exchange rate to go below 1.2 CHF for 1 euro. This intervention lasted until January 2015, when the SNB decided that it was time to let the exchange rate freely fluctuate. As you can see from the picture, that same day, the CHF strongly appreciated and reached parity with the euro (1 CHF for 1 euro).

Having observed the fluctuations in hotel demand and pricing, we study whether these fluctuations are associated to exchange rate movements.

• In order to do so, we classify hotels by geographic market , class (luxury, up upscale, upscale, up midscale, midscale and economy) and type of operation (independent, franchise and chain) and we analyze how the different categories of hotels respond to exchange rate appreciations.
• Additionally, we focus our attention on the intervention of the SNB and we study whether it affected the behaviors of hotels and clients between June 2011 and January 2015. Is it possible that pricing and consumption behaviors changed during the SNB intervention? Is it possible that agents (hotels and consumers) modified their behaviors knowing that the SNB was protecting them?

Hotel performance is surely related to local factors which go beyond hotel class and operation (business model). Northern areas of Switzerland seem to be more exposed to international competition and react more to exchange rate fluctuations. Southern and central areas are more touristic, but somehow seem more protected from international competition. One reason might be that their prices are relatively low with respect to the average Swiss hotel prices (central Switzerland) or another reason might be that their demand is quite rigid (Ticino for example has a relatively high average ADR and does not show any intention to reduce it because of exchange rate appreciations. Mountain regions have an average ADR but a relatively low occupancy).

Nevertheless, our results seem to suggest that chains and higher class hotels (luxury, upscale) have a better ability to insure themselves against exchange rate fluctuations. If necessary, independent hotels also limit their losses, but in a way that is different from chains. Independent hotels simply do not react to shocks at all, while chains are more prone to change prices in response to market forces.

Data suggest that over time the market is expanding in a stronger way in the regions that better react to exchange rate appreciations (Figure 3): Lake Geneva and Northern Switzerland. In fact, even if during the last decade hotels in this region had to face some negative shocks that implied some losses, we should always remember that, on average, their performance is well above the one of all the other parts of Switzerland.

Similarly, we observe in the last twenty years an important increase in luxury and upper scale hotels (Figure 4), and chains (Figure 5), which seems quite consistent with our results.

Figure 3: Evolution of hotels by region between 2000 and 2018

Figure 4: Evolution of hotels by class between 2000 and 2018

We also observe a larger increase in chains and franchises rather than in independent hotels, which still represent the vast majority of hotels in Switzerland.

Figure 5: Evolution of hotels by operation between 2000 and 2018

The present study was conducted before the COVID-19, using data between 2000 and 2018. Nevertheless, its main implications may apply also now. During the first months of this health crisis that soon turned into an economic crisis, the Swiss franc in fact showed a tendency to appreciate towards most of the currencies (Figure 1), replicating a situation similar to the one that we observed during the 2008 crisis. Future research will have to delve deeper into the analysis to understand whether the recent franc appreciations produced similar results on the hotel industry as the ones that we observed during and immediately after the Great Recession of 2008.

Associate Professor in Economics at EHL

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Moderation analysis of exchange rate, tourism and economic growth in Asia

Bosede Ngozi Adeleye

1 Dept of Accountancy, Finance and Economics, University of Lincoln, Lincoln, United Kingdom

2 Lincoln International Business School, University of Lincoln, Lincoln, United Kingdom

Jimoh Sina Ogede

3 Dept of Economics, Olabisi Onabanjo University, Ago-Iwoye, Nigeria

Mustafa Raza Rabbani

4 Dept of Accounting and Finance, British University of Bahrain, Sar, Kingdom of Bahrain

Lukman Shehu Adam

5 Dept of Economics and Development Studies, Kwara State University, Malete, Nigeria

Maria Mazhar

6 School of Economics, Quaid-i-Azam University, Islamabad, Pakistan

Associated Data

All relevant data are within the paper and its Supporting Information files.

This study brings novelty to the tourism literature by re-examining the role of exchange rate in the tourism-growth nexus. It differs from previous tourism-led growth narrative to probe whether tourism exerts a positive effect on economic growth when the exchange rate is accounted for. Using a moderation modelling framework, instrumental variables general method of moments (IV-GMM) and quantile regression techniques in addition to real per capita GDP, tourism receipts and exchange rate, the study engages data on 44 Asian countries from 2010 to 2019. Results from the IV-GMM show that: (1) tourism exerts a positive effect on growth; (2) exchange rate depreciation hampers growth; (3) the interaction effect is positive but statistically not significant; and (4) results from EAP and SA samples are mixed. For the most part, constructive evidence from the quantile regression techniques reveals that the impact of tourism and exchange is significant at lower quantiles of 0.25 and 0.50 while the interaction effect is negative and statistically significant only for the SA sample. These are new contributions to the literature and policy recommendations are discussed.

1. Introduction

The tourism and hospitality industry has experienced development and expansion making it one of the biggest and fastest-growing sectors [ 1 ]. Many countries and destinations have grown in popularity, resulting in an increase in the number of visitors and tourism receipts. The tourism sector has the potentials to make significant contributions to economic growth and development through a variety of channels. It is a “currency earning sector” that permits the use of human and physical capital stock to drive innovation and development. Simultaneously, the tourism sector is either directly or indirectly related to other sectors like transportation, accommodation, or retailing through trickledown effect [ 2 ]. It also influences spending, and expands trade and global competitiveness [ 3 ]. International tourism, in particular, is a source of foreign exchange generation which improves the balance of payment position [ 4 ] and eases the acquirement of advance technologies and capital goods that can be used in other manufacturing processes [ 5 , 6 ]. Furthermore, it plays an important role in stimulating investments in new infrastructure and enhancing competition thereby creating jobs and improving overall living standard [ 2 ].

Similarly, the exchange rate influences economic growth. In this paper, an improvement/increase in the exchange rate indicates the appreciation of a domestic currency against a foreign currency. It is a significant indicator of economic progress as it essentially mirrors the competitiveness between a domestic economy and the rest of world. The exchange rate reflects a standard exchange among purchasers and merchants of foreign currency in the foreign exchange market of a particular country. Particularly, non-oil trades, oil exporters, international tourist expenditures, and foreign remittances all drive inflow of foreign currency. According to Rapetti et al. [ 7 ] the growth effect of exchange rate specifically the real exchange rate (RER) is both growth-amplifying and growth-dwindling. The exchange rate can significantly affect a country’s balance of payments position particularly if the country’s reliance on imported goods is high. In these circumstances, a more competitive RER would aid in relieving foreign exchange bottlenecks that would otherwise stymie the development process.

The connection between tourism and the exchange rate is not far-fetched. International tourism receipts are significant sources of foreign exchange earnings and highly linked to the exchange rate. Changes in exchange rates greatly affect tourism demand in a destination as changes in the exchange rate will have an impact on the currency value of the country of origin. Any adjustments in the exchange rate will prompt an appreciation or depreciation of the tourist’s currency, affecting transportation costs and the tourist’s decisions to visit the country. Thus, the exchange rate has an impact on the number of tourists’ visits as well as tourism receipts [ 8 ]. Less flexible exchange rates are supposed to advance global exchange and tourism by lessening vulnerability in worldwide transactions, wiping out exchange costs, and expanding market transparency. Furthermore, the exchanges rate mimics the relative price differential (as it affects global economic environment, purchasing power and overall wealth of tourists), which tourists have insufficient information about since they make travel arrangements in their own currency in advance before leaving their country. In this way, low-uncertainty exchange rate regimes could promote international tourism flows [ 9 ] that in turn speed up the development process through foreign direct investment and globalization [ 10 ].

Tourism as a commodity is very susceptible to exchange rate shocks which affects tourists’ inclination to visit a foreign country. We, therefore, hypothesize that changes in the exchange rate will influence the impact of tourism on economic growth. To the best of our knowledge, this is the first study to empirically test this hypothesis. That is, does the exchange rate tilt the tourism-growth dynamics? To probe the discourse, an unbalanced panel data on 44 Asian economies from 2010 to 2019 comprising tourism receipts, per capita GDP (proxy for economic growth), official exchange rate and a set of control variables is used. To ensure the robustness of the results, a blend of econometrics techniques is deployed. To control for possible endogeneity of the tourism variable, the instrumental variable technique nested within the generalised method of moments (IV-GMM) is used [ 11 – 13 ]. Lastly, the quantile estimator [ 14 – 16 ] is used in the event that the dependent variable has a non-normal distribution. This empirical approach makes the study novel and holistic in ensuring a critical examination of its core arguments. The rest of the paper is structured as follows: section 2 discusses the literature; section 3 outlines the data and empirical model; section 4 discusses the results, and section 5 concludes.

2. Literature review

Tourism activities are considered as one of the most important sources of economic growth and foreign exchange earnings around the globe [ 2 , 6 , 17 ]. The literature on tourism development and its impact on exchange rate and economic growth has increased exponentially in the last three decades [ 18 , 19 ]. The studies on tourism and growth nexus have proliferated mainly due to the fact that international tourism has grown over the years despite some ephemeral shocks [ 20 ]. The tourism growth literature mainly focuses on the causal relationship between tourism and economic growth [ 19 , 21 – 23 ] whereas, tourism and exchange rate literature focus mainly on exchange rate volatility and tourist flows [ 24 – 26 ]. We divide our literature review into two parts; the first part consists of available literature on tourism and economic growth whereas, the second part consists of tourism and exchange rate.

2.1 Tourism and economic growth

This section discusses the literature on tourism economics focusing on economic growth and tourism nexus. From a theoretical perspective, Lanza and Pigliaru [ 27 ] were among the first to document the tourism-growth nexus. They find that countries with high tourism sectors experienced high economic growth. They developed a Lucas type-two sector model where tourism is taken as one of the sectors which depends on the endowments of natural resources such that countries with abundant natural resources have high growth potential and achieve a faster rate of growth. Perles-Ribes et al. [ 28 ] studied the tourism and economic growth nexus using autoregressive distributed lag (ARDL) and Toda-Yamamoto model for the period 1957 to 2014 taking into consideration the economic crises. Their findings revealed a bi-directional relationship between economic growth and tourism development. There are many studies proposing the hypothesis that growth of tourism in the country is directly linked to economic prosperity [ 29 ]. The study reports that there is bidirectional causality between tourism and economic growth. Fuinhas et al. [ 22 ] report that in the long run, high frequency of tourist arrivals in the country leads to positive economic growth. In another study, Naseem [ 30 ] concludes that in the long run, tourism receipts, number of tourist arrivals, and total expenditure have a strong positive relationship with economic growth. The study empirically examined the data from Saudi Arabia and validated the popular hypothesis that tourism leads to economic growth in the country. Similar findings were obtained by [ 31 – 35 ], where they concluded that tourism has a positive impact on the economic growth of the country. The study by Sahni et al. [ 36 ] used a quantile regression approach and concluded that tourism growth has a more pronounced effect on economic growth below the threshold and above the threshold. The study further concluded that countries with lower economic growth have more benefits from tourism development. The study by Selvanathan et al. [ 37 ], applied ARDL, vector error correction model (VECM) and panel frameworks and concluded that in the long run tourism development positively contributes to growth. Tourism development is the significant predictor of the economic growth and financial development at frequency rather than the low frequency [ 38 ]. On the contrary, Croes et al. [ 39 ], revealed that tourism development has a very short term effect on economic development and a negative and indirect link to human development. Similar findings were obtained by Kyara et al. [ 23 ] where it was revealed that there is a unidirectional causality relationship between tourism development and economic growth.

2.2 Tourism and exchange rate

The effects of exchange rate on tourism development can differ across the country, territory and within the tourism jurisdiction [ 38 ]. The real and nominal appreciation of the currency leads to a negative impact on the tourism development in the country [ 40 ]. Exchange rate has asymmetric impact on tourism on tourism development in developing countries such as, India, Bangladesh, Pakistan and Nepal in the short run [ 41 ]. Boskurt et al. [ 42 ] applied dynamic common correlated effects (DCCE) approach in their study on demand and exchange rate shocks on tourism development and concluded that effects of the exchange rate shocks are temporary on the tourism development. To examine the response of tourism demand to exchange rate fluctuation in South Korea, Chi [ 43 ] used ARDL model and concluded that tourists are sensitive to the appreciation of the Korean Won, whereas they are insensitive to its depreciation. The findings of the study imply that foreign visitors in Korea are loss averse and with increase or decrease in the exchange rate volatility tend to affect the tourism demand in an asymmetric manner. Dogru et al. [ 44 ] used ARDL approach to examine the trade balance and exchange rate taking evidence from tourism development. The study concluded that depreciation and appreciation of the US Dollar affects the bilateral tourism with Canada, Mexico, and the United Kingdom (UK). The study further concluded that in the long-run the appreciation of the US dollar negatively affects the tourism trade balance with Canada and the UK while it does not affect the tourism development with Mexico in the long-run. A study by Belloumi [ 45 ], examined tourism receipts and exchange rate nexus in Tunisia and concluded that there is a cointegrating relationship between tourism and economic growth. An increase in foreign direct investment (FDI) and appreciation of the exchange rate contracts the tourism demand of the country while in the long-run the depreciation of domestic currency and decrease in FDI inflow results in more tourist inflow [ 41 ]. Similar findings were obtained by [ 46 ] and [ 47 ] where they revealed that reduction in FDI inflow and depreciation of foreign exchange rate results in positive tourism development.

2.3 Tourism, exchange rate and economic growth

There are few studies that investigated the nexus of exchange rate, tourism development and economic growth [ 23 , 48 , 49 ]. Primayesa et al. [ 50 ] probed the dynamic relationship among real exchange rate, economic growth and tourism development in Indonesia using variance decomposition and impulse response function approach. The study revealed that in explaining the tourism shock in Indonesia, the real exchange rate is less important than the economic growth. The study further concluded that the shock of economic growth and real exchange rate has a positive effect on tourism activity in the short- and long-term. Harvey et al. [ 25 ] applied bounds testing approach to cointegration and error-correction modelling to examine whether tourism development and exchange rate promote the economic growth in Brunei Darussalam, Indonesia, Malaysia, and the Philippines. The study revealed the Philippines is the only country that has the positive long-run and short-run impact from the tourism industry and exchange rate.

3. Data and methodology

This study uses data on nine variables sourced from World Development Indicators (WDI) for 44 countries located in East Asia and the Pacific (EAP) and South Asia (SA) from 2010 to 2019. Availability of sufficient data on the variables of interest–per capita GDP, tourism receipts, and official exchange rate—justify the inclusion of a country in the sample and to explore the heterogeneity of the sample countries, we disaggregate the full sample into EAP with 36 countries and SA having 8 countries. The countries are East Asia and the Pacific (36): American Samoa, Australia, Brunei Darussalam, Cambodia, China, Fiji, French Polynesia, Guam, Hong Kong SAR, China, Indonesia, Japan, Kiribati, Korea, Dem. People’s Rep., Korea, Rep., Lao PDR, Macao SAR, China, Malaysia, Marshall Islands, Micronesia, Fed. States, Mongolia, Myanmar, Nauru, New Caledonia, New Zealand, Northern Mariana Islands, Palau, Papua New Guinea, Philippines, Samoa, Singapore, Solomon Islands, Thailand, Timor-Leste, Tonga, Vanuatu, Vietnam. South Asia (8): Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka.

3.1 Dependent variable

Real GDP per capita is the proxy for economic growth. Studies on tourism-growth nexus have widely used it [ 51 – 53 ] likewise, those on exchange rate-growth relationship [ 54 , 55 ].

3.2 Main explanatory variables

From World Development Indicators, International tourism, receipts (% of total exports) is defined as: expenditures by inbound visitors including payments to foreign carriers for international transport. In other words, this composite variable captures the spendings of inbound tourists to Asia and the Pacific, among others. In line with the literature [ 56 – 60 ], tourism receipts which is the first main explanatory variable is proxied by tourism receipts in current US dollars. Existing literature have found a positive relationship between different dimensions of tourism and economic growth [ 61 – 65 ]. The second key explanatory variable is exchange rate [ 42 , 66 – 68 ]. The exchange rate captures the competitiveness of a country in the international market [ 69 – 73 ]. Lastly, to address the study questions, an interaction term of tourism receipts with exchange rate (TRPT*XR) is included to determine if exchange rate moderates the impact of tourism on growth.

3.3 Control variables

The set of control variables align with those used in growth models: mobile phone subscription [ 5 , 74 , 75 ], individuals using the Internet [ 76 , 77 ], labour force participation [ 78 ] (Niebel, 2018), foreign direct investment net inflows [ 79 ], domestic credit to the private sector [ 80 – 83 ] and services trade [ 84 , 85 ]. We expect positive coefficients in line with existing literature. Table 1 details the variables used.

Source: Authors’ Compilation from World Bank [ 86 ] World Development Indicators (WDI)

3.4 Empirical model

We specify two baseline linear models that expresses economic growth as a function of tourism receipts, exchange rate and a set of control variables which satisfies the first objective:

Where, ln PC it = natural logarithm of per capita GDP; ln TRPT it = natural logarithm of tourism receipts; XR it = official exchange rate; Z ′ it and K ′ it = vector of control variables in natural logarithms; α i , γ i = parameters to be estimated; φ t , δ t = year dummies (which controls for common shocks such as the global financial crises of 2007–2009), and u it , e it = general error term. To satisfy the second objective, we add an interaction term ( TRPT*XR ) to Eq [ 1 ] and the model becomes:

Where, R ′ it = vector of control variables in natural logarithms; η i = parameters to be estimated; ω t = year dummies (which controls for common shocks such as the global financial crises of 2007–2009), and v it = general error term. From Eq [ 3 ], η 3 provides two information. First, the sign of the coefficient indicates if exchange rate exerts a significant moderation effect on economic growth. That is, whether the interaction of both variables intensifies or hinders growth. Secondly, the magnitude of the coefficient may sustain or sway the impact of tourism on growth which is derived as:

3.5 Estimation techniques and strategy

Specifically, our econometric strategy consists of a three-step procedure. First, we examine linear impact of tourism on economic growth. Next, we estimate the linear effect of exchange rate on economic growth. Lastly, we perform the moderation analysis to show the interaction effect on economic growth. We engage these analyses using two techniques: the instrumental variables-two-step generalised method of moments (IV-GMM) techniques and the quantile estimator [ 14 – 16 ]. Specifically, the IV-GMM technique is used to correct for cross-sectional dependence, endogeneity, autocorrelation and heteroscedasticity in the data [ 11 , 87 ]. It uniquely deploys the ivreg2 routine in Stata version 16 developed by Baum, Schaffer, and Stillman [ 12 , 13 ]. The routine performs several variants of single-equation linear regression models including the generalized method of moments (GMM). Hence, the GMM variant which implements the two-step feasible GMM estimation (that is, gmm2s option) is adopted to ensure that our results are devoid of endogeneity, heteroscedasticity and autocorrelation [ 12 ]. On the other hand, the quantile regression is deployed to examine the potentially differential effects of tourism and exchange rate at different levels of growth. The quantile regression model is a defined solution to minimize the equation for the θ th regression quantile, 0< θ <1 and expressed thus:

Where, y t is the dependent variable and x t is a k x 1 vector of explanatory variables.

4. Results and discussions

4.1 summary statistics and correlation analysis.

The upper panel of Table 2 contains the correlation matrix’s results, illustrating the relationship between the regressors and the outcome variables. Our findings indicate a negative correlation between per capita GDP and official exchange rate, implying that rising income will decrease the exchange rates in Asia. Likewise, individuals use the internet and the official exchange rate. Trade in services is negatively associated with tourism receipts, official exchange rate, FDI, and MOB. These findings suggest that increasing individuals using the internet and trade in services will impact the official exchange rate, tourism receipts, FDI, and MOB.

*** p<0.01

** p<0.05

* p<0.1

ln = Natural logarithm; PC = per capita GDP; TRPT = tourism receipts; XR = Official exchange rate; DC = Domestic credit to the private sector; LAB = labour force participation rate; FDI = foreign direct investment; MOB = mobile phone subscriptions; NET = individuals using the Internet; TRS = trade in services; 9.08E+09 = 9,080,000,000.00

Source: Authors’ Computations

The lower panel of Table 2 indicates the summary statistics for the variables from 2010 to 2019. The average of per capita GDP, tourism receipts, official exchange rate, domestic credit to the private sector, labour force participation, foreign direct investment, mobile phone subscriptions, internet users, and trade in services are 12398.47, 9080000, 1295.02, 71.42, 69.06, 1540000, 92490468, 38.86, and 30.269, respectively, from the entire sample. At the same time, the standard deviation provides information on the deviation from sample averages.

4.2 IV-GMM results

Table 3 displays results for the instrumental variables-two-step generalised method of moments (IV-GMM). Across the Full, EAP, and SA samples, tourism receipts and exchange rate are instrumented with their first difference and level terms. Limiting to the variables of interest, the summary of the linear models from the full sample shows tourism receipts as a significant positive predictor of economic growth. The findings indicate that a percentage change leads to 0.88% rise in economic growth, on average, ceteris paribus . We argue that a well-structured tourist sector together with investments in modern infrastructure will boost growth supporting Tugcu [ 88 ], Alfaro [ 89 ], Calero and Turner [ 90 ], Cheng and Zhang [ 91 ], and Scarlett [ 92 ] all of which argue in favour of tourism-driven growth. The exchange rate shows a significant negative effect on growth. According to the findings, a percentage-point change in the exchange rate results in a 0.00005% drop in economic growth. The reason for this is not far-fetched. Exchange rate fluctuations influence potential travellers’ decisions to alter their destination or shorten their vacation resulting in revenue loss for economies. This may result in adjustments to visitors’ travel plans while in a particular nation [ 93 ]. These findings corroborate those of Lin, Liu, and Song [ 94 ], Meo et al. [ 95 ], Sharma and Pal [ 96 ], Chi [ 43 ], and Seraj and Coskuner [ 97 ]. For EAP countries, tourism increases economic growth by 0.62%, on average, ceteris paribus . On the other hand, the coefficient of the exchange rate is negative and significant at 1 per cent, which supports the argument of Vieira et al. [ 98 ] and Seraj and Coskuner [ 97 ]. These studies contend that local currency appreciation will decrease the spending power of international tourists with consequent decline on tourism demand and economic growth. In South Asia, the effect of tourism on growth is positive but statistically not significant but exchange rate significantly boosts growth by 0.007%, on average, ceteris paribus . This finding contradicts Seraj and Coskuner [ 97 ] and suggests that currency appreciation is growth-enhancing. For the moderation models, columns [ 3 , 6 , 9 ] reveal that the interaction effect is positive but statistically not different from zero for the full and EAP samples while it decreases growth in South Asia which contradicts Sharma, Vashishat, and Rishad [ 99 ]. In other words, the conditional effect of tourism on growth reduces when exchange rate appreciates in South Asia.

t -statistics in (); -5.40e-05 = 0.0000540; ln = Natural logarithm; PC = real per capita GDP; TRPT = tourism receipts; XR = Official exchange rate; DC = Domestic credit to the private sector; LAB = labour force participation rate; FDI = foreign direct investment; MOB = mobile phone subscriptions; NET = individuals using the Internet; TRS = trade in services.

On the reliability of the instruments used to validate the robustness of our estimations, we controlled for identification and exclusion restrictions which are indispensable for robust GMM estimations [ 12 , 13 ]. Having used the IV-GMM estimation in ivreg2 , the appropriate test of overidentifying restrictions and testing the validity of instruments used is the Hansen J statistic: the GMM criterion function. From the lower panel of Table 3 , the p -value of the Hansen-J statistic across the six models ranges between 0.085 and 0.3874 which is clearly above 0.05. Hence, it fails to reject the null hypothesis of instruments validity indicating that the instruments used are valid and robust to our analysis.

4.3 Quantile regression results

Table 4 presents the quantile regression results across the 25th, 50th, and 75th quantiles of economic growth. The topmost panel displays the full sample results where tourism significantly improves growth at the 25 th and 50 th quantiles by 0.23% and 0.12%, respectively. Noticeably, the positive effect of tourism receipts declines along the distribution. On the other hand, exchange rate appreciation shows a reducing effect on growth at the 25 th and 50 th quantiles by -0.000051% and -0.000059%, respectively. This reducing effect is larger at the 50 th quantile indicating that economic growth vulnerable to exchange rate fluctuations. Following our findings, we hypothesise that variations in the official exchange rate affects tourist purchasing decisions and economic growth in the long-run [ 100 ]. On the interaction effect, we find no significant impact on growth corroborating the results shown in Table 3 .

I-statistics in (); ln = Natural logarithm; PC = per capita GDP; TRPT = tourism receipts; XR = Official exchange rate; DC = Domestic credit to the private sector; LAB = labour force participation rate; FDI = foreign direct investment; MOB = mobile phone subscriptions; NET = individuals using the Internet; TRS = trade in services.

The results of East Asia and the Pacific displayed in the middle panel indicate that tourism significantly increases growth at the 25 th and 50 th quantiles by 0.44% and 0.31%, respectively. A reducing positive effect is observed similar to that of the full sample. Also, exchange rate appreciation shows a reducing effect on growth at the 25 th and 50 th quantiles by -0.000061% and -0.000067%, respectively. Similar to the full sample, this reducing effect is larger at the 50 th quantile and we find no significant interaction effect on growth. From the lowest panel, the results from South Asia indicate that tourism significantly increases growth at the 50 th and 7 th quantiles by 0.17% and 0.19%, respectively. An increasing positive effect is observed contrary to the full and EAP samples. Likewise, exchange rate appreciation increases economic growth across all the quantiles, though with a declining trend from 0.0087% to 0.0075%. Contrary to the full and EAP samples, a significant negative interaction effect is observed across the quantiles supporting the results shown in Table 3 .

5. Conclusion and policy recommendation

This current study highlights the role of exchange rate in influencing the effect of tourism on economic growth in Asia. To the best of our knowledge, this is the first study that critically evaluates the influence of exchange rate on the tourism-growth nexus. That is, it gauges the nonlinear effect of tourism on economic growth when the exchange rate is accounted for. This position differs from other tourism-growth studies [ 22 , 27 – 30 , 101 , 102 ] that investigated the direct and linear effect of tourism on economic growth but aligns with Adeleye et al. [ 103 ] who examined a similar nexus on Sri Lanka. For the most part, these studies affirm that tourism exerts a direct and positive effect on economic growth. However, we expand the frontiers of knowledge having recognized that the exchange rate is an important macroeconomic policy instruments for promoting sustainable economic growth and encouraging tourism flows as it serves as an essential factor influencing the decision of tourists regarding tourism destinations. To this end, this paper examines the moderating effect of exchange rate and tourism receipts on economic growth in Asia from 2010 to 2019. From the full sample, findings from IV-GMM and quantile regressions techniques revealed that tourism significantly boosts economic growth, and the exchange rate indicates a negative effect. Deductively, we conclude that tourism is growth-enhancing which supports the tourism-led growth conjecture and that exchange rate appreciation is also growth-reducing. On the interaction effect, though the coefficient is positive but statistically insignificant it suggests that currency appreciation may possess inherent potentials in sustaining the positive effect of tourism on economic growth. Results from the East Asia and the Pacific and South Asia are diverse.

Based on the findings, the following recommendations are made for the government and stakeholders in Asia: (1) Provide a sound and efficient financial system which does not only provide adequate funding for promoting the tourism sector but also ensure easy accessibility to aid foreign tourist’s transaction. (2) Initiate investment incentive policies for the tourism sector which will reduce the operating cost, investment outlay and provide security for the investment of tourist investors. (3) Initiate a well-managed exchange rate system that supports tourism flows and economic growth. For further studies and subject to data availability, the role of government regulation, real exchange rate and competitiveness in relation to the tourism-growth dynamics may be undertaken.

Supporting information

Funding statement.

The author(s) received no specific funding for this work.

Data Availability

• PLoS One. 2022; 17(12): e0279937.

Decision Letter 0

30 Aug 2022

PONE-D-22-18174Moderation analysis of exchange rate, tourism and economic growth in AsiaPLOS ONE

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Reviewer #2: Yes

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Reviewer #1: Idea of the paper and statistical parts have been performed appropriately and rigorously. And there is no problem. But some formal parts have mistakes and errors. Some of them:

1- Abstract part should be improved.

2- Too many references. Can be reduced according to the journal index (Scopus, Sci, ssci etc.)

3- No need to citations in Data and Methodology parts. They must be in Literature Review part.

4- In text there are citation errors. For example more than 3 authors use et al. Some parts it is true but some parts wrong.

5- Some citations are missed in references especially in page 12.

6- Use "literature review" instead of "Review of literature".

7- At conclusion part comparisons with previous studies can be made.

Reviewer #2: The paper attempts to examine “moderation analysis of exchange rate, tourism and economic growth in Asia”. After reviewing, I find that this paper is interesting. The paper is readable ragarding the case of economic growth in Asian in the background of exchange rate, tourism and their interactive association.

See the attachment

Reviewer #3: The paper under consideration looks at the impact of tourism on GDP growth and the interactions of the impact with exchange rate. In my opinion this paper has important shortcomings that will prevent it from being published in the current form. My suggestion is rejection. The issues that lead to my decision are as follows:

1. The paper largely ignores the growth regression literature and certainly aims to be a part of it.

2. The value added generated in the tourism sector is in fact part of the overall value added of the economy. This is largely correlated with the international tourism. What sense does it have to regress GDP on a component of it? We can find out quite precisely what is the EXACT contribution of tourism to GDP and GDP growth.

3. The models are estimated by GMM. However, what are the instruments? The paper does not seems to use any sort of Arellano-Bond, Arellano Bower System-GMM. So the description is vague. And in particular, the panel System-GMM methods are mainly used to solve the endogeneity caused by the lagged dependent variable and not the inherent endogeneity of the economic problem posed here. So this part clearly needs clarification and justification. It does not suffice to write that „results are devoid of endogeneity, heteroscedasticity and autocorrelation.”

4. The measurement of both TRPT and GDP in USD should be discussed, i.e., the volume of tourist services may be positively related to depreciating exchange rate but its value in USD may not.

5. To what extend this is a different problem than analysis of any export-oriented sector? Why do we care?

6. How about controlling for real exchange rate, standard in BOP and competitiveness-related studies.

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Reviewer #1:  Yes:  Volkan Dayan

Reviewer #2: No

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Submitted filename: review.docx

Author response to Decision Letter 0

Dear Editor,

I have uploaded a Word file containing point-by-point responses to the Reviewers' comments.

Dr. Ngozi Adeleye

Submitted filename: Responses to Reviewers Comments_ExR-Tour-EG, Asia.docx

Decision Letter 1

14 Nov 2022

PONE-D-22-18174R1Moderation analysis of exchange rate, tourism and economic growth in AsiaPLOS ONE

Thank you for submitting your manuscript to PLOS ONE. After careful consideration, we feel that it has merit but does not fully meet PLOS ONE’s publication criteria as it currently stands.  One of the reviewers consider that his/her comments have not been properly addressed. Please revise the previous comments and answer to the reviewer. Please submit your revised manuscript by Dec 29 2022 11:59PM. If you will need more time than this to complete your revisions, please reply to this message or contact the journal office at  gro.solp@enosolp . When you're ready to submit your revision, log on to https://www.editorialmanager.com/pone/ and select the 'Submissions Needing Revision' folder to locate your manuscript file.

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Reviewer #1: All comments have been addressed

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Foreign exchange, tourism

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• Nevenka Čavlek 3 &
• Stephen Wanhill 4 , 5  

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• Exchange Rate
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Archer, S. 2000 Foreign Exchange. In Encyclopedia of Tourism, J. Jafari, ed., pp.235-237. London: Routledge.

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Dwyer, L., P. Forsyth, and P. Rao 2000 The Price Competitiveness of Travel and Tourism: A Comparison of 19 Destinations. Tourism Management 21:9-22.

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Lee, S., and S. Jang 2011 Foreign Exchange Exposure of US Tourism-related Firms. Tourism Management 32:934-948.

Witt, S., and C.Witt 1995 Forecasting Tourism Demand: A Review of Empirical Research. International Journal of Forecasting 11:447-475.

Smeral, E. 2003 Die Zukunft des internationalen Tourismus. Vienna: Wifo.

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Department of Tourism, The Faculty of Economics & Business, University of Zagreb, Zagreb, Croatia

Nevenka Čavlek

University of Limerick, Limerick, Ireland

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School of Tourism, Bournemouth University, Fern Barrow, BH12 5BB, Poole, UK

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Čavlek, N., Wanhill, S. (2015). Foreign exchange, tourism. In: Jafari, J., Xiao, H. (eds) Encyclopedia of Tourism. Springer, Cham. https://doi.org/10.1007/978-3-319-01669-6_557-1

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How Exchange Rates Affect Tourism and Businesses

Exchange rates may seem like a bit of an abstract concept, but they actually affect everything that we do, regardless of whether that includes going on a summer holiday or running an overseas business. How, you ask? Well, in this post, we’ll show you exactly how exchange rates affect tourism and businesses. But first, let’s have a look at why exchange rates move.

Why Exchange Rates Move

Exchange rates move as currencies are paired against each other. This means that as the value of one currency rises, the other’s value must fall.

The value of a currency is measured against a number of different factors . These include everything from employment rates to elections and even wars. The simplest of all economic announcements, including something on interest rates or farming data can cause the price of a currency to move up and down.

Also, it’s important to note that changes in the price of one currency (or even an asset) can have a huge knock-on impact. For example, if there’s an oil shortage in Saudi Arabia, then it can have effects on economies the world over. As well as lowering the value of middle eastern currencies, it also has an effect on currencies in the UK, US and beyond. That’s because, thanks to globalisation, these economies are dependent on each other. So, a fuel shortage in Iran will not only affect the price of oil, but the value of the pound, too.

So, exchange rates can move due to a number of different factors. But how does this affect you if you’re going on holiday or doing business deals? Let’s take a look.

The largest impact on tourism comes from foreign exchange rates when people are getting their holiday spending money.

When you go to a bureau de change, you may notice that the amount that you can buy on one day varies in comparison to another day. This change is only minimal, but it can make a big difference if you’re spending large amounts for your holiday spending money.

That’s why so many people shop around. The rate often varies hour to hour, and it certainly varies from location to location. However, on top of this, it’s also worth pointing out that although bureau de changes are convenient, they’re often not the best way of getting your money.

If you don’t want to be hit hard by unfavourable exchange rates and transaction fees, you’re better off looking online . This way, you’re less likely to pay extortionate fees for foreign exchange transactions.

Foreign exchange rates also have a large impact on businesses operating overseas. This is because, if you sign a contract to pay a certain amount of pounds for your goods regardless of what the host’s currency is worth, then you could end up paying way over or under the odds for your products.

Likewise, it is also worth noting that, if you agree to pay a fluctuating fee based on what each currency is worth at the time of purchase, then you may end up paying considerably more for one shipment than the last one.

As such, before you take your business global, you must consider the impacts of this. By paying different amounts for each pallet of goods, you may have to structure your finances differently. So you’ll have to plan for if the pound takes a nosedive, or even reconsider your pricing structure regularly .

To conclude, exchange rates affect everything that we do, regardless of whether it’s business or personal. So, before you travel or do a business deal, make sure you check the exchange rate carefully, you could save a fortune.

Zak Goldberg is a Law & Business Graduate from the University of Leeds who has chosen to follow his aspirations of becoming a full-time published writer, offering his expertise on all areas of law and finance.

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Please note you do not have access to teaching notes, the volatility of tourism demand and real effective exchange rates: a disaggregated analysis.

Tourism Review

ISSN : 1660-5373

Article publication date: 13 March 2020

Issue publication date: 25 March 2021

One of the main factors that can impact the cost of holidays to a particular destination is the exchange rate; exchange rate fluctuations impact the overall price of the holiday and should be expected to effect tourism demand. This paper aims to scrutinize the volatility of the real effective exchange rate between the source market relative to the holiday destination and tourism demand volatility, where the influence of disaggregated data is noted.

Design/methodology/approach

The study uses multivariate conditional volatility regressions to simulate the time-varying conditional variances of international visitor demand and exchange rates for the relatively mature Caribbean tourist destination of Barbados. Data on the country’s main source markets, the UK, the USA and Canada is used, where the decision to disaggregate the analysis by market allows the authors to contribute to policymaking, particularly the future of tourism marketing.

The volatility models used in the paper suggests that shocks to total arrivals, as well as the USA and UK markets tend to die out relatively quickly. Asymmetric effects were observed for total arrivals, mainly due to the combination of the different source markets and potential evidence of Butler’s (1980) concept of a tourist area’s cycle of growth. The results also highlight the significance of using disaggregated tourism demand models to simulate volatility, as aggregated models do not adequately capture source market specific shocks, due to the potential model misspecification. Exchange rate volatility is postulated to have resulted in the greater utilization of packaged tours in some markets, while the effects of the market’s online presence moderates the impact of exchange rate volatility on tourist arrivals. Markets should also explore the potential of attracting higher numbers of older tourist, as this group may have higher disposable incomes, thereby mitigating the influence of exchange rate volatility.

Research limitations/implications

Some of the explanatory variables were not available on a high enough frequency and proxies had to be used. However, the approach used was consistent with other papers in the literature.

Practical implications

The results from the paper suggest that the effects of exchange rate volatility in key source markets were offset by non-price factors in some markets and the existence of the exchange rate peg in others. In particular, the online presence of the destination was one of those non-price factors highlighted as being important.

Originality/value

In most theoretical models of tourism demand, disaggregation is not normally considered a significant aspect of the model. This paper contributes to the literature by investigating the impact real effective exchange rate volatility has on tourism demand at a disaggregated source country level. The approach highlights the importance of modeling tourism demand at a disaggregated level and provides important perspective from a mature small island destination.

该研究采用多元条件波动回归来拟合相对成熟的加勒比海旅游目的地巴巴多斯的国际游客需求和汇率的时变条件方差。本研究逐一分析了该国主要客源市场（英国, 美国和加拿大）的数据, 从而为政策制定, 尤其是对今后的旅游营销做出贡献。

汇率是影响到特定目的地度假成本的主要因素之一。汇率波动会影响整体的度假成本, 并会影响旅游需求。基于按客源地分类的数据, 本文详细研究了客源市场相对于度假目的地的实际有效汇率的波动性以及旅游需求的波动性。

本文使用的波动模型表明, 汇率冲击对入境总人数以及美国和英国市场影响短暂。冲击对总入境人数产生的不对称效应, 主要是由于不同的客源市场加总和巴特勒（1980）关于旅游区增长周期概念所致。本文结论还凸显了使用基于客源地数据的旅游需求模型来模拟波动性的重要性, 因为加总数据不能充分捕获具体客源地市场的冲击从而产生模型设定作物。汇率波动会引起某些市场中团体游客的增加, 而目的地的线上热度影响会调节汇率波动对游客人数的影响。市场还应探索吸引更多老年游客的潜力, 因为该群体的可支配收入可能更高, 从而减轻了汇率波动的影响。

由于一些解释变量的数据频率不够高, 本文不得不使用一些替代指标。所使用的方法与文献中的其他论文一致。

该论文的结果表明, 在某些客源地市场, 汇率波动的影响会被某非价格因素所抵消, 而在另一些主要客源地市场, 固定汇率的存在刚好规避了汇率波动产生的影响。目的地的线上热度是重要的非价格因素之一。

在大多数旅游需求理论模型中, 按客源地拆分的数据通常不被视为模型的重要方面。本文的理论贡献则是通过研究实际有效汇率波动对不同客源国的旅游需求的影响强调了旅游需求建模中使用基于客源地数据的重要性, 并以一个成熟的小岛目的地为角度进行了阐述。

Uno de los principales factores que pueden afectar al costo de las vacaciones a un destino en particular es el tipo de cambio; Las fluctuaciones del tipo de cambio afectan a el precio general de las vacaciones y es normal que afecten a la demanda turística. Este documento analiza la volatilidad del tipo de cambio efectivo real entre el mercado de origen en relación con el destino de vacaciones y la volatilidad de la demanda turística, donde se observa la influencia de los datos desagregados.

Diseño/metodología/enfoque

El estudio emplea regresiones de volatilidad condicional multivariadas para simular las variaciones condicionales variables en el tiempo de la demanda de visitantes internacionales y los tipos de cambio para el destino turístico caribeño relativamente maduro de Barbados. Se emplean datos sobre los principales mercados de origen del país, el Reino Unido, los Estados Unidos de América y Canadá, donde la decisión de desagrerar el análisis por mercado permite a los autores contribuir a la formulación de políticas, en particular al futuro del marketing turístico.

Los modelos de volatilidad utilizados en el documento sugieren que los shocks en las llegadas totales, así como en los mercados de los Estados Unidos y el Reino Unido, tienden a desaparecer con relativa rapidez. Se observaron efectos asimétricos para las llegadas totales, principalmente debido a la combinación de los diferentes mercados de origen y la evidencia potencial del concepto de Butler (1980) del ciclo de crecimiento de un área turística. Los resultados también resaltan la importancia de utilizar modelos desagregados de demanda turística para simular la volatilidad, ya que los modelos agregados no capturan adecuadamente los shocks específicos del mercado de origen, debido a la posible especificación errónea del modelo. Se postula que la volatilidad del tipo de cambio influye en una mayor utilización de los paquetes turísticos en algunos mercados, mientras que los efectos de la presencia del mercado en linea (online) moderan el impacto de la volatilidad del tipo de cambio en las llegadas de turistas. Los mercados también deberían explorar el potencial de atraer un mayor número de turistas mayores, ya que este grupo puede tener mayores ingresos disponibles, mitigando así la influencia de la volatilidad del tipo de cambio.

Limitaciones / implicaciones de la investigación

Algunas de las variables explicativas no estaban disponibles en una frecuencia alta y se tuvieron que utilizar proxies. Sin embargo, el enfoque utilizado fue consistente con otros artículos en la literatura.

Implicaciones practices

Los resultados del documento sugieren que los efectos de la volatilidad del tipo de cambio en los mercados de origen clave fueron compensados por factores no relacionados con los precios en algunos mercados y la existencia de la vinculación del tipo de cambio en otros. En particular, la presencia en línea (online) del destino fue uno de esos factores no relacionados con el precio destacados como importantes.

Originalidad

En la mayoría de los modelos teóricos de la demanda turística, la desagregación normalmente no se considera un aspecto significativo del modelo. Este documento contribuye a la literatura al investigar el impacto que la volatilidad efectiva del tipo de cambio real tiene sobre la demanda turística a nivel de país de origen desagregado. El enfoque resalta la importancia de modelar la demanda turística a un nivel desagregado y proporciona una perspectiva importante desde un destino insular pequeño y maduro.

• United Kingdom
• Exchange rate
• Online presence
• Demand volatility
• Small island tourism economies
• Volatility of demand
• Market-specific behavior
• Price competitiveness
• Tour packages
• Currency fluctuations
• United States
• Tipo de cambio
• Volatilidad de la demanda
• Economías pequeñas de turismo isleño
• Comportamiento específico del mercado
• Competitividad de precios
• Paquetes turísticos
• Presencia en línea
• Fluctuaciones monetarias
• Reino Unido
• Estados Unidos

Alleyne, L.D. , Okey, O.-O. and Moore, W. (2021), "The volatility of tourism demand and real effective exchange rates: a disaggregated analysis", Tourism Review , Vol. 76 No. 2, pp. 489-502. https://doi.org/10.1108/TR-09-2019-0373

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How Does Exchange Rates Affect Tourism in the UK?

By Robert Palmer

The exchange rate is a key factor in determining the cost of travel for tourists. For those traveling to the UK, the exchange rate plays a significant role in shaping their budget and expenses while on holiday. In this article, we will explore the impact of exchange rates on tourism in the UK.

Exchange Rates and Tourism

Exchange rates determine the value of one currency against another. For example, if 1 British pound (GBP) can buy 1.35 US dollars (USD), then the exchange rate is 1 GBP = 1.35 USD. The exchange rate fluctuates based on various economic and political factors such as inflation, interest rates, and geopolitical events.

For tourists traveling to the UK, exchange rates directly affect their purchasing power. When the value of their currency is strong against GBP, they can purchase more goods and services with their money. Conversely, when the value of their currency weakens against GBP, they can purchase less.

Impact on Tourism in the UK

The impact of exchange rates on tourism in the UK can be significant. A strong GBP may discourage some tourists from visiting as it makes travel more expensive, while a weak GBP may attract more tourists as it makes travel cheaper.

• Decreased tourism: A strong GBP makes travel to the UK more expensive for foreign visitors. This may lead to a decrease in tourism as fewer people are willing to pay higher prices for flights, accommodations, and other expenses.
• Increase in domestic tourism: A weak GBP may discourage UK residents from traveling abroad due to higher costs associated with foreign currencies. This could result in an increase in domestic tourism as people opt for staycations instead.
• Increase in international tourism: Conversely, a weak GBP may attract more international tourists as travel becomes cheaper for them. This could result in an increase in tourism as more people take advantage of the favorable exchange rate.

In conclusion, exchange rates play a crucial role in determining the cost of travel for tourists visiting the UK. A strong GBP may discourage some visitors, while a weak GBP may attract more.

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Role of tourism industry in generating foreign exchange

Introduction. The tourism industry affects the development of both individual countries and the world economy as a whole. With the expansion of international trade and other forms of international economic relations, raising the level of culture and education, tourism is developing rapidly. Significant impact on the activities of the tourism sector is caused by exchange rate fluctuations. As the tourism industry cannot adjust the exchange rate on its own, it has to adapt to currency fluctuations. Thus, the role of the tourism industry in the formation of foreign currency is significant, so the question of the impact of the tourism industry on the formation of foreign currency is relevant today. The purpose of thepaper is to determine the role of the tourism industry in the formation of foreign currency. Results. International tourism is the most numerous commodity in world foreign trade, and for some countries it is already the most important export sector and foreign exchange earnings. As the world is currently experiencing a global health, social and economic emergency with the COVID-19 pandemic, travel and tourism are among the most affected sectors with local aircraft, closed hotels and travel restrictions in almost all countrieіs. The exchange of foreign currency is associated with the purchase or sale of currency other than their own. The rate at which the currency of one country can be converted into the currency of another country is the unit price in terms of another currency in which the exchange takes place. For the tourism industry, a “strong” currency makes its country less attractive, while travel to countries with a “weak” currency is encouraged. A further fall in the dollar against the euro will mean that Europeans, inspired by the purchasing power of the euro and the low dollar, will be much more likely to visit the United States and countries whose currencies are pegged to the dollar as tourists. Conclusion. Thus, on the basis of the conducted analysis it is possible to define that really, there is an interdependence of development of tourist branch and formation of foreign currency in the country. Particular attention should be paid to further study of exchange rate changes and their impact on the intensity of tourism development. In countries where the local currency is pegged to the US dollar, the depreciation of the dollar will also depreciate the local currency. Changes in exchange rates affect the level of price competition in countries, as well as the growth rate of national income.

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Research background: Today’s world is torn between extreme conservatism and duality, in opposition, trying to break the classical framework of freedom in the movement of people. In the context of complex global relations, this impulse, especially related to the travels for tourism purposes, raises new issues concerning the safety and security. The tourism industry has a priority for the economic development of many countries in the world and is a large source of export earnings and, at the same time, an important factor in the balance of payments of a significant part of the national economies in the world. The growing importance of the tourism industry, however, puts tourist destinations worldwide at the forefront of new challenges, one of which is terrorism. In this environment, new relationships are emerging and this reflects on the development strategies, as well as on the financial outcomes of tourism industry which are also largely affected. Purpose of the article: Respecting the new realities, the study explores the link between the risk of terrorism and the revenues from international tourism. Its main purpose is to investigate the impact of terrorism on the financial revenues from tourism in the European countries and the United States. The research is deter-mined by the perception that the financial flows from the international tourism are the quantitative manifestation of the hidden effects of the terrorism. Methods: The research method includes a regression cross-section analysis and Granger Causality test. The survey is panel and includes 37 countries from Europe tourism region and the United States from Americas’ tourism region (according UNWTO) for the period 2012–2017. Findings & Value added: In conclusion, the effects of terrorism on the studied regions have been summarized, establishing dependence between terrorism and tourism, which illustrates a specific creative-destructive reflections of terrorism on tourism with regions particularities.

Foreign Exchange Exposure Management Practices by Zimbabwe's Tourism and Hospitality Companies: A Case for the Depreciation of Rand (2014-2016)

One of the key challenges for tourism and hospitality in the Sub-Sahara Africa (SSA) region is currency behaviours and Exchange rate regime choices. When a company engages in international business foreign currency risk management becomes a crucial part of doing business and the tourism industry of Zimbabwe was not spared on this issue. The objective of this research was to assess the foreign exchange (forex) Exposure Management Practices by Zimbabwe's tourism and hospitality companies. The study was done through a survey on 28 operators in Zimbabwe. A qualitative research approach was adopted in analysis of the data It was found out that the most commonly used ways of reducing the exposure by Zimbabwe's tourism companies were the amicable and mixed-method approaches, of receiving the currency and use it in the country of origin to import materials, matching receipts and payments in foreign currency, risk shifting though it come with low volumes and compromised repeat business. The study recommended that companies and the entire economy must consider invoicing products and services in Rands and even use the rand as a reporting currency. If for example tourism and hospitality players would price regional tourists especially from South Africa and other Rand countries, ignoring the impact of rand depreciation, it would mean that Zimbabwe's tourism and hospitality providers will be in direct competition with the former's own local service providers based on rand priced packages.

Tourism Firms’ Vulnerability to Risk: The Role of Organizational Slack in Performance and Failure

This study explores the influence of political risk on firms in the tourism industry. It addresses a research gap regarding the impact of political risk on firm-level performance and failure and uncovers the role of organizational slack in this relationship. Firm-level political risk is estimated from 2002 to 2019 financial data for firms across six tourism sectors in a developed economy, the United States. Such risk is found to be significantly associated with firm performance and business failure. From the perspectives of the resource-based view and the threat-rigidity hypothesis, the results support the moderating effects of absorbed and unabsorbed slack on links between risk, performance, and business failure. Given that the COVID-19 pandemic has highlighted the tourism industry’s vulnerability, this study will be of interest to tourism firms seeking to improve business sustainability and resilience.

Intervention Strategies in Foreign Exchange Market

Abstract The goal of the paper is to present the intervention strategies used by central banks in order to influence the value of the domestic currency, transparency versus discretion when it comes to publishing data about FX intervention and the cost and effectiveness of intervention. It is rarely that nowadays countries allow for an exchange rate to be formed on the market basis through the effects of supply and demand for foreign exchange on the foreign exchange market. The central bank buys or sells a foreign currency in the foreign exchange market in order to increase or decrease the value of its national currency in comparison to the foreign currency. The reasons for the intervention are the reduction of short-term oscillations of the exchange rate, the impact at the level of foreign exchange reserves, as well as the maintaining the price and financial stability as the ultimate goal of most central banks. The paper will present intervention strategies on foreign exchange market, which involves the implementation of interventions in the market of options, forward, foreign currency repo and foreign currency swaps. Then, on the spot market, interventions using an auction, as well as the application of foreign currency indexed certificates.

The Impact of the COVID-19 Pandemic on the Competitiveness of the Tourism Industry

The COVID-19 pandemic has been going on since December 2019 and changed all predictions of tourism competitiveness in various countries in the world, including various regions in Indonesia. The research objective is intended to measure the competitiveness of tourism in the AmboThe COVID-19 pandemic has been going on since December 2019 and changed all predictions of tourism competitiveness in various countries in the world, including various regions in Indonesia. The research objective is intended to measure the competitiveness of tourism in the Ambon City area to determine the contribution of tourism to the economy of Ambon City and Tual City. This study was done in an exploratory manner. The results of the Competitiveness Monitor analysis show that the competitiveness indicators (Human Tourism, Price Competitiveness, Infrastructure Development, Environment, Human Resources, and Social Development) in Ambon City was better than the ones in Tual City. However, the tourism competitiveness analysis referred to had completely changed along with the regional quarantine (lockdown) system implemented in various countries, and the Regional-Scaled Social Restrictions (Pembatasan Sosial Berskala Regional (PSBR)) system implemented in various provinces in Indonesia – which also included a temporary closure of inter-province seaports in Maluku to limit the virus spread. Therefore, there is an urgency of the role of government and related stakeholders to prepare for a new tourism business order, especially in the provision of transportation, and availability of hotels, restaurants, human resources, and environment which are free from the COVID-19 virus.

THE IMPACT OF BALANCE OF PAYMENTS ON MONETARY POLICY

The paper monitors the balance of payments in the Republic of N. Macedonia, which determines the amount of the exchange rate through the supply and demand of foreign currency, as well as the impact of the exchange rate on the balance of payments movements. Real exchange rates are essentially equilibrium exchange rates. exchange rate that will keep the balance of payments in balance without taking measures for foreign exchange control, without pronounced inflation and deflationary tendencies and without constant expectation of monetary and foreign exchange reserves.There are several methods by which balance of payments can be established: by devaluation, by currency control and by deflation. When considering the relationship between the national currency exchange rate and the balance of payments of a national economy in terms of their interconnections, one should depart from their causal link of impacts. The exchange rate affects the balance of payments, as well as the balance of payments affects the exchange rate.The first part of the paper elaborates in detail the key activities of the balance of payments adjustment and the exchange rate adjustment, as well as their mutual impact.We use the adjustment mechanism to restore balance once the initial equilibrium has been disturbed. The payment adjustment process takes two different forms. One, under certain conditions, has adjustment factors that automatically contribute to balancing. Second, in the event that automatic adjustment fails to strike a balance, the government adopts a discretionary policy to achieve this goal.

The Impact of COVID-19 Quarantine on Children‘s Behaviors and Language

COVID-19 pandemic has spread across the world, which considered a relative of the severe acute respiratory syndrome (SARS), with possibility of transmission from animals to human and effect each of health and economic. Several preventative strategies and non-pharmaceutical interventions have been used to slow down the spread of COVID-19. The questionnaire contained 36 questions regarding the impact of COVID-19 quarantine on children`s behaviors and language have been distributed online (Google form). Data collected after asking parents about their children behavior during quarantine, among the survey completers (n=469), 42.3% were female children, and 57.7 were male children. Results showed that quarantine has an impact on children`s behaviors and language, where stress and isolationism has a higher effect, while social relations had no impact. The majority of the respondents (75.0%) had confidence that community pharmacies can play an important role in helping families in protection their children`s behaviors and language as they made the highest contact with pharmacists during quarantine. One of the main recommendations that could be applied to help parents protection and improvement their children`s behaviors and language in quarantine condition base on simple random sample opinion is increasing the role of community pharmacies inpatient counseling and especially towards children after giving courses to pharmacists in child psychology and behavior. This could be helpful to family to protect their children, from any changing in them behaviors and language in such conditions in the future if the world reface such the same problem.

AN EMPIRICAL STUDY OF INDIAN INSURANCE INDUSTRY POST GLOBAL FINANCIAL CRISIS

India has recently emerged as a major political and economic power in the world. The financial crisis that engulfed the world in 2008 needed developing countries like India to lead the rescue and recovery, instead of G7 westerns countries who dealt with such crisis in the past. Recently, discussions and negotiations are going amongst G20 countries regarding a new global financial architecture (G-20 Summit, 2008). The outcome will affect the relevant industries in India and hence it is a public interest issue for the actuarial profession in the country. Increased and more intrusive and costly regulations and red tapes are likely to be a part of the new deal (Economic Survey 2009-10). The objective of this paper is to study the perception of higher level authorities in Insurance sector regarding the role of regulator in minimizing the impact of global financial crisis. The primary data has been collected from 200 authorities in insurance industry. The data has been analyzed with statistical tools like MS-Excel. On the basis of the findings, various measures and policy recommendations for insurers have been suggested to minimize the impact of crisis.

The link between coronavirus, anxiety, and religious beliefs in the United States and United Kingdom

Research has shown that stress impacts on people’s religious beliefs. However, several aspects of this effect remain poorly understood, for example regarding the role of prior religiosity and stress-induced anxiety. This paper explores these aspects in the context of the recent coronavirus emergency. The latter has impacted dramatically on many people’s well-being; hence it can be considered a highly stressful event. Through online questionnaires administered to UK and USA citizens professing either Christian faith or no religion, this paper examines the impact of the coronavirus crisis upon common people’s religious beliefs. We found that, following the coronavirus emergency, strong believers reported higher confidence in their religious beliefs while non-believers reported increased scepticism towards religion. Moreover, for strong believers, higher anxiety elicited by the coronavirus threat was associated with increased strengthening of religious beliefs. Conversely, for non-believers, higher anxiety elicited by the coronavirus thereat was associated with increased scepticism towards religious beliefs. These observations are consistent with the notion that stress-induced anxiety enhances support for the ideology already embraced before a stressful event occurs. This study sheds light on the psychological and cultural implications of the coronavirus crisis, which represents one of the most serious health emergencies in recent times.

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Exchange Rate: Understanding its Impact on Global Economy

✅ All InspiredEconomist articles and guides have been fact-checked and reviewed for accuracy. Please refer to our editorial policy for additional information.

Exchange Rate Definition

The exchange rate is the value or rate at which one national currency can be exchanged for another. It is a measure that represents the comparative value of different currencies, used in international trade and investment.

Understanding Exchange Rate Mechanism

The exchange rate’s determining mechanism revolves around numerous complex, intertwined factors. Chief among these are inflation, interest rates, and market speculations.

Inflation and Exchange Rate

Inflation plays a critical role in determining the exchange rate. When a country's inflation rate is low, the purchasing power of its currency gets a boost relative to other currencies. This increase results in an upsurge in the value of that country's currency. Conversely, high inflation rates usually involve depreciation of the country's currency.

It's simply because, with high inflation, a unit of currency can purchase less goods or services. An example can illustrate this easily. Let's assume Country A and Country B both produce widgets. If the inflation is higher in Country A, the cost of widgets produced there will rise faster compared to those in Country B. Buyers will then tend to purchase widgets from Country B, increasing the demand and, consequently, the value of Country B's currency.

Interest Rates Role in the Exchange Rate Mechanism

Interest rates are another key determinant. When interest rates increase, a country's currency often rises in value. Here is why: high interest rates provide higher returns to investors for holding that country's currency. Therefore, higher interest rates attract foreign capital and cause the exchange rate to rise. The impact of higher interest rates is mitigated, however, if inflation in the country is much higher than in others, or if additional factors serve to drive the currency down.

Market Speculation Impact on the Exchange Rate

Finally, market speculation has a profound effect on exchange rates. If countries appear susceptible to future economic instability, foreign investors may start to withdraw their investments. The anticipated decline will lead to a sell-off in the foreign exchange market, causing the currency's value to fall.

On the other hand, if the country's economic prospects look positive, more foreign capital will flow into the country, thereby increasing the demand for its currency and causing its value to increase. Consequently, the exchange rate will move in favor of this country's currency. This speculative approach can result in significant fluctuations in the exchange rate.

In summary, the mechanism of exchange rate determination is influenced by a range of factors, varied in nature and impact. Understanding these can help demystify the reasons for exchange rate movements.

Please note that this is a simplification for the sake of understanding. In reality, the situation is far more complex and is influenced by a multitude of other factors, including trade balances, political stability, economic performance and many more.

Types of Exchange Rate Systems

There are various exchange rate systems globally, each with unique operation methods and impacts on economies. They are primarily categorized into three types: fixed exchange rate, floating exchange rate, and hybrid exchange rate systems.

Fixed Exchange Rate System

Under a fixed exchange rate system, a country's currency's value is set relative to a specified quantity of another currency or to a basket of other currencies, or to another measure of value, usually gold. The currency’s value is tied to a foreign currency, a commodity, or a currency basket. The central bank maintains the exchange rate at a pre-set level or within a range – buying or selling its currency on the foreign-exchange market if the rate threatens to drop below or rise above that level.

A key advantage of fixed exchange rate systems is that they eliminate exchange rate risk as there are no fluctuations in the currency exchange rate. However, this system often requires a high level of foreign reserves to maintain the fixed rate, and economic shocks can lead to drastic policy measures, including complete currency devaluation.

Floating Exchange Rate System

Unlike the fixed system, a floating exchange rate system allows the market forces of supply and demand to determine the exchange rate without intervention by the country's government or central bank. This system can self-adjust to shocks or foreign economic changes, ensuring that the domestic economy is less likely to suffer long term harm from such occurrences.

While it sounds ideal, the drawbacks to a floating exchange rate system include high volatility, which might lead to economic instability, and an uncertain business environment due to unpredictable rate fluctuations.

Hybrid Exchange Rate System

As the name suggests, the hybrid exchange rate system is a mixture of fixed and floating exchange rate systems. Some countries opt to have their currency partly floating, where the currency value floats within a band set by the government or central bank. It's also known as a managed float system. Other hybrid systems may involve pegging their currency to a major currency but still allowing minor fluctuations.

This system provides a balance, reducing the risks associated with the other two extreme systems. On the downside, it can involve complex management and potentially lead to conflict between free-market principles and the desired level of control.

Exchange rate systems play a significant role in shaping macroeconomic stability and the broader financial landscape of a society. Its choice depends on a country's individual economic characteristics, policy goals, and level of development.

Role of Central Banks in Exchange Rates

Central banks play an impactful role in controlling and adjusting exchange rates, ensuring a stable economic climate. They have the power to intervene in the foreign exchange market by buying or selling their own currency to stabilize the exchange rate.

Intervention by Central Banks

Central banks adjust exchange rates via two major types of interventions: direct and indirect.

Direct interventions involve the buying and selling of foreign currencies. For instance, if a country's currency is seen as too strong, the central bank might sell its own currency to increase its supply in the market. Conversely, if the currency is too weak, the bank may buy it back to reduce its availability and hence raise its value.

Indirect interventions are more about changing the domestic money supply. If a country wants to devalue its currency, the central bank can increase the local money supply, thereby causing inflation which reduces the currency's international value. If revaluation is the aim, then the central bank may decrease the domestic money supply, causing deflation which increases the currency’s international price.

Devaluation and Revaluation

These are two critical tactics central banks can utilize.

Devaluation is artificially lowering the currency's value. Central banks typically do this by selling large amounts of the domestic currency in the global foreign exchange market. The increase in supply results in a decline in the currency's price. Devaluation can help enhance export competitiveness, as it makes domestic goods cheaper for foreign buyers.

Revaluation is essentially the reverse. By reducing the supply of its currency in the global market, e.g. by buying up large amounts of its own currency, a central bank can make its currency dearer. This helps decrease the price of imports but can significantly hinder the competitiveness of domestic industries abroad.

However, it's important to note that such interventions aren't without consequences. They can lead to instability and distortions in the market, and the effect is often temporary, as market forces invariably kick in. So while central banks wield a potent tool in managing exchange rates, their use ought to be judicious.

Exchange Rate Regime and Economic Development

Having established what an exchange rate is, it becomes crucial to understand how the type of exchange rate regime has a significant impact on a country's economic development. The two most common types of exchange rate regimes include fixed (or pegged) rates and floating rates, both of which have potential pros and cons.

Fixed Exchange Rate Regimes

In a fixed or pegged exchange rate regime, a country's currency value is set relative to the value of another single currency or to a basket of other currencies or to another measure of value such as gold. The goal of this exchange rate regime is usually to maintain the country's currency at a stable rate.

A stable exchange rate encourages foreign investment due to lower risks associated with currency fluctuation. Foreign investors can be more confident about the value retention of their investments and can better predict future outcomes. Moreover, it can foster trade since cross-border transactions are less risky when exchange rate fluctuations are minimally expected.

Floating Exchange Rate Regimes

On the other hand, in a floating exchange rate regime, the value of a currency is determined by market mechanisms based on demand and supply. The currency's value can change freely and is influenced by numerous factors like economic stability, inflation, interest rates, political stability and more.

One of the main advantages of floating rates is that they are self-adjusting. This means, a country that uses a floating exchange rate isn't required to maintain high levels of foreign reserves. Instead, if an economic shock occurs, the currency value will adjust on its own, helping to dampen the shock on the local economy. For instance, if there is a domestic economic downturn, the currency might depreciate which can stimulate exports by making them cheaper.

However, keep in mind that while fixed and floating exchange rate regimes offer their unique sets of pros and cons, the choice of exchange rate regime can greatly hinge on the specific economic conditions and development goals of a country.

Impact of Exchange Rates on Trade and Investment

Understanding the impact of exchange rates fluctuations.

Exchange rates play a pivotal role in shaping international trade and investment. A shift in these rates can lead to substantial implications for businesses, investors, and economies at large.

Consequence on International Trade

When a currency appreciates—meaning it becomes more valuable compared to other currencies—it can reduce the competitiveness of a country's exports. This is because the goods and services offered by a country become more expensive to foreign buyers. A clear example would be a Chinese importer buying goods from the U.S; if the dollar appreciates against the yuan, the Chinese importer will have to pay more yuan to buy American goods, likely reducing demand for those goods.

On the other hand, currency depreciation—the reduction of a currency's value relative to others—can stimulate exports as goods and services become cheaper for foreign markets. However, it can also lead to higher import costs, affecting any businesses that rely on imported goods or raw materials.

Effect on Investment

Currency fluctuations can significantly impact investment too. A strong currency can attract foreign investors as returns from the local market will yield more when converted back to their home currency. This influx of foreign investments can stimulate growth in the local economy.

Conversely, a depreciating currency can deter investments. The worry is that profits made will be less when converted back to the foreign investor's home currency. In extreme cases, this could lead to capital flight, with investors rapidly pulling out their investments in fear of further currency depreciation.

However, it should be noted that these are simplifications of the potential impacts. In reality, the situation can be much more complex, as other economic indicators such as inflation, political stability, and economic growth also interact with and influence exchange rates and their effects on trade and investment.

Exchange Rates and Corporate Strategy

When businesses engage in international trade, they're routinely exposed to fluctuations in the exchange rate. These fluctuations can significantly impact their profitability and cash flow. This risk can be mitigated by incorporating robust strategies in the face of exchange rate volatility.

Using Forward Contracts to Hedge

One common strategy employed by businesses is the use of forward contracts. These are agreements made in the present to buy or sell currency at a specific rate at a future date. For instance, if a U.S. company knows it'll have to pay in euros for imported goods in six months, it can lock in a rate today, avoiding potential future losses.

Options for Hedging

Options offer another method for hedging against exchange rate volatility. Unlike forward contracts, options—essentially contracts that provide the right, but not the obligation, to buy or sell currency at a specific exchange rate—allocate businesses the leeway to capitalize on favorable exchange rate movements while remaining protected against adverse shifts.

Money Market Hedging

Money Market Hedging is another tool at businesses' disposal. Here, the firm borrows and lends in two different currencies such that the loan repayments match the future cash inflow or outflow in a foreign currency. It implies protection against exchange rate changes while fulfilling foreign currency obligations without the exchange process.

Natural Hedging

Lastly, businesses could choose to embrace the practice of natural hedging. This strategy implies balancing cash inflows and outflows in a foreign currency. For example, a company can aim to match its foreign currency revenue (cash inflows) with its costs (cash outflows) in that same currency, thus creating a natural hedge against inflation.

Although these are just a few methods businesses can use to strategize around exchange rate volatility, they signify the importance of maintaining a proactive approach to manage these inherent risks. The consideration of each approach depends on the specific needs, context, and risk tolerance of the company.

Implications of Exchange Rate Fluctuations on CSR & Sustainability

Moving into the discussion of how exchange rate fluctuations can affect Corporate Social Responsibility (CSR) and sustainability efforts of a company, it is essential to note that both the profit and the ethical concerns are subjected to these fluctuations.

Impact on CSR Expenditure

An important area of impact is the budget allocation for CSR activities. If a company's home currency weakens against the currency of the foreign market it operates, it may need to reassess its total CSR spend. If the bulk of the CSR initiatives occur in the home country, a weaker home currency may lead to a reduction in overall CSR expenditure as more home currency is needed to purchase foreign currency. This might force companies to scale down their CSR projects or look for alternative funding. In such cases, companies with heavy forex exposure may choose to shift their CSR efforts to communities in foreign markets to optimize their spend in the local currency.

Effect on Sustainable Sourcing

Furthermore, the sustainable sourcing strategies of businesses may also be affected. Multinational companies often strive to source their raw materials sustainably from foreign markets. However, a turbulent exchange rate can disrupt this. For instance, if a company sources organic cotton from a country and the exchange rate fluctuates significantly, this can either make procurement more expensive and affect the financial sustainability of the project, or it may provide a relative cost advantage. In both scenarios, strategies and policies around sustainable sourcing may need to be reassessed.

Challenges for CSR Project Evaluation

Additionally, exchange rate fluctuations introduce a set of challenges for assessing the effectiveness and value of international CSR projects. A series of changes in a foreign exchange rate can potentially alter the in-home currency value of project benefits, which may make it difficult for a company to compare the results of different projects and to measure their impact accurately.

The exact impact of exchange rate fluctuations on CSR and sustainability will vary from company to company, but these challenges and constraints should underline the need for businesses to integrate financial risk management into their CSR and sustainability strategy. Financial tools such as hedging contracts may be used to mitigate such risks. Ultimately, understanding these impacts will enable corporations to navigate exchange rate fluctuations effectively and maintain their commitment towards CSR and sustainability.

Fixed versus Floating Exchange Rates: Pros and Cons

Fixed exchange rates.

When a country employs a fixed exchange rate system, it anchors its currency value to that of another country or a basket of currencies. This approach delivers stability. Trades with other nations become more predictable, disincentivizing speculative attack. Inflationary pressure can also be reduced, as currency's value is unaffected by market fluctuations.

Disadvantages

The chief downside of fixed exchange rates is the lack of flexibility. If the economy is hit with a shock, it may not be able to adjust quickly. Furthermore, maintaining a fixed exchange rate requires vast reserves of foreign currency. This can lead to financial strain as a government may need to buy or sell its own currency on the international market to align the domestic currency's value with the set rate.

Floating Exchange Rates

Floating exchange rates offer more economic autonomy. A country using this system can adjust its monetary policies according to its domestic needs without worrying about maintaining a certain currency value. It also further shields economies from economic turmoil in other countries.

On the downside, floating exchange rates are inherently volatile. They can fluctuate wildly, causing unpredictable shifts in import and export costs which can unsettle businesses. If a country's currency value falls dramatically, it might endure severe inflation.

Mixed Exchange Rates

Some countries opt for a hybrid system, utilizing features from both fixed and floating exchange rates. This approach attempts to strike a balance between monetary autonomy and currency stability, aiming to minimize the disadvantages of each system.

The choice between fixed and floating exchange rates ultimately depends on several factors, including a country's economic stability, its stage of development, its openness to foreign trade, and the size and diversity of its economy. Neither system is inherently superior; rather, different countries might find one system more suitable based on their unique circumstances.

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‘Foreign tourist dollar’: everything you need to know about the preferential exchange rate

If you’re visiting argentina, you’ve probably heard you need to pay for everything with stacks of cash to stretch your dollars. but as of december, you can get the same rate on your mastercard or visa. here’s what you need to know about paying by credit card in argentina..

• January 20, 2023

January 6, 2023 – updated January 20, 2023

Aline Spating arrived in Argentina on a very hot January day and spent much of it in a very long line, slumped in the shade among tourists swigging beer from coolers. The 24-year-old German had just crossed the border from Brazil to the steamy Argentine jungle town of Puerto Iguazú, and was waiting to change a stack of US dollars into pesos at Western Union. 

It was worth the delay, she felt: fellow travelers had warned her never to pay by card in Argentina, because changing money at Western Union would give her almost twice as many pesos per dollar. The owner of her hostel even drew a concept map explaining Argentina’s economic ordeals, saying she should pay for everything in cash changed at Western Union or cuevas (caves, or illegal exchange houses). 

What Aline didn’t know was that these financial gymnastics aren’t necessary anymore.

Until recently, payments made in Argentina with foreign credit and debit cards were changed at the official dollar exchange rate, which is AR$185.75 to the dollar at the time of writing. But on November 4, Argentina’s central bank launched a preferential exchange rate for foreign tourists. 

Known as the “foreign tourist dollar”, it means payments made on foreign credit cards use the “ MEP ” (“Electronic Payment Market”) dollar exchange rate, which is currently AR$331.79 to the dollar. In other words, if you’re paying by card, your dollars go 78% further than before. 

Currently, the “foreign tourist dollar” only works for purchases, and not cashpoint withdrawals.

How does the “tourist dollar” work?

Mastercard joined the program on December 2 and Visa followed suit just under two weeks later, meaning payments made in Argentina through foreign credit card from those companies are now processed at the MEP dollar rate.

Mastercard confirmed to the Herald that their cards charge their users the official rate then reimburse them for the difference, while foreign Visa holders said their cards process the initial payment at the MEP dollar rate.

Lucas P.M., a 59-year-old U.S. citizen, told the Herald a purchase he made on his Mastercard was charged at the official rate (in this case, US$22), but he was automatically reimbursed for the difference (US$9.52) four days later. Three other Mastercard users told the Herald they’d had the same experience.

Lucas visits Argentina once a year, and said he would continue using his card “basically because of the convenience of it: first, because I did not bring any cash with me and, second, because I do not know any arbolitos [informal dollar sellers]”.

“Returns are identified days after the purchase, since it depends when the transaction is effectively processed,” said Federico Cofman, Mastercard’s Country Manager for Argentina and Uruguay. He added that returns were usually made within 72 hours, depending on the card issuer.

Visa cardholders told the Herald their payments had been processed at the MEP rate. Mariana (not her real name), a 26-year-old Guatemalan, used to bring US dollar bills from her home country and change them in cuevas or with friends. “I stored them under the mattress and dosed them. When I saw the blue dollar [the informal exchange rate] went up, I exchanged,” she said.

When the change came in, she made an experimental purchase to see what would happen. It went through with no problems at the preferential rate, so she will now start using her card. “The difference between the ‘tourist’ [dollar] and the blue is like 30 pesos, so it’s not that big, and it works for me because I don’t have the inconvenience of having to buy everything with cash or running out of dollars,” she said.

With Visa and Mastercard, “more than 90% of the market share” is covered, according to sources inside the central bank. “Only AMEX [American Express], which has less than 10% of the market, is still not on board”. Representatives for American Express in Argentina told the Herald that the company is going to offer the service, but cannot give a precise time frame yet. “We’re working on the implementation and the system and process adaptation, which will take a while,” they added.

What are the advantages and disadvantages?

The new rate makes the country a cheaper destination for tourists. Switching from cash to card payments could also be safer, since tourists will no longer have to take their chances with informal exchange houses and hotels will not need to handle such huge wedges of cash, sources in the tourism and hospitality sector said. 

The greatest takeup so far has been from Brazilians, followed by Europeans and visitors from the US, according to the Tourism Ministry, which views the measure as a resounding success. They think the new exchange rate will help restore tourist industry income to pre-pandemic levels, or even surpass those figures.

Cofman, the Mastercard country manager, said that foreign card transactions increased by 25% in value and 28% in volume within a week of the new rate’s implementation. At first, purchases were dominated by “typical” card purchases such as air tickets, restaurants and hospitality, he said, but holders are increasingly paying for everyday things such as supermarket bills and transport by card.

However, some tourists on low budgets are not convinced.

“I will probably always use the way that gives me the most pesos,” Spating said. At the time of writing, there is a small difference of 30 pesos per dollar between the informal (blue) and MEP exchange rates. “I also prefer cash because, when I wanted to pay the hostel with my card, for example, the owner told me it’s an extra 5%,” she added. 

It is worth noting that some businesses, especially informal traders in smaller and more remote areas, don’t take card payments, so it’s always a good idea to carry cash, just in case.

A side effect

The new exchange rate is designed for foreign tourists, but Argentine residents who have foreign credit cards can also take advantage of it because the Economy Ministry currently has no way of telling whether a cardholder is a resident. Carlos, a 33-year-old Argentine software engineer, who asked the Herald to withhold his real name because he was concerned about possible legal consequences, tried both his Visa and Mastercard U.S. cards, and the “tourist dollar” exchange rate worked like a charm.

Like a minority of Argentines that work remotely for foreign countries and could open an account in an overseas bank, his dollars are now worth nearly twice as much as before.

You may also be interested in:

“Tourist dollar” preferential rate now available for digital wallets

UnionPay cardholders now get foreign tourist dollar rate

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