Research Note: Long-Lasting Effects and Welfare Costs of Fluctuations

Abstract

The tourism industry is growing rapidly but is also highly fluctuating. Using China's inbound tourism market as the object and based on the B–N data decomposition theory, this paper adopts the statistics of variance ratio to measure the long-lasting effects of stochastic fluctuations on China's inbound tourism industry. It also discusses the influences of stochastic fluctuations and the decreasing growth rate on the welfare of China's inbound tourism. The conclusion is that undoubtedly China's inbound tourism industry will continue to grow, but the impact of stochastic shocks will endure for a relatively long time. Twenty-four per cent of the long-term fluctuation of China's inbound tourism industry is the result of stochastic shocks, whose effect, in the short term, will continue to be reinforced. Though the elimination of fluctuations will increase welfare by 0.40%, lowering the growth rate will decrease welfare by a larger percentage. If the monthly growth rate decreases by 0.1%, welfare will fall by about 19.37%, 48 times the amount of welfare loss without fluctuation. Therefore, China's inbound tourism business should stick to the long-term policy of facilitating growth, while some administrative and legislative measures should be taken to address the negative impact of stochastic fluctuation appropriately.