Application of Gravity Model in Estimating Tourism Demand in Malaysia

This paper estimate tourism demand in Malaysia based on the key economic factors like income, price, exchange rate, consumer price index, distance, population and economic crisis using a modified Gravity model. The movement, pattern and changes of international tourist arrivals are also examined. A cross-sectional pool time-series of tourist arrivals from Australia, Hong Kong, Indonesia, United Kingdom, Thailand, Taiwan and China through using Gravity Model was applied. Log-linear equation indicates that the tourism demand is highly correlated with Gross National Income (GNI) of the countries which showing the impact on the standard of living. On the other hand, tourism demand negatively correlated with Exchange Rate (ER) as tourist from higher purchasing power prefers to visit Malaysia. Consumer Price Index (CPI) or inflation rate reduce number of tourist to travel. The increasing number of tourist arrivals was influenced by population growth and distance may reduce tourism demand. Economic crisis negatively affected the tourism demand from the ASEAN countries but positively correlated with the western and other continents. This study clearly indicates that in spite of regional economic crisis, the Malaysian government can still rely on tourism industry as a means of sustaining the economy through international tourists.