The Economic Impact of the Winter Olympic & Paralympic Games

Appendix B: The Role of Exchange Rates in Travel Decisions

Movement in the rate of exchange between the Canadian dollar and other currencies, particularly the USA dollar, has implications for international visitor volumes to British Columbia, the cost of the Games and the value of Olympic revenues from foreign sources. At greatest risk from exchange rate movement are the foreign-sourced sponsorship and broadcast revenues and foreign-sourced goods and services. Most of these arrangements are negotiated in USA dollars.

Revenue payments flow over a period of several years spanning the Games. Any strengthening in the Canadian dollar during the USA dollar-denominated revenue collection years will be reflected in lower Games revenue and reduced economic benefit. Conversely, a weakening in the dollar will generate a windfall gain. The reverse is true for payments to external suppliers of goods and services. There is some opportunity to manage this risk through hedging, once contract values have been established.

While the impact of currency fluctuations is obvious for payments denominated in foreign currency, the impact on tourism volumes is much less clear. The Canadian dollar has been trading at a considerable discount to the USA dollar for many years. As a "favourable exchange rate" is often cited in the media as a reason for international tourism, one might expect a weakening Canadian dollar to be a persistent incentive for tourism travel to Canada for Americans and other internationals with strong currencies relative to Canada. The historical data does not support this conclusion. There is no readily discernible material correlation between the Canada-USA exchange rate and American or international tourism to British Columbia.

In the observation period 1971 through 2000, using the simple average of the monthly rates as the annual Canada - USA exchange rate, growth in American visitors to British Columbia moved counter-intuitively about 40% of the time. That is, in 11 of the 28 years observed, American tourism to the province either grew during periods when the cost of the Canadian dollar was rising (i.e. the US dollar was worth less) or declined when the cost of the dollar was falling. The comparative number for British and Japanese visitors was 46% and 36% respectively.

In the remaining 17 years of USA visitor data, when both tourism growth and the exchange rate were moving in the same direction, there is no material correlation between the size of the respective movements. A 0.11% change in the exchange rate corresponds to a 4.78% change in visitor volume in one case, while 7.85% change corresponds with a 1.16% change in visitor volume in another. Nor is there a discernable lag relationship between one and the other. Similar results are evident in the other two markets examined: Britain and Japan.

Why is this so? The simple answer is that exchange rates are not a good measure of the relative cost of living for a tourist at the foreign destination versus at home or at alternative destinations. A favourable exchange rate means only that the purchaser of the currency is getting more local currency per unit of his or her own domestic currency than in some preceding period: it says nothing about the purchasing power of that local currency in the local economy, either now or previously. Nor does it say anything about the relative purchasing power of the purchaser's own currency in this or any other local economy versus what it would buy at home.

To create a consistent basis for comparison of relative purchasing power of currencies in foreign markets, the OECD developed the Purchasing Power Parities Index (PPPI). This index measures the cost of a standard basket of goods in the local currency in the currency's domestic economy relative to what that same basket of goods would cost in the USA, in USA dollars. The cost of the USA basket in USA dollars is set at "1". Currently Canada scores about 1.2 relative to the USA.

When the USA resident visits British Columbia (or Canada) and purchases the standard basket of goods (in this case the hotel room, the food and beverages, the gasoline etc.) with a USA dollar, we charge $1.26 Canadian for that basket which would have cost $1.00 USA dollar in the USA. But, when the visitor proffers the USA dollar in payment in Canada we return 23 cents in change, assuming a current exchange rate of $1.49 to the USA dollar. For one USA dollar, the American visitor has received the same basket of goods he or she could have bought in the USA for one USA dollar and the visitor has pocketed 23 cents Canadian in change. This 23 cents represents the USA traveler's "bonus" for vacationing in Canada versus staying at home. The same calculation can be made to determine the bonus (positive or negative) for visitors from other countries.

Does this explain international tourism movements? Not really. As the chart indicates the PPPI and the annual rate of change in USA visitor volumes sometimes move in opposite directions.

The more complex answer lies in the motivation to travel. The motivation for international travel is clearly grounded in a complex mix of monetary and psychological factors. The psychological factors include, among many others, the desire to experience different places, to see different things and the perception of good value for money. The monetary aspect of the motivation to travel appears more firmly rooted in an individual's sense of economic worth or well being than in the simple cost of a vacation or the exchange rate per se.

An individual's sense of economic well being is a function of his or her employment status, job security and disposable income among other things at the personal level and, at a broader level, in the general state of the economy in which he or she resides. Unlike the Canadian dollar, demand for, and hence the price of the USA dollar relative to the Canadian dollar, is driven in some large measure by the extraordinary international market demand for USA dollars as a multilateral or international trade currency. As a consequence, the underlying strength of the Canadian economy versus the USA economy is understated in the exchange rate.

Value for money is not a direct cost comparison of one thing or place to another but rather the aggregate of objective and subjective factors that lead the consumer to conclusions such as, the vacation experience was an expensive hassle and I would not do it again; it was expensive but so much fun I would do it again; or, it was cheaper than alternative destinations but dull and boring. Only the second scenario suggests good value for money if the vacation objective was to relax and have fun.

Two examples pertain. Recently there has been a surge of interest among Mexicans to vacation in British Columbia as reported in Business In Vancouver³. Again, the "favourable" exchange rate is cited as a key reason. Indeed, the exchange rate has improved nearly 10% since the beginning of this year. Yet there was no corresponding surge of Mexican tourists in the 1990's, when the economic environment in Mexico was much different, even though 2.5 pesos would buy one dollar, versus the 6 pesos required today. Similarly, visitors from Britain have taken over as the leading off-shore visitor group with volume increases of 12.2% and 11.6% in the past two years. Much of this growth has been in winter tourism at Whistler. In that same period, the Canadian dollar has gained 8.6% against the pound. Part of the reason for the volume growth in the face of a declining pound is revealed in observations from hoteliers about the psychological element of tourism , U.K. skiers appreciate good value such as having lessons in their own language, enjoying relatively uncrowded slopes and orderly lift lines.⁴ Of course it hasn't hurt that Britain's unemployment rate is reaching historical lows.

The conclusion one may draw from this is that British Columbia will continue to attract international visitors in spite of a significant strengthening of the Canadian dollar or weakening of the travelers "bonus" provided two core conditions are met: 1: the visitor lives in a vigorous domestic economy that provides a sense of economic well being and hence the willingness to spend on travel; and, 2: the visitor perceives good value for money in British Columbia compared to competing destinations.

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