Modelling substitution between domestic and outbound tourism in Australia: A system-of-equations approach

• Substitution relationships between Australian domestic and outbound tourism are found.
• A dynamic almost ideal demand system model is employed.
• Short-run demand elasticities are calculated.
• A new price variable based on purchasing power parity index is developed.
• Further promotion of Australian domestic tourism is recommended.

This study uses a system-of-equations approach to model the substitution relationship between Australian domestic and outbound tourism demand. A new price variable based on relative ratios of purchasing power parity index is developed for the substitution analysis. Short-run demand elasticities are calculated based on the estimated error correction almost ideal demand systems. The empirical results reveal significant substitution relationships between Australian domestic tourism and outbound travel to Asia, the UK and the US. This study provides scientific support for necessary policy considerations to promote domestic tourism further.