Background

This paper investigates, for the first time, whether there is a relationship between international trade and international travel flows using time series econometric techniques. Using data for Australia and four important travel and trading partners, the USA, the UK, NZ and Japan, the paper tests three specific hypotheses: that business travel leads to international trade; that international trade leads to international travel; and that international travel, other than business travel, leads to international trade. Using cointegration and Granger-causality approaches the paper finds support for prior beliefs that there is a relationship between international travel and international trade, and suggests that this may be a fruitful area for further research.

Trade openness, popularly measured as (X + M)/GDP in the hundreds of studies published to date, consistently considers the world's biggest trading countries such as the USA, the UK, Japan and Germany to be closed economies, irrespective of the data set used. This study suggests a composite trade share measure that more completely reflects reality by combining two important dimensions of trade openness: trade share and the relative importance of a country's trade level to total world trade. Robustness tests support the new proposed measure in lieu of the conventional measure of openness and suggest that the latter may not only be incomplete but may also overstate the impact of trade on such things as income and the environment.

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