Economic Impact of Tourism

3. The service sector is
responsible for
40% of GDP in Developing
countries.
65% of GDP in industrialised
countries.

4. Economic Benefits
Foreign exchange earnings
Government revenues
Employment generations

6. For tourism planning and development strategies,
economic impact analyses with reliable flows of
expenditure data are needed.
International tourism activity is often easier to measure
than domestic tourism activity.
Immigration procedure
currency exchange
specific visitor expenditure surveys

7. In 1986, performance development of service sectors
due to intersectoral linkages.
From the mid-1990s, globalization accelerates service
industries.
Recognition of importance of service sector came in the
establishment of GATS. ( General Agreement of Trade in
Services )

8. The General Agreement on Trade in Services (GATS)
is a treaty of the World Trade Organization (WTO) that
entered into force in January 1995 as a result of
the Uruguay Round negotiations. The treaty was
created to extend the multilateral trading system
to service sector, in the same way the General
Agreement on Tariffs and Trade (GATT) provides such a
system for merchandise trade.

9. Globalization
Globalization refers to the result of collection of forces
that tend to change the way that the economic, political
and cultural worlds operate.
Market-based economy
Geographical distance between economic factors
becomes a factor of diminishing significance.

10. 0 Tourism has been able to stand up to the pressures of
global recession.
0 It is important to examine the economic significance
of the tourism
0level of tourism activity
0type and nature of the economy
0 Developing countries by measuring the ability to
generate inflow of foreign exchange or greater price
flexibility in its export industries.
0 Diversification strategies and to combat regional
imbalance in developed countries.

11. The Significance
of International Tourism
Table 5.1 Principal tourist-generating countries, 1986–2002: expenditure
(US$bn)
Source: Derived from WTO, 1988; 1992; 1997; 2003

12. The Significance of
International Tourism Continued
Table 5.2 Principal destinations in terms of tourism receipts, 1986–2002:
tourism receipts (US$bn)
Source: Derived from WTO, 1988; 1992; 1997; 2003

13. Economic Dependence
on Tourism
Table 5.3 Tourism receipts expressed as a percentage of total export earning
and gross national income, 2001
Source: Derived from Euromonitor, International Monetary Fund (IMF), International Financial Statistics

14. Tourism Satellite
Accounts
0 Based on the need to provide consistency in
measurement:
0 Within a country over time
0 Between countries
0 They are not economic impact models but are usually
built around such models (Input-Output Models)
0 Provide an accounting overview of tourism from a
demand perspective

16. Tourism’s Economic
Impact
0 Tourism’s economic impact is NOT the same as
tourist receipts
0 Full assessment of tourism’s economic impact must
take into account:
0 Leakages of expenditures out of local economy
0 Direct plus indirect plus induced effects
0 Displacement and opportunity costs...

17. Leakages
0When tourists make expenditures within an economy
the amount of money that stays within that economy
depends upon the extent of leakages that occur.
0For ex. if a tourist purchases a souvenir from a gift shop,
the extent of leakages will depen upon whether the
input (row material) was imported or made locally. If it
is imported the tourist is really buying the value added
that was created within the economy.
0i.e. the value of local transport, import, wholesale and
retail margins(goods), government taxes and duties etc.

18. Leakages
0 The reason only a proportion of extra income is
re-spent in the local economy is that other calls
are made on that income, which remove part of the
flow from being re-spent in local transactions.
Primarily these other calls are:
1. Taxation on income
2. That part of extra income which people choose to
save -the marginal propensity to save (MPS)
3. Expenditure on imports.
0 These losses to the direct re-spending chain are
leakages from extra local consumption-income
circulation.

19. Measurement of economic impact
0The calculation of the economic impact of tourist
expenditure is achieved by using multiplier analysis
and the estimation of the economic impact of
tourism development projects is achieved by
resorting (applying) to project appraisal techniques
such as cost-benefit analysis.
0The mesurement of the economic impact, if it is to
be meaningful, must encompass the various effects
of tourist spending as it impacts througout the
economy. That is the direct, indirect and induced
effects associated with expenditure need to be
calculated.

20. The different levels
of tourism’s economic impact
0Direct Effects: it is the value of tourist expenditure less the
value of imports necessary to supply those “front line” goods
and services. The direct impact is likely to be less than the
value of tourist expenditure.
0Indirect Effects: The establishments that directly receive the
tourist expenditure also need to purchase goods and
services from other sectors within the local economy, for ex.
hotels will purchase the services of builders, accountants,
banks, etc.
0Furthermore the suppliers of these goods and services will
also need to purchase the goods and services from other
establishments within the local economy and so the process
continues
0These subsequent rounds of expenditure is known as the
indirect effects

21. 0 Induced Effects: During the direct and indirect rounds of
expenditure, income will accrue to local residents in the form
of wages, salaries, distributed profits, rent, and interest.
0 This addition to local income will be re-spent in the local
economy on goods and services and this will generate
further rounds of economic activity.
0 It is only when all three levels of impact are estimated that the
full positive economic impact of tourism expenditure is fully
assesed.

23. The Multiplier Concept
0The multiplier concept is based upon the recognition
that sales for one firm require purchases from other
firms within the local economy, i.e. the industrial
sectors of an economy are interdependent.
0This means that firms purchase not only primary
inputs such as labor, but also intermediate goods and
services produced by other establishments.
0Therefore, a change in level of final demand for one
sectors output will affect not only the industry in
question, but also other sectors that supply goods to
that sectors that act as suppliers to those sectors as
well.

24. The Multiplier Concept
0 Tourism multipliers have been developed over some years
based on largely Keynesian principles of the recirculation of
a proportion of income by recipients into consumption
spending which then causes further income and
employment.
0 The basis of a simple multiplier is that a direct injection of cash
into an economy, by, say, international tourism expenditure,
means a higher income for suppliers of tourism services.

25. The Multiplier Concept
0 This will be distributed partly as wages and salaries, rent,
interest and profit, and partly as indirect income to
suppliers of goods and services needed by tourism
enterprises.
0 The latter indirect income, distributed to food and beverage
suppliers, electricity and phone companies, fuel distributors,
printers and so on, is also distributed in further factor and
supplier payments.

26. The Multiplier Concept
0Recipients of all the above increased
incomes may then spend or save these
increases.
0To the extent that they choose to spend on
goods and services produced in their home
economy, a round of transactions creates
increased induced income for the
secondary suppliers, who themselves then
have more to spend, and so on. The
multiplier principle is summarized in
Figure 5.1.

27. Measuring the Economic
Impact of Tourism
0 The Multiplier Concept
Figure 5.1 The multiplier process

28. Measuring the Economic
Impact of Tourism
Figure 5.1 The multiplier process (cont’d)

30. Types of Multipliers
0 transactions (or sales) multiplier: identifies the increased
volume of business activity by sales turnover value, in relation to
initial tourism expenditure.
0 output multiplier: is similar to the transactions multiplier,
except that it includes the value of all goods and services
produced rather than sold; that is, it may include additions to
inventories.
0 income multiplier: in tourism impact analysis, most multiplier
calculations have been applied to income generated, and the
multiplier concerned may be termed the tourism income
multiplier.
0 employment multiplier: this relates total extra employment
created to direct tourism employment brought about by
increased tourism arrivals.
0 government revenue multiplier: that measures the impact on
government revenue from allsources, associated with an
increase of tourist expenditure.
0 import requirements – these are not normally seen as a
multiplier but have the same characteristics.

32. Models Used to
Measure Tourism’s Economic Impact
0 Base theory models
0 Keynesian multiplier models
0 Ad hoc multiplier models
0 Input–output models
0 Computable General Equilibrium (CGE) models

33. Base Theory Models0 Nathan Associates developed the following model where
0 Er = total local employment;
0 Erc = local employment servicing local demand; and
0 Erx2 is the direct change in employment created by a change in
tourism expenditure
E
E
i
E E
r
rx rc r2
21
1


 /

34. Keynesian Multiplier
Models0 Let
0 c = the marginal propensity to consume
0 L = first round leakages
0 ti = the marginal rate of indirect taxation
0 td = marginal rate of tax and deductions
0 b = the marginal rate of transfer payments
0 m = the marginal propensity to import
k
L
c t t b mi d


    
1
1 1 1( )( )

35. Ad Hoc
Multiplier Models
0 Let
0 A = the proportion of additional tourist
expenditure remaining in the economy after first
round leakages
0 B = the propensity of local people to consume in
the local economy;
0 C = the proportion of expenditure by local people
that accrues as income in the local economy.
A
BC
*
1
1

36. Input-Output Models
Figure 5.2 Basic input–output transactions table

37. Input-Output Models
(cont’d)
Figure 5.2 Basic input–output transactions table (cont’d)

38. Secondary employment and income 2: Input-Output Analysis- A
sample transactions matrix- Producing sectors(raw) and Consuming
sectors(column)
1 2 3 4 5 6 Final
Demand
Total
Output
Mineral 5 5 15 10 3 5 7 50
Agriculture 2 4 15 2 2 2 12 40
Manufacutring 10 5 20 10 5 5 25 80
Construction 5 2 10 3 10 8 12 50
T&T 2 2 5 2 2 5 22 40
Other Services 4 3 8 5 5 5 20 50
Value Added 22 19 7 18 13 19
Total Input 50 40 80 50 40 50 310

39. Input-Output Models
continued
0ΔX = (I - A) –1ΔY
0Where
0 X = a vector of the total sales of each sector of the
economy
0 A = a matrix of the inter-industry transactions within the
economy;
0 Y = a vector of final demand sales; and
0 I = an identity matrix (equivalent to 1 in simple algebra).
0 Δ = a change in a variable

40. CGE Models
0 Have emerged out of the need to make input-output
models dynamic – therefore they are built to
accommodate
0 price changes
0 resource re-allocation between sectors
0 analyses of wide range of economic changes
0 However, they need significant amounts of data, much
of which is not available

42. Weaknesses and
Limitations of Multiplier Models
0 Restrictive assumptions: Sectors were all assumed to have the
same propensities to import, employ labor, pay taxes and
produce homogenous output. But they are not the same.
0 Data deficiencies. Secondary data are rarely adequate to meet
the requirements of the more demanding and advanced models.
Other diffucilities arise out of the tourism itself as a multi-
product industry directly affecting a large number of sectors.
0 Negative economic impacts: The production of tourism goods
and services requires the commitments of resources that could
otherwise be used for alternative purposes an this creates
alternative costs or opportunity costs. Where tourism
development substitutes one form of expenditure and
eceonomic activity for another, this is known as the
displacement effect.

43. The Size of
Multiplier Values
Table 5.5 The range value of tourism output multipliers for selected destinations

44. The Size of
Multiplier Values (cont’d)
Table 5.6 The range of tourism income multipliers for selected types of destinations
Source: Compiled by the authors from published articles and unpublished government reports

46. Detailed Multiplier
Models can be used to…
0analyse national or regional effects of public or
private sector investment in tourism projects
0simulate the economic impact, sector by sector, of
any proposed tourism developments;
0examine the relative magnitudes of the impacts
made by different types of tourism and by tourism
compared with other sectors of the economy; and
0identify the optimal tourism mix (those
associated with relatively high net benefits)

47. Conclusion
0The economic impact of tourism is generally
positive but with some negative aspects
0The literature is biased
0Tourism Satellite Accounts demonstrate the
economic significance of tourism
0There have been a variety of attempts to build
a robust model to measure the economic
impact of tourism and input-output and CGE
models provide us with the best tools – but at
the cost of high data demands.