Chapter 5 The economic impact of tourism

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Chapter 5The economic impact of tourism
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This lectures learning objectives

• To gain an understanding of the economic
  contribution of tourism locally, nationally and
  internationally
• To examine the methods used to estimate tourist
  expenditure and the way in which the significance
  of tourism can be measured
• To appreciate the positive and negative economic
  impacts of tourism activity and
• To acquire a general knowledge of the approaches
  that may be used to measure the economic impacts
  of tourism and the strengths and weaknesses
  associated with each approach.

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The Significanceof International Tourism
Table 5.1 Principal tourist-generating
countries, 19862002 expenditure
(USbn) Source Derived from WTO, 1988 1992
1997 2003
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The Significance ofInternational Tourism
Continued
Table 5.2 Principal destinations in terms of
tourism receipts, 19862002
tourism receipts (USbn) Source Derived
from WTO, 1988 1992 1997 2003
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Economic Dependenceon 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
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Tourism SatelliteAccounts

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

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Tourisms EconomicImpact

• Tourisms economic impact is NOT the same as
  tourist receipts
• Full assessment of tourisms economic impact must
  take into account
• Leakages of expenditures out of local economy
• Direct plus indirect plus induced effects
• Displacement and opportunity costs...

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Leakages

• When tourists make expenditures within an economy
  the amount of money that stays within that
  economy depends upon the extent of leakages that
  occur.
• For 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.
• i.e. the value of local transport, import,
  wholesale and retail margins(goods), government
  taxes and duties etc.

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Leakages

• 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
• Taxation on income
• That part of extra income which people choose to
  save -the marginal propensity to save (MPS)
• Expenditure on imports.
• These losses to the direct re-spending chain are
  leakages from extra local consumption-income
  circulation.

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Measurement of economic impact

• The 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.
• The 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.

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The different levelsof tourisms economic impact

• Direct 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.
• Indirect 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.
• Furthermore 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
• These subsequent rounds of expenditure is known
  as the indirect effects

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• 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.
• 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.
• It is only when all three levels of impact are
  estimated that the full positive economic impact
  of tourism expenditure is fully assesed.

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The Multiplier Concept

• The 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.
• This means that firms purchase not only primary
  inputs such as labor, but also intermediate goods
  and services produced by other establishments.
• Therefore, 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.

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The Multiplier Concept

• 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.
• 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.

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The Multiplier Concept

• 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.
• 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.

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The Multiplier Concept

• Recipients of all the above increased incomes may
  then spend or save these increases.
• To 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.

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Measuring the EconomicImpact of Tourism

• The Multiplier Concept

Figure 5.1 The multiplier process
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Measuring the EconomicImpact of Tourism
Figure 5.1 The multiplier process (contd)
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Types of Multipliers

• transactions (or sales) multiplier identifies
  the increased volume of business activity by
  sales turnover value, in relation to initial
  tourism expenditure.
• 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.
• 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.
• employment multiplier this relates total extra
  employment created to direct tourism employment
  brought about by increased tourism arrivals.
• government revenue multiplier that measures the
  impact on government revenue from allsources,
  associated with an increase of tourist
  expenditure.
• import requirements these are not normally seen
  as a multiplier but have the same characteristics.

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Models Used toMeasure Tourisms Economic Impact

• Base theory models
• Keynesian multiplier models
• Ad hoc multiplier models
• Inputoutput models
• Computable General Equilibrium (CGE) models

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Base Theory Models

• Nathan Associates developed the following model
  where
• Er total local employment
• Erc local employment servicing local demand
  and
• Erx2 is the direct change in employment created
  by a change in tourism expenditure

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Keynesian MultiplierModels

• Let
• c the marginal propensity to consume
• L first round leakages
• ti the marginal rate of indirect taxation
• td marginal rate of tax and deductions
• b the marginal rate of transfer payments
• m the marginal propensity to import

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Ad HocMultiplier Models

• Let
• A the proportion of additional tourist
  expenditure remaining in the economy after first
  round leakages
• B the propensity of local people to consume in
  the local economy
• C the proportion of expenditure by local
  people that accrues as income in the local
  economy.

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Input-Output Models
Figure 5.2 Basic inputoutput transactions table
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Input-Output Models(contd)
Figure 5.2 Basic inputoutput transactions table
(contd)
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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
TT 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

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Input-Output Models continued

• ?X (I - A) 1?Y
• Where
• X a vector of the total sales of each sector of
  the economy
• A a matrix of the inter-industry transactions
  within the economy
• Y a vector of final demand sales and
• I an identity matrix (equivalent to 1 in simple
  algebra).
• ? a change in a variable

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CGE Models

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

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Weaknesses andLimitations of Multiplier Models

• 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.
• 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.
• 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.

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The Size ofMultiplier Values
Table 5.5 The range value of tourism output
multipliers for selected destinations
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The Size ofMultiplier Values (contd)
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
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Detailed MultiplierModels can be used to

• analyse national or regional effects of public or
  private sector investment in tourism projects
• simulate the economic impact, sector by sector,
  of any proposed tourism developments
• examine the relative magnitudes of the impacts
  made by different types of tourism and by tourism
  compared with other sectors of the economy and
• identify the optimal tourism mix (those
  associated with relatively high net benefits)

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Conclusion

• The economic impact of tourism is generally
  positive but with some negative aspects
• The literature is biased
• Tourism Satellite Accounts demonstrate the
  economic significance of tourism
• There 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.