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Income, employment and prices Learning outcomes By studying this section students will be able to: distinguish between microeconomics and macroeconomics measure the total level of economic activity in an economy understand and apply the multiplier principle Thailand Total economy-wide activity (US$ bn), between 2007 - 2010 Total economy-wide activity (US$ bn) (Thailand) Personal Consumption 2007 2008 2009 2010 132.148 148.481 135.357 144.333 Government Expend. (incl. transp. of persons) 30.0587 31.7508 30.7825 34.3432 Non-Market Products - Individual 9.12369 9.64386 9.3436 10.4307 Non-Market Products - Collective 20.935 22.107 21.4389 23.9125 65.1011 73.4998 63.1112 68.8555 Exports 180.406 205.779 181.313 203.251 Imports 176.903 214.02 178.755 200.85 Gross Domestic Product 246.053 275.939 252.614 271.873 Employment (000s) 36269.8 36909.1 36385.1 37183.9 Gross Capital Formation Foreign Trade TYPES OF ECONOMIC ANALYSIS Economic impact analysis -- What is the contribution of tourism activity to the economy of the region? An economic impact analysis traces the flows of spending associated with tourism activity in a region to identify changes in sales, tax revenues, income, and jobs due to tourism activity. The principal methods here are visitor spending surveys, analysis of secondary data from government economic statistics, economic base models, input-output models and multipliers. TYPES OF ECONOMIC ANALYSIS Fiscal impact analysis – Will government revenues from tourism activity from taxes, direct fees, and other sources cover the added costs for infrastructure and government services? Fiscal impact analysis identifies changes in demands for government utilities and services resulting from some action and estimates the revenues and costs to local government to provide these services. TYPES OF ECONOMIC ANALYSIS Financial analysis – Can we make a profit from this activity? A financial analysis determines whether a business will generate sufficient revenues to cover its costs and make a reasonable profit. It generally includes a short-term analysis of the availability and costs of start-up capital as well as a longer-range analysis of debt service, operating costs and revenues. A financial analysis for a private business is analogous to a fiscal impact analysis for a local government unit. TYPES OF ECONOMIC ANALYSIS Demand analysis – How will the number or types of tourists to the area change due to changes in prices, promotion, competition, quality and quantity of facilities, or other demand shifters? A demand analysis estimates or predicts the number and/or types of visitors to an area via a use estimation, forecasting or demand model. The number of visitors or sales is generally predicted based on judgment (Delphi method), historic trends (time series methods), or using a model that captures how visits or spending varies with key demand determinants (structural models) such as population size, distance to markets, income levels, and measures of quality & competition. TYPES OF ECONOMIC ANALYSIS Benefit Cost analysis (B/C) – Which alternative policy will generate the highest net benefit to society over time? A B/C analysis estimates the relative economic efficiency of alternative policies by comparing benefits and costs over time. B/C analysis identifies the most efficient policies from the perspective of societal welfare, generally including both monetary and non-monetary values. B/C analysis makes use of a wide range of methods for estimating values of non-market goods and services, such as the travel cost method and contingent valuation method. TYPES OF ECONOMIC ANALYSIS Feasibility study – Can/should this project or policy be undertaken? A feasibility study determines the feasibility of undertaking a given action to include political, physical, social, and economic feasibility. The economic aspects of a feasibility study typically involve a financial analysis to determine financial feasibility and a market demand analysis to determine market feasibility. A feasibility study is the private sector analogue of benefit cost analysis. The feasibility study focuses largely on the benefits and costs to the individual business or organization, while B/C analysis looks at benefits and costs to society more generally. TYPES OF ECONOMIC ANALYSIS Environmental Impact assessment – What are the impacts of an action on the surrounding environment? An environmental assessment determines the impacts of a proposed action on the environment, generally including changes in social, cultural, economic, biological, physical, and ecological systems. Economic impact assessment methods are often used along with corresponding measures and models for assessing social, cultural and environmental impacts. Methods range from simple checklists to elaborate simulation models. Macroeconomics Macroeconomic issues affect the whole economy Aggregates Eg. adds together the spending of individuals to calculate consumers’ expenditure, or aggregate demand Aggregates Aggregate The total value of the goods and services produced in a country, plus the value of imported goods less the value of exports. Aggregate supply demand Aggregate demand is the sum of all demand in an economy. This can be computed by adding the expenditure on consumer goods and services, investment, and net exports (total exports minus total imports). A simple macroeconomic model • The economy is divided into two sectors, households and firms • Real and Money Flows • Circular Flow • National Income = A • National Output = B • National Expenditure = C GDP and GNP Gross domestic product (GDP) is defined as the "value of all final goods and services produced in a country in one year“. Gross National Product (GNP) is defined as the "value of all goods and services produced in a country in one year, plus income earned by its citizens abroad, minus income earned by foreigners in the country". Net National Product Some investment is merely replacing worn out machinery, so: Net national product (national income) = Gross national product – Capital consumption (The total depreciation in the value of the capital goods in an economy during a specified period) Impacts: Types of Household Expenditure Impacts: Employment 1 Impacts: Employment 2 Impacts: Taxation The tourism industry’s indirect tax contribution has been estimated at 10.6% of total tax revenues worldwide. Economic Impacts: Pattaya Economic Impacts: Pattaya Economic Impacts: Pattaya Economic Impacts: Meribel, France De-industrialisation in the developed world Employment in the services sector has grown in importance, manufacturing employment has shown a long-term decline. This is known as deindustrialization. This is caused by three factors. First, technological progress enables productivity increases in manufacturing and thus the ratio of labour input to output declines. Second, manufacturing has been subject to intense competition from low labour cost countries such as China and Vietnam, so many manufactured goods are now imported. Third, as incomes increase expenditure on services increases by a greater proportion (services demonstrate high income elasticity of demand). De-industrialisation Wages Demand and supply Trade Unions Minimum Wage Multipliers Example: Investment of 100 000 on a new leisure complex. Firms will hire factors of production to the value of 100000 and therefore national income, measured at point A, will rise by 100000. However, the effects of the investment do not stop there. Cont’d…. Multipliers (cont’d) Example: The workers who earned money from building the complex will spend their money in shops and bars, etc. Thus the incomes of shop and bar owners will rise. They in turn will spend their incomes. In other words, a circular flow of income and expenditure will take place. The investment expenditure sets in motion a dynamic process, and the total extra income passing point A will exceed the initial 100 000. This is known as the multiplier effect. . Multipliers The Keynesian multiplier (k) shows the amount by which a change in expenditure (∆ EXP) in an economy leads to a change in national income (∆Y) ∆EXP x k = ∆Y Thus if an increase in investment on a leisure complex of 100 000 led to a final increase in national income of 400 000, then the multiplier would have a value of 4. Multipliers The key factors affecting the size of the multiplier are: The size of the initial injection into the economy “Leakages” from the economy: • Savings • Taxation • Imports Multipliers Formula for calculating the multiplier: k = 1/MPL where MPL = the marginal propensity to leak (the proportion of extra income that leaks out of the economy). MPL = MPS + MPM + MPT where MPS = marginal propensity to save (the proportion of extra income saved), MPM = marginal propensity to spend on imports (the proportion of extra income spent on imports) and MPT = marginal propensity to be taxed (the proportion of extra income taken in taxes. Multipliers For example if MPS = 0.1Y, MPM = 0.05Y and MPT = 0.1Y, where Y = income, then: k = 1/(0.1 + 0.05 + 0.1) k = 1/0.25 k = 4. Multiplier Impacts Tourism Destination Price Index Prices in destinations can have an important effect on tourism demand A tourism destination price index can offer a guide to relative prices of key tourismrelated activities (e.g. hotel costs, meal prices, car hire etc) Destination Price Index Tourism Destination Price Index Government policy Government policies to promote employment may include the following: Demand management • (e.g. increase in gov’t spending; tax cuts increase demand) Export-led policies • Lower taxes for producers of export products Project assistance • Attract (e.g. tax incentives) foreigners to create projects in the country. Governments of countries with comparatively high rates of inflation may utilize counter-inflationary policy. Demand pull inflation Cost push inflation Cost-Push Inflation vs. Demand-Pull Inflation Inflation is caused by a combination of four factors. Those factors are: The supply of money goes up. The supply of goods goes down. Demand for money goes down. Demand for goods goes up. Cost-Push Inflation Inflation can result from a decrease in aggregate supply. The two main sources of decrease in aggregate supply are An increase in wage rates An increase in the prices of raw materials These sources of a decrease in aggregate supply operate by increasing costs, and the resulting inflation is called cost-push inflation. Other things remaining the same, the higher the cost of production, the smaller is the amount produced. At a given price level, rising wage rates or rising prices of raw materials such as oil lead firms to decrease the quantity of labor employed and to cut production. Demand-Pull Inflation The inflation resulting from an increase in aggregate demand (an increase in demand for goods) is called demand-pull inflation. Such an inflation may arise from any individual factor that increases aggregate demand, but the main ones that generate ongoing increases in aggregate demand are Increases in the money supply • more money flowing in the economy e.g. individuals or FIs Increases in government purchases • The increased demand for goods by the government causes factor 4 inflation. Increases in the price level in the rest of the world • Suppose you are living in the United States. If the price of gum rises in Canada, we should expect to see less Americans buy gum from Canadians and more Canadians purchase the cheaper gum from American sources. From the American perspective the demand for gum has risen causing a price rise in gum. The End