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Slide 5.1
Chapter 5
The economic impact of tourism
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.2
This lecture’s 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.
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.3
The Significance
of International Tourism
Table 5.1 Principal tourist-generating countries, 1986–2002: expenditure
(US$bn)
Source: Derived from WTO, 1988; 1992; 1997; 2003
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
The Significance of
International Tourism Continued
Slide 5.4
Table 5.2 Principal destinations in terms of tourism receipts, 1986–2002:
tourism receipts (US$bn)
Source: Derived from WTO, 1988; 1992; 1997; 2003
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.5
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
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.6
Tourism Satellite
Accounts
• 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 (InputOutput Models)
• Provide an accounting overview of tourism
from a demand perspective
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.7
Tourism’s Economic
Impact
• Tourism’s economic impact is NOT the same
as tourist receipts
• Full assessment of tourism’s economic impact
must take into account:
– Leakages of expenditures out of local economy
– Direct plus indirect plus induced effects
– Displacement and opportunity costs...
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.8
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.
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.9
•
Leakages
The reason only a proportion of extra income is respent 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.
•
These losses to the direct re-spending chain are
leakages from extra local consumption-income
circulation.
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.10
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 costbenefit 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.
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.11
The different levels
of tourism’s 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
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.12
• 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.
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.13
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.
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.14
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.
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.15
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.
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.16
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.
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.17
Measuring the Economic
Impact of Tourism
• The Multiplier Concept
Figure 5.1 The multiplier process
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.18
Measuring the Economic
Impact of Tourism
Figure 5.1 The multiplier process (cont’d)
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.19
•
•
•
•
•
•
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.
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Models Used to
Measure Tourism’s Economic Impact
Slide 5.20
•
•
•
•
•
Base theory models
Keynesian multiplier models
Ad hoc multiplier models
Input–output models
Computable General Equilibrium (CGE)
models
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.21
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
Er
1  i2

Erx 2 1  Erc /Er
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.22
Keynesian Multiplier
Models
• 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
1 L
k
1  c(1  ti )(1  t d  b)  m
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.23
Ad Hoc
Multiplier 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.
1
A*
1 BC
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.24
Input-Output Models
Figure 5.2 Basic input–output transactions table
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.25
Input-Output Models
(cont’d)
Figure 5.2 Basic input–output transactions table (cont’d)
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.26
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
Cooper et al: Tourism: Principles and Practice, 3e
310
Pearson Education Limited 2005, © retained by authors
Slide 5.27
Input-Output Models continued
• ΔX = (I - A) –1ΔY
• 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).
– Δ = a change in a variable
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.28
CGE Models
• Have emerged out of the need to make inputoutput 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
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.29
Weaknesses and
Limitations 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.
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.30
Table 5.5
The Size of
Multiplier Values
The range value of tourism output multipliers for selected destinations
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.31
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
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.32
Detailed Multiplier
Models 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)
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors
Slide 5.33
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.
Cooper et al: Tourism: Principles and Practice, 3e
Pearson Education Limited 2005, © retained by authors