Tourism Multiplier Effect TH2107

TH2107 Tourism Multiplier Effect The multiplier effect is a concept in economics Figure 1 introduced by British economist John Maynard The Tourist Multiplier Effect Keynes in the 1930s. The concept applies to changes in demand for any industry’s output, thus not solely related to...

TH2107 Tourism Multiplier Effect The multiplier effect is a concept in economics Figure 1 introduced by British economist John Maynard The Tourist Multiplier Effect Keynes in the 1930s. The concept applies to changes in demand for any industry’s output, thus not solely related to tourism activity. Within the context of tourism, multiplier effects are those economic impacts brought about by a change in the pattern of tourism spending. The term “multiplier” is derived from the fact that the value of tourism spending is multiplied by some estimated factor to determine the total economic impact (Rusu, 2011). Tourism creates jobs in the service sector and encourages growth in the raw materials and manufacturing sectors. This is known as the tourism multiplier effect, which in its simplest form is how many times money spent by a tourist circulates through a country’s economy. Money spent in a hotel helps create jobs directly in the hotel and indirectly elsewhere in the economy. The hotel, for example, has to buy food from local farmers, who may spend some of this money on fertilizer or clothes. The demand for local products increases as tourists often buy souvenirs, which increases secondary From “Tourism Multiplier Effect” by Barcelona Field Studies Centre, n.d. employment (Rusu, 2011). (https://geographyfieldwork.com/TouristMultiplier.htm) Copyright 2000-2021 by Barcelona Field Studies Centre S.L. Economic Impacts of Tourism Spending The revenue generated by inbound tourism flowing into a country, region, or location injects new Figure 2 resources into the economy. The impact on the Direct, Indirect, and Induced Impacts of Tourism economy from tourism spending is experienced either directly, indirectly, or induced (Santos, 2017). The direct effects of this revenue are experienced by the providers of tourist goods and services, generating income for various economic agents and directly increasing a country’s gross domestic product (GDP). This is observed when business owners receive profits, workers receive wages, and the government receives taxes on the sale of goods and services by business owners (Santos, 2017). Indirect effects are derived from the intermediate consumption by suppliers of tourism goods and services. For example, to market a pizza, a restaurant must first acquire flour, tomatoes, toppings, and wood for the oven. In the same way, an airline From Economia de Turismo by G.E.O. Santos and D.K. Kadota, 2012. Copyright 2012 by G.E.O. Santos and D.K. Kadota company needs aircraft and fuel. The sale of these intermediate consumption goods and services, in turn, provides revenue for suppliers, resulting in income for 05 Handout 1 *Property of STI  [email protected] Page 1 of 2  TH2107 the economic agents involved. These suppliers also consume their own inputs, leading to new rounds of indirect impacts along the production chain (Santos, 2017). In contrast, the income of workers and business owners provided by tourism revenue is spent acquiring different goods and services, leading to induced effects. For example, a hotel employee who spends part of their salary paying for their children’s school fees generates income for the economic agents involved in the educational activity. The same may occur with the workers or owners of companies that do not sell anything directly to tourists but have been indirectly impacted by tourism revenue (Santos, 2017). Economic Leakage Economic leakage is the act of money leaving the host country and ending up elsewhere (Stainton, 2020). The indirect and induced impacts of the first round of transactions lead to second-round effects, and so on. Thus, round after round, the impacts reach further and further. However, as the multiplier effect continues, its impact weakens, and money eventually “leaks” from the economy. There are three (3) types of leakage that have been identified: Taxes: the resources collected by the government through direct (paid by individuals) and indirect taxes leave circulation, reducing the purchasing power of individuals and businesses. Consequently, taxes reduce indirect and induced impacts from one round to the next. Savings: part of the income of workers and business owners is saved and is not used to consume goods and services. This money leaving circulation decreases the induced effects of tourism spending. Imports: a portion of companies’ and individuals’ expenditures is allocated for purchasing imported goods and services. The resources used to pay for these items leak from the economy towards other countries, failing to generate new rounds of national impacts (Santos, 2017). Due to the international nature of the tourism industry, along with the world becoming increasingly globalized and monopolized by the most successful multinational corporations (MNCs), economic leakage is becoming more and more prevalent (Stainton, 2020). Many destinations give up their traditional ways of making money, for example, through farming, in exchange for tourism. They develop and grow their tourism industries intending to make money. Unfortunately, destinations' income from their tourism industry is often not as high as they would like it to be. In severe cases, the destination receives only a small fraction of the income from tourism. If a destination gives up its traditional ways of making money in exchange for tourism, then it no longer has the income from this industry either (Stainton, 2020). References: Barcelona Field Studies Centre (n.d.) Tourism Multiplier Effect. Geography Fieldwork. Retrieved October 7, 2021, from https://geographyfieldwork.com/TouristMultiplier.htm Horwath Tourism and Leisure Consulting. (1981). Tourism Multipliers Explained. Published in Conjunction with WTO, November. http://horwathhtl.co.za Rusu, S. (2011) Tourism multiplier effect. Journal of Economics and business research, XVII (1), 70-76. Stainton, H. (2020) Economic leakage in tourism explained. Tourism Teacher. https://tourismteacher.com/economic-leakage-tourism/ Santos, GEO (2017). The Tourism Multiplier Effect. In G. Lohmann and A. Panosso Netto (Eds.). Tourism theory: Concepts, models, and systems (pp. 105-107). CAB International. Singh, D.H.R. (2010) Tourism income multipliers for Latin American Countries. Tourism Analysis 15, (485-488). Cognizant Communication Corporation. Tourism Beast (n.d.) Tourism Multiplier. Tourism Beast Website. Retrieved October 8, 2021, from https://www.tourismbeast.com/tourism-multiplier/ 05 Handout 1 *Property of STI  [email protected] Page 2 of 2