Economic Impact of Tourism PDF

Economic Impact of tourism Overview of Economic Impacts of tourism The service sector is responsible for 40% of GDP in Developing countries. 65% of GDP in industrialized countries.  Foreign exchange earnings Economi c Government Benefits revenues...

Economic Impact of tourism Overview of Economic Impacts of tourism The service sector is responsible for 40% of GDP in Developing countries. 65% of GDP in industrialized countries.  Foreign exchange earnings Economi c Government Benefits revenues Employment generations Invisible Export Import Substitution 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. specific Immigration currency visitor procedure exchange expenditure surveys 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 ) The General Agreement on Trade in Services (GATS) is a treaty of the World Trade Organization ( WTO) that entered into for ce in January 1995 as a re sult of the Uruguay Round negotiatio ns. The treaty was created to extend the multilateral trading system to service sector, in the same way the General Agreement on Tari ffs and Trade (GATT) provi des such a system for mer chandise trade. Globalization Globalization refers to the result of collection of forces that tend to change the way Market-based economy that the economic, political and cultural worlds operate. Geographical distance between economic factors becomes a factor of diminishing significance.  It is important Tourism has to examine the been able to economic stand up to the significance of pressures of the tourism global level of tourism activity recession. type and nature of the economy Developing countries by Diversification measuring the strategies and ability to to combat generate inflow of regional foreign exchange imbalance in or greater price developed flexibility in its countries. export industries.  The Significance of International Tourism Table 5.1 Principal tourist-generating countries, 1986–2002: expenditure (US$bn) Source: Derived from WTO, 1988; 1992; 1997; 2003  The Significance of International Tourism Continued Table 5.2 Principal destinations in terms of tourism receipts, 1986–2002: tourism receipts (US$bn) Source: Derived from WTO, 1988; 1992; 1997; 2003  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 Tourism Satellite Accounts Within a country over time Based on the need to provide consistency in measurement: 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 Generation of economic impacts by tourist spending  Tourism’s economic impact is NOT the same as tourist receipts Tourism’s Full assessment of Economic tourism’s economic impact must take into Impact account: Leakages of expenditures out of local economy Direct plus indirect plus induced effects Displacement and opportunity costs... 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. 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. 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. The different levels of tourism’s economic impact Indirect Effects: The establishments Direct Effects: it is the value of tourist that directly receive the tourist expenditure less the value of imports expenditure also need to purchase necessary to supply those “front line” goods and services from other sectors goods and services. The direct impact within the local economy, for ex. is likely to be less than the value of hotels will purchase the services of tourist expenditure. builders, accountants, banks, etc. Furthermore the suppliers of these goods and services will also need to These subsequent rounds of purchase the goods and services from expenditure is known as the indirect other establishments within the local effects economy and so the process continues 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. 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. The Multipli This means that firms purchase not only primary inputs such as labor, but also intermediate goods and services er produced by other establishments. Concep Therefore, a change in level of final demand for one sectors output will t 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.  Tourism multipliers have been developed over some years based The on largely Keynesian principles of the recirculation of a proportion of income by recipients into Multipli consumption spending which then causes further income and employment. er Concep The basis of a simple multiplier is that a direct injection of cash into an economy, by, say, t international tourism expenditure, means a higher income for suppliers of tourism services. 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. The Multiplier Concept To the extent that they choose to spend on goods and services produced in their home economy, a round of Recipients of all the above increased transactions creates increased incomes may then spend or save induced income for the secondary these increases. suppliers, who themselves then have more to spend, and so on. The multiplier principle is summarized in Figure 5.1.  Measuring the Economic Impact of Tourism The Multiplier Concept Figure 5.1 The multiplier process  Measuring the Economic Impact of Tourism Figure 5.1 The multiplier process (cont’d) Types of Multipliers  Types of Multipliers output multiplier: is similar to income multiplier: in tourism transactions (or sales) the transactions multiplier, impact analysis, most multiplier multiplier: identifies the except that it includes the value calculations have been applied increased volume of business of all goods and services to income generated, and the activity by sales turnover value, produced rather than sold; that multiplier concerned may be in relation to initial tourism is, it may include additions to termed the tourism income expenditure. inventories. multiplier. government revenue employment multiplier: this multiplier: that measures the import requirements – these relates total extra employment impact on government revenue are not normally seen as a created to direct tourism from allsources, associated with multiplier but have the same employment brought about by an increase of tourist characteristics. increased tourism arrivals. expenditure. Methodological approaches  Models Used to Measure Tourism’s Economic Impact Base theory models Keynesian multiplier models Ad hoc multiplier models Input–output models Computable General Equilibrium (CGE) models  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  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 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  Input-Output Models Figure 5.2 Basic input–output transactions table  Input-Output Models (cont’d) Figure 5.2 Basic input–output transactions table (cont’d)  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 Input-Output Models continued ΔX = (I - A) –1 ΔY 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 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 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 Weakness the same. es and Limitation s of Data deficiencies. Secondary data are rarely adequate to meet the requirements of the more demanding and Multiplier advanced models. Other diffucilities arise out of the tourism itself as a multi-product industry directly Models 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.  The Size of Multiplier Values Table 5.5 The range value of tourism output multipliers for selected destinations  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  The Policy Implications of multiplier analysis Detailed Multiplier Models can be used to… analyse national or regional simulate the economic impact, effects of public or private sector sector by sector, of any investment in tourism projects proposed tourism developments; examine the relative magnitudes of the impacts made by different identify the optimal tourism mix types of tourism and by tourism (those associated with relatively compared with other sectors of high net benefits) the economy; and Conclusion The economic impact of tourism is The literature is generally positive but biased with some negative aspects There have been a variety of attempts to build a robust model Tourism Satellite to measure the Accounts economic impact of demonstrate the tourism and input- economic significance output and CGE of tourism models provide us with the best tools – but at the cost of high data demands.