Chapter 3: The Economics of Tourism and Hospitality PDF

THE ECONOMICS OF TOURISM AND HOSPITALITY CHAPTER 3 Learning Objectives:  Explain the role of tourism and hospitality in economic development;  Analyze the economic impact of tourism and hospitality on a destination area;  Differentiate the direct effects from the secondary effects of tourist...

THE ECONOMICS OF TOURISM AND HOSPITALITY CHAPTER 3 Learning Objectives:  Explain the role of tourism and hospitality in economic development;  Analyze the economic impact of tourism and hospitality on a destination area;  Differentiate the direct effects from the secondary effects of tourist expenditures on the economy of the host area;  Elucidate the meaning of tourism multiplier and its effect on the economy of the host country;  Describe the undesirable effects of the economic aspects of tourism and hospitality; and  Identify the strategies which can maximize the economic effects of tourism and hospitality.  The Role of Tourism and Hospitality in Economic Development Tourism is used by several developing countries as an alternative to help economic growth for the following reasons:  There is a continuous demand for international travel in developed countries;  As income in developed countries increases, the demand for tourism and hospitality also increases at a faster rate; and  Developing countries need foreign exchange to aid their economic development. The Organization for Economic Cooperation and Development (OECD) has concluded that tourism and hospitality provide a major opportunity for growth to countries at the intermediate stage of economic development and require more foreign exchange earnings.  The Role of Tourism and Hospitality in Economic Development Tourism and hospitality is an invisible export that differs from international trade in many ways: a. In tourism and hospitality, the consumer collects the product from the exporting country. Thereby, eliminating freight costs for the exporter, except in cases which the airline used are those of the tourist-receiving country. b. The demand for pleasure travel is mostly dependent on non-economic factors, such as local disturbances, political unrest, and changes in the fashionability of resorts/countries created mainly through media coverage. At the same time, international tourism is price elastic and income elastic. This means that changes in price and revenue will also change the demand for pleasure travel. c. By using specific fiscal measures, the exporting or tourist-receiving country can manipulate exchange rates so that those for tourists are higher or lower (usually the latter is implemented to attract a large number of tourists) than those in other foreign trade markets. Also, tourists are allowed to buy in domestic markets at the same prices as the local residents (the exceptions are the duty-free tourist shops operated in many Caribbean islands and elsewhere). d. Tourism is a multi-faceted industry that directly affects several factors in the economy, such as hotels, shops, restaurants, local transport firms, entertainment establishments, handicraft producers, and indirectly affects many others, such as the equipment manufacturers and utilities. e. Tourism brings many more non-monetary benefits and costs than other export industries, such as social, cultural, and environmental benefits and costs.  Economic Impact a. Direct and Secondary Effects. It is necessary to know the direct and secondary effects of visitor expenditures on the economy of the area to measure the economic impact of tourism and hospitality on the destination area. b.Tourism Multiplier is used to estimate the direct and secondary effects of tourist expenditures on the economy of a country. The figure below illustrates the multiplier effect. Economic Impact  Economic Impact The tourism multiplier formula is: where: K = the multiplier y = the change in the income generated by E E = the change in expenditure (the initial sum of money spent by the tourist) The size of the multiplier depends on the extent to which the various sectors of the economy are linked to one another. When the tourism and hospitality sectors buy heavily from other local economic sectors for goods and services, there will be a smaller tendency to import, and the multiplier will be higher than if the reverse were true.  Economic Impact A simplified formula for tourism multiplier is: where: K = the multiplier L = the direct first-round leakages c = the tendency to consume cj = the proportion of that propensity spent abroad tic = the indirect tax td = the value of direct deductions (income tax, national insurance, and so on) b = the level of government benefits m = the value of imports  Cost-Benefit Ratio Those concerned with developing the tourism and hospitality industry, whether a government or a private individual, would like to know the extent of potential benefit and their costs. Benefits divided by costs equal the cost-benefit ratio. The following procedures are used to arrive ratios: a. Determine where the tourist dollar is spent; b. Determine what percentage of each expenditure leaves the local economy; c. Derive a “multiplier effect,” a ratio applied to the income that reflects multiple spending within an economy; d. Apply the multiplier effect to the tourist expenditures to arrive at the total benefits of tourist expenditures in dollars; e. Derive a cost-benefit ratio expressed as dollars received/spent; and f. Apply the cost-benefit ratios to tourist expenditures to provide estimates of income and costs of tourist business to a community, for both the private and public sectors.  Undesirable Economic Aspects of Tourism Some undesirable economic aspects of tourism and hospitality are higher prices and economic instability. Tourist purchases may result in higher rates in a destination area because of additional demand and/or increased imports. This would mean that local residents would also have to pay more for products and services. Since pleasure travel is a discretionary item, it is subject to changes in prices and income. These fluctuations may result in economic instability.  How to Maximize the Economic Effect of Tourism and Hospitality a. Growth Theories: i. Balanced Growth Theory. Proponents of this theory suggest that tourism and hospitality should be viewed as an essential part of a broad-based economy. Its objective is to integrate tourism and hospitality with other economic activities. To obtain the maximum economic benefit, tourism and hospitality goods and services should be locally produced. ii. Unbalanced Growth Theory. Supporters of this theory see tourism and hospitality as the spark to economic growth. The unbalanced growth theory emphasizes the need to expand demand, while the balanced growth theory stresses the development of supply. As demand increases through the vigorous development of tourism and hospitality, other industries will move to provide products and services locally.  How to Maximize the Economic Effect of Tourism and Hospitality b. Economic Strategies. The key to maximizing the economic effects of tourism and hospitality is to maximize the amount of revenue and jobs developed within the region. To attain this objective, some economic strategies have been adapted, such as import substitution incentives and foreign exchange. i. Import Substitution. It imposes quotas or tariffs on the importation of goods, which can be developed locally. It also grants subsidies or loans to local industries to encourage the use of local materials. Its objective is to minimize the leakage of money.  How to Maximize the Economic Effect of Tourism and Hospitality ii. Incentives. The wise use of incentives can encourage the influx of capital, both local and foreign, necessary to develop tourism and hospitality supply. The most common forms of incentives are: 1. Tax exemptions/reductions on imported machinery, materials, and the like; 2. Reduction in company taxation through favorable depreciation allowances on investment, or special treatment concerning excise taxes, sales taxes, income taxes, income taxes, turnover taxes, profit taxes, or property taxes; 3. Tax holidays (limited period); 4. Guarantee of stabilization of tax conditions (for up to 20 years); 5. Grants (for up to 30% of total capital costs); 6. Subsidies (guaranteeing a minimum level of profit, occupancy, etc.); 7. Loans at low rates of interest; 8. Provision of land freehold at nominal or little cost or at low rents; 9. Free and unrestricted repatriation of all part of invested capital profits, dividends, and interest subject to tax provisions; and 10.Guarantees against nationalization or appropriation.  How to Maximize the Economic Effect of Tourism and Hospitality Before implementing an incentive strategy, a destination should: 1. Examine the performance of the schemes of other countries in light of their resources and development of objectives; 2. Research the actual needs of investors; 3. Design codes of investment concessions related to specific development objectives with precise requirements of investors; and 4. Establish targets of achievements and periodically monitor and assess the level of realization of such objectives. iii. Foreign Exchange. Many countries have placed restrictions on spending to maximize foreign exchange earnings. They have limited the amount of their own currency that tourists can bring in and take out of the destination to ensure that foreign currency is used to pay bills in the host region. Tourists may be required to pay hotel bills in foreign currency. Visitors may be required to show that they have enough money for their stay before they are permitted to enter the country, or they may be required to enter with a specified amount of foreign currency for the duration of their visit.