The service sector is responsible for

40% of GDP in Developing countries.

65% of GDP in industrialisedcountries.

Economic Benefits

Foreign exchange earnings

Government revenues

Employment generations

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.

Immigration procedure

currency exchange

specific visitor 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 force in January 1995 as a result of the Uruguay Round negotiations. The treaty was created to extend the multilateral trading system to service sector, in the same way the General Agreement on Tariffs and Trade (GATT) provides such a system for merchandise trade.

Globalization

Globalization refers to the result of collection of forces that tend to change the way that the economic, political and cultural worlds operate.

Market-based economy

Geographical distance between economic factors becomes a factor of diminishing significance.

0Tourism has been able to stand up to the pressures of global recession.

0 It is important to examine the economic significance of the tourism

0 level of tourism activity

0 type and nature of the economy

0Developing countries by measuring the ability to generate inflow of foreign exchange or greater price flexibility in its export industries.

0Diversification strategies and to combat regional imbalance in developed countries.

The Significanceof International Tourism

Table 5.1 Principal tourist-generating countries, 1986–2002: expenditure

(US$bn)

Source: Derived from WTO, 1988; 1992; 1997; 2003

The Significance ofInternational 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 Dependenceon Tourism

Table 5.3 Tourism receipts expressed as a percentage of total export earning

and gross national income, 2001Source: Derived from Euromonitor, International Monetary Fund (IMF), International Financial Statistics

Tourism SatelliteAccounts

0Based on the need to provide consistency in measurement:0 Within a country over time

0 Between countries

0They are not economic impact models but are usually built around such models (Input-Output Models)

0 Provide an accounting overview of tourism from a demand perspective

Tourism’s EconomicImpact

0Tourism’s economic impact is NOT the same as tourist receipts

0 Full assessment of tourism’s economic impact must take into account:

0 Leakages of expenditures out of local economy

0 Direct plus indirect plus induced effects

0 Displacement and opportunity costs...

Leakages

0When tourists make expenditures within an economy the amount of money that stays within that economy depends upon the extent of leakages that occur.

0For 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.

0 i.e. the value of local transport, import, wholesale and retail margins(goods), government taxes and duties etc.

Leakages0 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:

1. Taxation on income2. That part of extra income which people choose to

save -the marginal propensity to save (MPS) 3. Expenditure on imports.

0 These losses to the direct re-spending chain are leakages from extra local consumption-income circulation.

Measurement of economic impact

0The 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.

0The 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 inducedeffects associated with expenditure need to be calculated.

The different levelsof tourism’s economic impact

0Direct 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.

0 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.

0Furthermore 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

0These subsequent rounds of expenditure is known as the indirect effects

0 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.

0This 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.

0 It is only when all three levels of impact are estimated that the full positive economic impact of tourism expenditure is fully assesed.

The Multiplier Concept

0The multiplier concept is based upon the recognitionthat sales for one firm require purchases from other firms within the local economy, i.e. the industrial sectors of an economy are interdependent.

0This means that firms purchase not only primary inputs such as labor, but also intermediate goods and services produced by other establishments.

0Therefore, 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.

The Multiplier Concept0Tourism 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.

0The 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.

The Multiplier Concept

0This 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.

0The 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

0Recipients of all the above increased incomes may then spend or save these increases.

0To 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.

Measuring the EconomicImpact of Tourism

0The Multiplier Concept

Figure 5.1 The multiplier process

Measuring the EconomicImpact of Tourism

Figure 5.1 The multiplier process (cont’d)

Types of Multipliers

0 transactions (or sales) multiplier: identifies the increased volume of business activity by sales turnover value, in relation to initial tourism expenditure.

0 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.

0 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.

0 employment multiplier: this relates total extra employmentcreated to direct tourism employment brought about by increased tourism arrivals.

0 government revenue multiplier: that measures the impact on government revenue from allsources, associated with an increase of tourist expenditure.

0 import requirements – these are not normally seen as a multiplier but have the same characteristics.

Models Used toMeasure Tourism’s Economic Impact

0Base theory models

0Keynesian multiplier models

0Ad hoc multiplier models

0 Input–output models

0 Computable General Equilibrium (CGE) models

Base Theory Models0Nathan Associates developed the following model where

0 Er = total local employment;

0 Erc = local employment servicing local demand; and

0 Erx2 is the direct change in employment created by a change in tourism expenditure

E

E

i

E E

r

rx rc r2

21

1

/

Keynesian MultiplierModels

0 Let

0 c = the marginal propensity to consume

0 L = first round leakages

0 ti = the marginal rate of indirect taxation

0 td = marginal rate of tax and deductions

0 b = the marginal rate of transfer payments

0 m = the marginal propensity to import

kL

c t t b mi d

1

1 1 1( )( )

Ad HocMultiplier Models

0 Let

0 A = the proportion of additional tourist expenditure remaining in the economy after first round leakages

0 B = the propensity of local people to consume in the local economy;

0 C = the proportion of expenditure by local people that accrues as income in the local economy.

ABC

*1

1

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

0ΔX = (I - A) –1ΔY

0Where

0X = a vector of the total sales of each sector of the economy

0A = a matrix of the inter-industry transactions within the economy;

0Y = a vector of final demand sales; and

0 I = an identity matrix (equivalent to 1 in simple algebra).

0Δ = a change in a variable

CGE Models

0Have emerged out of the need to make input-output models dynamic – therefore they are built to accommodate

0 price changes

0 resource re-allocation between sectors

0 analyses of wide range of economic changes

0However, they need significant amounts of data, much of which is not available

Weaknesses andLimitations of Multiplier Models

0Restrictive 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.

0Data 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.

0Negative 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 ofMultiplier Values

Table 5.5 The range value of tourism output multipliers for selected destinations

The Size ofMultiplier 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

Detailed MultiplierModels can be used to…

0analyse national or regional effects of public or private sector investment in tourism projects

0simulate the economic impact, sector by sector, of any proposed tourism developments;

0examine the relative magnitudes of the impacts made by different types of tourism and by tourism compared with other sectors of the economy; and

0 identify the optimal tourism mix (those associated with relatively high net benefits)

Conclusion

0The economic impact of tourism is generally positive but with some negative aspects

0The literature is biased0Tourism Satellite Accounts demonstrate the

economic significance of tourism0There 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.