501: Tourism Business

 Multiplier theory emerges from the work of Kahn and

Keynes

 Multipliers are a means of estimating how much extra

income is produced in an economy as a result of
initial spending or injection of cash.

 Every time money changes hand, it provides new

income and continuous series of conversions of
money spent by tourists from what economists term
“Multiplier Effect”

 The more often a conversion occurs, the greater its

beneficial effect on the economy of the recipient
country.
 Direct: In the case of tourism, this expenditure is
made by the tourist, government or similar
agencies involved in tourism, providing goods
and services, tourism generated exports or for
tourism related investment in an area.
 Indirect: Covers successive rounds of inter-
business transactions resulting from direct
expenditure.
 Induced: This is the increased consumer spending
resulting from the additional personal income
generated by direct expenditure
 (Indirect + Induced = Secondary Expenditure)
 The money generated by tourist spending
multiplies as it passes through various
sections of the economy. It can be explained
as follows
◦ From an initial impulse such as investment and
expenditure, there occurs one or more primary
effects such as income and expenditure.

◦ These primary effects in the course of a 2nd period,

produce secondary effects of the same type as the
first.

◦ The process is repeated several times in the course

of time.
◦ The multiplier makes it possible to calculate the
sum of various primary, secondary and tertiary
effects of the same type, which is then applied to
the primary effect in order to arrive at the total
effect.

 For example, the money paid by the tourist in paying

his hotel bill will be used by the management to
provide for the costs which it had incurred in meeting
the demands of the visitors such as food, drink,
furnishing, laundry, electricity, entertainment etc.

 The recipients in turn use the money to meet their

financial commitments.
 In other words, the tourist expenditure not
only supports the tourist directly but helps
indirectly to support many other businesses.

 In this way, money may be said to be used

several times and to spread into various
sectors of the economy.

 In sum, the money paid by the tourist may

be used several times and after a long series
of transfers over a given period of time,
passes through all sectors of the national
economy, stimulating each in turn throughout
the process
 The transfer of money however, is not absolute as
there are leakages. Any leakage of this kind will
reduce the stream of expenditure, which in
consequence will limit and reduce the multiplier
effect.

 Leakages will be less in countries with advanced

economies, and countries less in need of foreign
imports, hence they are said to have more advanced
economies.

 The developing countries should strictly control

imported items to get maximum benefits. The
benefits otherwise accruing from tourism would be
reduced or even cancelled by leakages.
1) Remittance of income outside the host area,
for example foreign workers.

2) Indirect and direct taxation, where the tax

proceeds are not re-spent in the host area.

3) Savings out of the income received by the

workers in the host area.
 Sales (Transaction) Multiplier –this measures the
extra business turnover created (direct and
secondary) by an extra unit of tourist expenditure.

 Output Multiplier –this is similar to the Sales

Multiplier but it also takes into account inventory
changes, such as the increase in stock levels by
hotels, restaurants and shops because of increased
trading activity.

 It should be noted that few researchers specify

whether or not inventory changes have been taken
into account.
 Income Multiplier- this measures the income generated by an extra unit of
tourist expenditure. Confusion arises over the definition of income. Many
researchers define income as disposable income accruing to households
within the area, which is available for them to spend.

 Although salaries paid to overseas residents are often excluded, a proportion

of these salaries may be spent in the local area and should therefore be
included. In considering national economies some studies include revenue
accruing to the government in income.

 Income multipliers can be expressed in one of two ways: the ratio method,
which expresses the direct and indirect incomes (or the direct and secondary
incomes) generated per unit of direct income; or the normal method, which
expresses total income (direct and secondary)generated in the study area per
unit increase.

 Ratio multipliers indicate the internal linkages which exist between various
sectors of the economy, but do not relate income generated to extra sales.
Hence, on their own, ratio multipliers are valueless as a planning tool.
 Employment Multiplier – this can be
expressed in one of two ways: as a ration of
the combination of direct and secondary
employment generated per additional unit of
tourist expenditure to direct employment
generated, or as the employment created by
tourism per unit of tourist expenditure
 Base Model – this is very simplistic and rarely used in
practical research. It assumes that one can divide the
economy under research into export activities and local
(non-export) activities, and that a stable relationship
exists between the export and local sectors, with these
sectors linked by linear relationships. It further assumes
that unemployed resources are available within the
economy, and that the scale of the export activities is the
sole determinant of the level of income and employment
within the area.

 Keynesian Model –this is based on identifying streams of

income and employment which are generated in “rounds”,
which diminish in geometric progression because of
leakages at each round.

 Input-Output Model – the input-output concept analyses

the economy into its sectors and expresses a relationship
of these sectors in matrix form, based on the results of
research into the effects of tourist expenditure.