2019 H1 Economics A-Level CSQ 1

(a) With reference to Figure 1, compare the growth of travel and tourism to the growth of
total world output from 2011 to 2016. [3]
Comparison #1: Growth rate of global travel and tourism was higher than that of global
GDP throughout the period.
Comparison #2: Both growth rates were positive and falling throughout.
Comparison #3: Growth rate of global travel and tourism fell faster than that of global
GDP over the period.

(b) Assess whether or not the statement in Extract 2.3 that the Egyptian ‘government’s
promises to take effective action to repair the economic damage have been
ineffective’ is a normative one. [4]
A normative statement is one which contains value judgement, and unlike a positive
statement, cannot be simply refuted by reference to evidence.
In this case, the statement in Extract 2.3 can be deemed as a normative one since a
judgment is made on whether the improvements to the economy are sufficiently
significant for the government’s actions to be considered effective.
Furthermore, given the wide ranging factors beyond the actions of the government
impacting the economy, it is impossible to attribute the performance of the economy
solely to the actions of the government. Thus the statement ultimately is one that
contains value judgement.

(c) Using a supply and demand diagram, explain the likely effects on Singapore’s tourism
market of increased advertising expenditure by the STB and the initiatives to improve
productivity of the hotel industry. [6]
Demand factor: The increased advertising expenditure by the STB is meant to raise
awareness of Singapore as a tourist destination in external markets. In addition, it seeks
to incline the tastes and preferences of foreigners towards Singapore. This helps to raise
the demand (DD) for tourism in the Singapore market from D to D’.
 Supply factor: The initiatives to improve productivity of the hotel industry will serve to
lower marginal cost of production of provided related services to tourism. This helps to
raise the supply (SS) of tourism services from S to S’ in the Singapore market.

Relative shifts: The demand factor is likely to be more significant than the supply factor.
Given the nature of the hospitality industry which is largely service orientated,
productivity improvements are limited. Furthermore, the productivity improvements
are only limited to the hotel and travel agent industries which does not account for the
full range of tourism services.

Adjustment process: With the rise in DD and SS, a shortage occurs at the initial price P,
as Qd exceeds Qs. This puts upward pressure on price leading to a rise in Qs and a fall in
Qd, till a new equilibrium is obtained when Qd=Qs once again. At this new equilibrium, a
higher equilibrium price P’, and a higher equilibrium quantity Q’ result.

(d) Explain what is meant by the statement in Extract 3 that ‘it is estimated that the
multiplier effect of increased tourist expenditure in the UK is 2.8’, and comment
briefly on how reliable this estimate might be. [5]
The multiplier effect refers to the proportional change in real national income that
results from an injection, or change in autonomous consumption. In this case, the figure
2.8 signifies that the overall increase in real national income in the UK is expected to be
2.8 times the increase in tourist expenditure. This is due to the multiplier effect where
increased incomes in the tourism sector will induce further consumption on domestic
goods and services. This cyclical effect in the economy of increased spending leads to a
 rise of real national income that is a multiple of the original increase attributed to
tourism.
The estimate is unlikely to be that accurate given the difficulty of estimating relevant
marginal propensities of the economy (i.e. MPW and MPCd) which is needed for the
calculation of the multiplier value. This is due to data limitations especially given the
challenge of collecting specific data pertaining to household consumption.

(e) Explain how UK hotel owners might use the concept of price elasticity of demand to
estimate the effect on their revenue of a fall in the value of the pound sterling. [8]
When there is a fall in the value of the pound sterling, the price of UK hotel
accommodation will fall in pound sterling for foreigners.

With the availability of alternative accommodation such as Airbnb, the demand for UK
hotel accommodation by foreign tourists can be judged to be price elastic. With respect
to the price elastic demand of hotel accommodation, the quantity demanded of hotel
accommodation by foreign tourists will rise more than proportionately given the fall in
price. Thus the fall in revenue due to the fall in price will be outweighed by the rise in
revenue due to the rise in quantity demanded. On the whole, revenue earned from
foreign tourists is likely to rise.

On the other hand, the demand of business travellers for UK hotel accommodation will
likely be more price inelastic since they require the business facilities offered by the hotels
and thus alternative accommodation will not be close substitutes. In this case, the
quantity demanded will rise less than proportionately as compared to the fall in price.
Here, the fall in revenue due to the fall in price will outweigh the rise in revenue due to
the rise in quantity demanded. As such, the revenue earned from foreign business
travellers is likely to rise.

(f) Discuss the likely impact on the macro-economy in a country such as France of
significant additional government expenditure on measures aimed to reduce the
likelihood of terrorist incidents. [9]
Significant additional government expenditure on such measures will serve to raise AD
via the G component. As AD>AS, this will lead to inventory levels of related firms falling
below their desired level. In a bid to restore those inventory levels, these firms will expand
their output by acquiring more factors of production such as labour. The additional
income will induce consumption on domestic goods and services via the multiplier
process, leading to a further increases in output. The final increase in equilibrium real
national output will be a multiple of the additional government expenditure indicating
actual growth, assuming there is spare capacity in the economy. In addition, demand
deficient unemployment is also reduced as more labour is employed for the increased
production.
 If the measures associated with the reduction in likelihood of terrorist incidents are
related to expenditure on infrastructure, this leads to greater capital accumulation. With
the increase of capital, this leads to an outward shift of the vertical portion of the AS curve,
leading to a rise in full employment level of income in the long run. Thus, there is potential
growth.

However, if the economy is near full employment level of income, the rise in AD in the
short run means that the economy experiences resource constraint which will reduce
efficiency, causing factor costs to increase more rapidly than total output. This causes unit
cost of production to increase as represented by a movement upwards along the upward
sloping portion of the AS curve. This means firms will only produce extra output if it can
be sold at higher prices. Hence an increase in AD causes demand pull inflation.

In conclusion, the impact of the increased government spending on the economy is likely
positive – boosting both actual and potential growth as well as reducing unemployment.
The extent of the positive impact is dependent on the level of spare capacity in the
economy otherwise there may be undesired inflationary pressures.

(g) Discuss the view that the best way for governments to minimise the effects of the
negative externalities arising from increased inbound tourism is to impose an indirect
tax on all tourist expenditure. [10]
As highlighted in Extract 3, tourism can bring about adverse third party effects to the
locals in the form of increased pollution and congestion. These negative externalities
impose an external cost which results in a divergence between the marginal social and
private costs, leading to an overconsumption of tourist services as the market equilibrium
output exceeds the social optimal level of consumption. Since the additional cost imposed
by this level of overconsumption exceeds the benefit obtained, a net welfare loss to
society results.

An indirect tax serves to raise the marginal cost of providing these tourism services. This
leads to a fall in supply, thereby resulting in a fall in the market equilibrium level of
consumption. Assuming the amount of the indirect tax imposed leads to the external cost
to be fully internalised, the market equilibrium output should coincide with the social
optimal level of consumption, thereby eliminating the allocative inefficiency and welfare
loss, which results from effects of the negative externalities. Even if the tax is
underestimated, the reduction in allocative inefficiency will help minimise the undesired
effects.

However, such an indirect tax is bound to have a significant negative impact on the
macroeconomic objective of countries especially if they are highly dependent on tourism
for growth. The increased cost may lead to tourists switching away towards other holiday
destinations. The fall in export revenue will lower AD and lead to a lower equilibrium level
of national income, adversely affecting actual growth. An alternative measure would be
to invest in green technology or infrastructure in tourism related industries to reduce the
external costs involved. For example, this may take place in the form of using more
environmentally friendly vehicles as taxis and installing more bins and signage to
discourage littering. This will help reduce the demand for tourism services that
contributes to the external cost thus lowering the overconsumption and reducing the
allocative inefficiency.

Countries which tend to suffer more from negative externalities associated with tourism
are also countries which are more reliant on tourism as a source of revenue. While an
indirect tax may be successful in addressing the effects of the negative externalities, the
heavy trade-offs created mean that it is likely to be the best way to go about the problem.
Less extreme measures such as improving the provision of related services to minimise
the negative externalities will lead to less of an impact to the economy. In the shorter
term, perhaps legislation might even be preferred to the tax where culprits who
contribute blatantly to the pollution in the form of littering are fined.