The Economics of

Tourism and Hospitality

OBJECTIVES: - Explain the role of Tourism and Hospitalityand
economicdevelopment

- Analyze the economic impact of tourism and hospitality on

a destination area

- Differentiate the direct effects from the secondary effects

of tourist expenditure on the economy of host area

- Elucidate the meaning of tourism multiplier and its effect of

the economy of the host country

- Describe the undesirable effects of the economic aspect 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
Several development
countries have used tourism
and hospitality development as
alternative to help economic
growth.
The reasons for this are:
•There is a continuous demands for
international travel and developed countries.
•As income developed countries in developed
countries increases, the demand of tourism
and hospitality also increases at a faster rate.
•Developing countries need foreign exchange
to aid their economic development.
Tourism and hospitality is an
invisible export which differ
international trade in many
ways.
1. In tourism and hospitality the consumer collect the
product from the exporting country thereby eliminating
the freight cost for the exporter except in cases which
the airline used are those tourist receiving country.

2. The demand for pleasure travel is largely dependent

on non-economic factors such as local, disturbances,
political unrest, and changes in the fashionability of
resorts/countries created mostly by media coverage.
3. By using specific fiscal measures, the exporting or tourist
receiving countries can manipulate exchange rate so that those
for tourist are higher or lower (normally the latter is implemented
in order to attract large number of tourist) than those in order
foreign trade markets.

4. Tourist and hospitality is multifaceted industry that directly

affect several sectors and the economy such as hotels, shops,
restaurant, local transport, firms, entertainment establishment,
handicraft producers, and directly affect many others, such as
equipment manufacturers and utilities.
5. Tourism and hospitality brings many more
non-monetary benefits and costs than other
exports industries such as, social, cultural, and
environmental benefits and costs.
ECONOMIC IMPACT

When travelers outside the distinction area

spend on goods and services with in
distinction, tourism hospitality acts as an
export industry by bringing in revenues from
outside resources. Tourist expenditures also
increase the level of economic Activity in the
host area directly.
Direct and secondary Effects

In order to measure the economic impact of tourism and hospitality on

the destination area, it is important to know the direct and secondary
effects of visitor expenditures on the economy of the area. Tourist
expenditures receive as income by business such as hotels,
89,75 120,890 2,50 75,60
restaurant,
0
car rentals, tour operators, and
8
retail shops serving
0
tourists
have a on the economy of the host area. The term direct means that
the income is received directly. Indirect or secondary effects mean that
the money paid by tourists to business are, in turn, used to pay for
suppliers, wages of workers, and other items used in producing the
products or direct service bought tourists.
TOURISM MULTIPLIER
The term "multiplier" is use to describe the
total effect, both direct and secondary of an
External source of income introduce in to the
economy. The toursim multiplier effect is use
to estimate the direct and secondary effect of
tourist expenditures on the economy of the
country.
 Local tour
Spend
Increased
personal income Seed
Save
Handicrafts Fertilizer
Raw Import
materials (Leakage)
Tourist Purchase of supply

Wages ...
Hotelier
Rent
Wages Food ...
Savings
Service
(eg,taxi)

Figure 2. Multiplier Effect

A tourist makes an initial expenditure into the destination . this is received as
income by local tour operators, handicraft store owners, hoteliers and taxi
drivers. in the first round of transactions, a hotelier may you some of the
money received to buy some supplies, play some wages, and retains some
profit. the income in the second round may be spent or saved, while the
employee who has received payment for services rendered may spend some
of it on rent and some on food, anime Subtitle
put some into savings. the money spent
on supplies in the third round of spending goes for such things as seed,
fertilizer, and imported raw materials. amy and time spent on imports has
leaked out of the local economy. this process continues until the additional
income generated by a new round of spending essentially become zero.
leakage is the value of goods and services that must be imported to service
the needs of tourism and hospitality. to estimate the total economic impact on
an area imports must be subtracted from the income generated by visitors.
The formula for tourist multiplier is:

K= Y
E
t l
Where: i

Su e
t
b e

bt
K= the multiplier S u

it
l
Y= the change in income generated by E
E= the change in expenditure (the initial sum of
money spent by the tourist)
Su e t l
bt ti
it b
l Su e
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 by
heavily from other local economic sectors
for goods and services, there will be a
smaller tendency to import and the multiplier
will be greater that if the reverse were true.
A simplified formula for tourism
multiplier is:

K= 1- L
1 - (c -cj - tic) ( 1 - td = b +
m)
Where:
K= the multiplier
L= the direct first round leakages
C= the tendency to consume
Cj= the proportion of the 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
Most developing economies have
an income multiplier grange
between 0.6 and 1.2, while
developed economies have
arranged between 1.7 and 2.0
The cost-benefit ratio

Those concerned with developing the tourism and

hospitality industry, weather a government or a
private individual, would like to know the extent of
potential benefits and their cost. Benefits / cos
equal the cost-benefit ratio. To arrive at these
ratios, the following procedures are used:
1. Determine where the tourist dollars spent;
2. Determine what percentage of each expenditure leaves the
local economy;
3. Derive a "multiplier effect," oratio applied to income that
reflects multiple spending within an economy;
4. Apply the multiplier effect to the tourist expenditure to arrive
at the total benefits of tourist expenditures in dollars;
5. Derive a cost-benefit ratio expressed as dollars
received/dollars spent; and benefits of tourist expenditures in
dollars;
6. Apply the cost-benefit ratios to tourists expenditures to
provide estimates of income and cost of tourist business to a
community, for both the private and public sectors.
Undersirable
Economic Aspects Of
Tourism
Some undesirable economic aspects of tourism and
hospitality are;
•Higher prices- Because of additional demand and
increase imports tourists purchases may result in
higher prices in a destination areas.
• Economic Instability- Since pleasure travel is
discretionary item, it is subject to changes in prices
and income this fluctuation may result in economic
instability.
How to Maximize the Economic
Effect of Tourism and Hospitality
Growth Theories

Some economic growth theories have been

proposed to maximize the economic effect
of tourism and hospitality within a
destination area the theory of balanced
growth and the theory of unbalanced
growth.
Proponents of the theory of balanced and
unbalanced growth suggest that tourism and
hospitality shoul d be viewed as an important
part of a broad based economy. Its objective is to
integrate tourism and hospitality with other
economic activities to obtain maximum economic
benefit tourism and hospitality goods and service
should be locally produced.
Supporters of the theory and balanced
growth see tourism and hospitality as the
spark to economic growth. While the
proponents of the theory of balanced growth
stress the development of supply. Supporters
of the theory of unbalanced growth
emphasize the need to expand demand.
Economic Strategies

The key to maximizing the economic effects of

tourism and hospitality is to maximize the amount
of revenue jobs develop within the region . To
attain this objective some economic strategies
have been adapted such as import substitution
incentives and foreign exchange.
Import Substitution

It imposes qouta or tariffs on the importation of

goods which can be developed locally . It also
grants subsidies grants or loans to local
industries to encourage the use of local
materials its objective is to minimize the leakage
of money.
Insensitives

The wise of 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/ reduction an imported
machinery materials and the like;
2. production in company taxation by means of
favorable depreciation allowance on
investment or sales taxes income taxes
turnover taxes profit taxes or property taxes.
3. tax holidays (limited period)
4. guarantee of stabilization of tax condition
(for up to 20 years)
5. grants (for up to 30% of total capital cost)
6. subsidies (guaranteeing minimum level of
profit occupancy etc);
7. loans at low rates of interest;
8. provision of land behold at nominal or little
cost or at low rents;
9. Free and unrestricted preparation of all or
part of invested capital profits dividends and
interest subject to tax provisions and;
10. guarantees against nationalization or
appropriation;
Before Implementing an
Incentive Strategy a
Destination;

1. examine the performance of the skins

of other countries in light of their
resources and development of objectives;
2. research the actual needs of investor;
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 targets.
Foreign
Exchange
Many countries have place restriction on
spending in order to maximize foreign
exchange earning. They have limited the
amount of their own currency that tourist can
bring in and take out of the destination to
ensure that foreign currency is used to pay
bills in the host region.Tourist may be
required to pay hotel bills in foreign
currency.
Toursist visitors may be required to show
that they have enough money for their
stay before they are permitted to enter the
country or they me even be required to
interwood specified amount of foreign
currency for the duration of the visit.