THE ECONOMICS OF

TOURISM
1. To explain the role of tourism in economic development;
2. To analyze the economic impact of tourism on a destination
area;
3. To differentiate the direct effects from the secondary effects of
tourists expenditures on the economy of the host area;
4. To elucidate the meaning of tourism multiplier and its effect
on the economy of the host country;
5. To describe the undesirable effects of the economic aspects of
tourism; and
6. To identify the strategies which can maximize the economic
effects of tourism.

LEARNING OBJECTIVES
  Several developing countries
have used tourism development as an alternative to
help economic growth..
The reasons for this are:
1. There is a continuous demand for international travel in
developed countries.
2. As income of developed countries increases, the
demand for tourism also increases at a faster rate.
3. Developing countries need foreign exchange to aid their
economic development.
Tourism is an invisible export,
which differs from international
trade in many ways.
1. In tourism, consumer collects the product from the exporting country thereby
eliminating the freight costs for the exporter, except in cases in which the airline
used are those of the 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. At the same time,
international tourism is both price elastic and income elastic. This means that
changes in price and income will also change the demand for pleasure travel.

3. By using specific fiscal measures, the exporting or tourist receiving country can
manipulate exchange rates so that those for tourists are higher or lower
(normally the latter is implemented in order to attract large number of tourist)
than those in other foreign trade markets. Also, tourist 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).
4. Tourism is a multifaceted industry that directly affects several sectors in the
economy such as hotels, shops, restaurants, local transport firms,
entertainment establishments, handicraft producers and indirectly affects
many others, such as equipment manufacturers and utilities.

5. Tourism brings many more non-monetary benefits and costs than other export
industries, such as social, cultural and environmental benefits and costs.
 ECONOMIC IMPACT

• When travelers outside • Tourist expenditures • Tourism’s economic

the destination area also increase the level of impact on a destination
spend on goods and economic activity in the area can be immense
services within the host area directly. since it provides a
destination, tourism source of income,
acts as an export employment, and
industry by bringing in foreign exchange.
revenues from outside
sources.
 Direct and Secondary Effects
• Tourist expenditures received as income by businesses such as hotels, restaurants,
car rentals, tour operators and retail shops serving tourists have direct effect on the
economy host area.

• The direct term means that the income is received directly.

• Indirect or secondary effects mean that the money paid by the tourists to businesses
are in turn used to pay for supplies, wages of workers and other items used in
producing the products or direct services bought by tourist.
 Tourism Multiplier
• The term multiplier is used to describe the total effect, both direct and secondary of
an external source of income introduced into the economy.

• Tourism multiplier or multiplier effect is used to estimate the direct and secondary
effects of tourist expenditures on the economy of a country.
 SPEND
LOCAL TOUR
OPERATOR INCREASED PERSONAL
INCOME SAVE SEED

HANDICRAFTS FERTILIZER
RAW MATERIALS
IMPORTS
PURCHASE OF SUPPLIES
TOURIST

HOTELIERS WAGES

RENT
WAGES
FOOD
SERVICES (taxi)

SAVINGS
 Cost - Benefit Ratio
Those concerned with developing the tourism industry, whether a government or a private individual, would like to know the
extended of potential benefits and their costs. Benefits divided by cost is equal the cost-benefit ratio. To arrive at these ratios,
the following procedures are used:

1. Determine where the tourist dollar is spent;

2. Determine what percentage of each expenditure leaves the local economy;

3. Derive a “multiplier effect’, a ratio applied to income that reflects multiple spending within an economy;

4. Apply the multiplier effect to the tourist expenditures to arrive at the total benefits of tourist expenditures in dollars;

5. Derive a cost-benefit ratio expressed as dollars received / dollars spent; and

6. 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 are
higher prices and economic instability.

• Because of additional demand and/or increased imports,

tourist purchases may result in higher prices in a
destination area.

• The economic effect of tourism can be maximized

through the following strategies, import substitution,
incentives and foreign exchange.
Thanks!
Any questions?