THE ECONOMICS OF

Tourism and
Hospitality
 The Role of Tourism and
Hospitality in Economic
Development
Several developing countries have used tourism and
hospitality development as an alternative to help
economic growth. The reasons for this are: first, there is
a continuous demand for international travel in
developed countries; second, as income in developed
countries increases, the demand for tourism and
hospitality also increases at a faster rate; and third,
developing countries need foreign exchange to aid their
economic development.

The Organization for Economic Cooperation and

Development (OECD) has concluded that tourism and
hospitality provides a major opportunity for growth to
countries that are at the intermediate stage of economic
development and require more foreign exchange
earnings.
 Here is a summary of each
numbered point in the
provided
1. Tourism and hospitality text:
are unique exports because the consumer travels to the
producing country to receive the service, eliminating transportation costs for the
exporter, except when the airline used is from the tourist-receiving country.

2. The demand for leisure travel is significantly influenced by non-economic factors like
political stability, local events, and media portrayals of destinations. International
tourism and hospitality are both price and income elastic, meaning changes in price and
income directly affect demand.

3. Governments can use fiscal policies to manipulate exchange rates, making tourism
more or less expensive for tourists. Lowering the cost of tourism for foreign visitors is a
common strategy to attract more tourists. Tourists typically enjoy the same prices as
locals, except in duty-free shops.

4. Tourism and hospitality are multifaceted industries directly affecting various sectors
like hotels, restaurants, and transportation, and indirectly influencing others such as
equipment manufacturers.

5. Tourism and hospitality generate more non-monetary benefits and costs than other
export industries, including social, cultural, and environmental impacts.
 ECONOMIC
IMPACT
Tourism and hospitality generate significant
economic benefits. When visitors spend money, it
brings in revenue from outside sources, acting as
an export industry and directly boosting local
economic activity. Many countries use tourism to
increase foreign exchange earnings for economic
growth. The industry's impact is substantial,
providing income, employment, and foreign
exchange.
 DIRECT AND
SECONDARY EFFECT
To assess tourism's economic impact, it's
crucial to understand both direct and
secondary effects. Direct effects are the
income received directly by businesses (hotels,
restaurants, etc.) from tourist spending.
Indirect or secondary effects are when that
income is used to pay for supplies, wages, etc.,
further stimulating the local economy.
 TOURISM
The term MULTIPLIER
“multiplier” is used to describe the
total effect, both direct and secondary, of an
external source of income introduced into the
economy. The tourism multiplier or multiplier
effect is used to estimate the direct and
secondary effects of tourist expenditures on
the economy of a country. The multiplier
effect is illustrated in Figure 2.
 Figure 2. Multiplier Effect Source: Mill, R.C. and Alastair Morrison. The Tourism System. Dubuque, IA:
Kendall/Hunt, 1998.
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 A tourist's initial spending creates a ripple effect in a
destination's economy. The money is received as income by
various businesses and individuals, who then spend it, creating
further income. This process continues through multiple rounds
of spending, but some money "leaks" out as imports are
purchased. To calculate the total economic impact, the value of
these imports must be subtracted from the total income
generated by tourism.

The formula for tourism multiplier is:

Y
K= E
K = the multiplier
y = the change in income generated by E
E = the change in expenditure (the initial sum of
money spent by the tourist)
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 buy
heavily from other local economic sectors for goods and services, there will be a
smaller tendency to import and the multiplier will be greater than if the reverse
were true.

A simplified formula for tourism multiplier is;

1-L
K= 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 that 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 range between 0.6
and 1.2, while developed economies have a range between 1.7 and 2.0.
 The Cost-Benefit Ratio is a crucial metric for
evaluating the potential benefits and costs
associated with developing the tourism and
hospitality industry. The process to calculate this
ratio involves the following steps:
1. Identify where tourist spending occurs. Assess the percentage of each
expenditure that remains in the local economy.
2. Calculate a "multiplier effect," which indicates the repeated spending
within the economy.
3. Use the multiplier effect to determine the total benefits of tourist
spending in monetary terms.
4. Express the cost-benefit ratio as dollars received divided by dollars
spent.
5. Apply these ratios to estimate the income and costs of the tourism
business for both private and public sectors in the community.
Undesirable Economic Aspects
ofeconomic
Tourism
Tourism's economic downsides include inflated prices for both tourists and locals, and
instability due to the discretionary nature of tourism spending, leading to
fluctuating demand.

How to Maximize the Economic Effect of Tourism

and Hospitality
GROWTH THEORIES
To maximize tourism's economic benefits, two growth theories are proposed: balanced growth, which
advocates for integrating tourism with other industries to ensure local production and broad-based
economic development; and unbalanced growth, which prioritizes expanding tourism demand to
stimulate the growth of supporting industries.

Economic Strategies
Strategies to maximize economic impact include import substitution, incentives, and foreign
exchange management, all aimed at increasing regional revenue and job creation.
IMPORT SUBSTITUTION
It imposes quotas or tariffs on the importation of goods which can be
developed locally.

INCENTIVES
Incentives can attract both local and foreign capital to develop tourism and
hospitality sectors. Targets include tax exemptions, reduced company taxation,
tax holidays, grants, subsidies, loans, land freehold, repatriation, and guarantees
against nationalization. Implementing such a strategy requires thorough research
and monitoring.

FOREIGN EXCHANGE
Tourists often use foreign currency to pay bills in host countries, ensuring
a smooth exchange process and maximizing foreign exchange earnings.
 SUMMARY
Many developing countries have used tourism and hospitality development as an aid to economic
growth. The reasons for this are: there is a continuous demand for international travel in developed
countries; and the demand for tourism and hospitality will increase as incomes in developed countries
increase. Developing countries need foreign exchange to aid their economic development.

The economic impact of tourism and hospitality on a destination area is enormous since it provides a
source of income, employment, and foreign exchange. Tourist expenditures have direct and secondary
effects on the economy of a country. The tourism multiplier is affected by leakages or the value of
services that must be imported to lower the multiplier effect; the less leakages, the greater the
multiplier effect.

The cost-benefit ratio determines which economic sector will produce the most benefit in terms of
income generated relative to the cost of development. It is obtained by dividing the benefits by the
costs.

There are some economic aspects of tourism and hospitality which are undesirable. These are higher
prices and economic instability. Higher prices are brought about by additional demand and/or
increased imports, while economic instability is the result of fluctuations in prices and income.

The economic effect of tourism and hospitality can be maximized through the following strategies:
import substitution, incentives, and foreign exchange.
 REFERENCES
Bull, Adrian. The Economics of Travel and Tourism. Boston: Addison Wesley
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Ioannides, D. and K.G. Debbage (Eds.). The Economic Geography of the Tourism
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Johnson, Peter and Barry Thomas. Tourism, Museums, and the Local Economy: The
Economic Impact of the North of England Open Air Museum at Beamish.
Brookfield: V.T. Ashgate Publishing Co., 1991.
Lundberg, Donald; Krishnamoorthy, E. M., and Mink H. Stavenga. Tourism
Economics. New York: Wiley, 1995.
TIA. A Portrait of Travel Industry Employment in the U.S. Economy. Washington
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Travel Industry Association of America Foundation, 1996
. Velas, Francois and Lionel Becherel. International Tourism: An Economic
Perspective. Hampshire, U.K.: Macmillan Press, 1995.
WTO. Tourism Economic Report. Madrid: World Tourism Organization, 1998
Thank
you
very
much!