THE ECONOMICS OF
TOURISM AND HOSPITALITY
CHAPTER 3
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. Reasons for this
are:
1. There is a continuous demand for international travel in developed
countries;
2. As income in developed countries increases, the demand for tourism
and hospitality also increases at a faster rate;
3. 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.
Tourism and hospitality is an invisible export which differs from international trade in
many ways.
01 In tourism and hospitality, the 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.
Demand for pleasure travel is largely dependent on non-economic factors, such as;
02 local disturbances
political unrest
changes in the fashionability of resorts/countries created mostly by media coverage
International tourism and hospitality is both price elastic and income elastic. This means that
changes in price and income will also change the demand for pleasure travel.
By using specific fiscal measures, the exporting or tourist-receiving country can manipulate
03 exchange rates so that those for tourists are higher or lower (normally the latter is implemented in
order to attract large numbers of tourists) than those in other foreign trade markets.
Tourists are allowed to buy in domestic markets at the same prices as the local residents.
Tourism and hospitality is a multifaceted industry that directly affects several sectors in the
04 economy, such as;
Hotels, shops, restaurants, local transport firms, entertainment establishments, handicraft
producers,
and indirectly affects many others, such as;
Equipment manufacturers and utilities
Tourism and hospitality brings many more non-monetary benefits and costs than other export
05 industries, such as;
Social, cultural, and environmental benefits and costs.
ECONOMIC IMPACT
Travelers outside the destination area spend on goods
and services within the destination, tourism and
hospitality acts as an export industry by bringing in
revenues from outside sources.
Tourist expenditures also increase the level of
economic activity in the host area directly.
Many countries have utilized tourism and hospitality as
a means to increase foreign exchange earnings to
produce investment necessary to finance economic
growth.
DIRECT AND
SECONDARY EFFECTS
"Direct” - means that the income is received directly.
Tourist expenditures received as income by businesses
such as hotels, restaurants, car rentals, tour operators,
and retail shops serving tourists have a direct effect on
the economy of the host area.
Indirect or secondary effects - the money paid by
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
tourists.
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.
Used to estimate the direct and secondary effects of
tourist expenditures on the economy of a country.
Local Tour Increased Speed
Operator Personal
Income
Seed
Save
Fertilizer
Handicrafts Raw
Import
Purchase Material
(leakage)
Tourist of Supplies
Wages
Hotelier ...
Rent
Food
...
Services Wages
Savings
(e.g., taxi)
Figure 2. Multiplier Effect
The formula for tourism multiplier is:
y
K= E
where:
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)
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
COST-BENEFIT RATIO
Those concerned with developing the tourism and hospitality industry, whether a government or a private
individual, would like to know the extent of potential benefits and their costs. Benefits divided by costs 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
higher prices
economic instability
Because of additional demand and/or increased imports, tourist
purchases may result in higher prices in a destination area. This
would mean that local residents would also have to pay more for
products and services.
Since pleasure travel is a discretionary item, it is subject to
changes in prices and income. These fluctuations may result in
economic instability.
How to Maximize the Economic Effect of Tourism and Hospitality
01 GROWTH THEORIES
Economic growth theories have been proposed to maximize the economic effect of tourism
and hospitality within a destination are. These are the theory of balanced growth and the
theory of unbalanced growth.
This theory states that tourism and hospitality needs the support of other industries.
Its objective is to integrate tourism and hospitality with other economic activities.
Supporters of the theory of unbalanced growth see tourism and hospitality as the spark to
economic growth. While the proponents of the theory of balanced growth emphasize the
need to expand demand. As demand is increased through the vigorous development of
tourism and hospitality, other industries will move to provide products and services locally.
02 ECONOMIC STRATEGIES
The key to maximizing the economic effects of tourism and hospitality is to
maximize the amount of revenue and jobs developed within the region.
To attain this objective, some strategies have been adapted, such as import
substitution, incentives, and foreign exchange.
03 IMPORT SUBSTITUTION
It imposes quotas 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.
04 INCENTIVES
The wise 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/reductions on imported machinery, materials, and the like;
2. reduction in company taxation by means of favorable depreciation allowances on
investment, or special treatment in relation to excise taxes, sales taxes, income taxes,
turnover taxes, profit taxes, or property taxes;
3. tax holidays (limited period);
4. guarantee of stabilization of tax conditions (for up to 20 years);
5. grants (for up to 30% of total capital costs);
6. subsidies (guaranteeing minimum level of profit, occupancy, etc.);
7. loans at low rates of interest;
8. provision of land freehold at nominal or little cost or at low rents;
9. free and unrestricted repatriation of all part of invested capital
profits, dividends, and interest subject to tax provision; and
10. guarantees against nationalization or appropriation.
Before implementing an incentive strategy, a destination should:
examine the performance of the schemes of other countries in
light of their resources and development of objectives;
research the actual needs of investors;
design codes of investment concessions related to specific
development objectives with precise requirements of investors;
and
establish targets of achievements and periodically monitor and
assess the level of realization of such targets.
05 FOREIGN EXCHANGE
They have limited the amount of their own currency that tourists can bring in and
take out of the destination to ensure that foreign currency is used to pay bills in the
host region.
Tourists may be required to pay hotel bills in foreign currency.
Visitors may be required to show that they have enough money for their stay before
they are permitted to enter the country or they may even be required to enter with a
specified amount of foreign currency for the duration of their visit.
MEMBERS:
ANDREA NICOLE BONOS
AIROL MAINE AMADOR
FERDINAND GURAY
JENNIFER AYO
JAN ASHLEY BELO
JOSHUA MENDOZA
