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Measuring the impact of tourism on economic growth

Measuring the impact of tourism on economic growth

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Published by Stanislav Ivanov

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Published by: Stanislav Ivanov on Oct 10, 2010
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21
GEOTOUR 2006Košice 5 – 7 October 2006
Measuring the impact of tourism on economic growth
Stanislav Ivanov
1
and Craig Webster 
2
 
ABSTRACT:
The paper presents a methodology for measuring the contribution of tourism to an economy’sgrowth, which is tested with data for Cyprus, Greece and Spain. We use the growth of real GDP per capita as a measure of economic growth and disaggregate it into economic growth generated by tourism and generated by other industries. We argue that current methodologies examine onlythe relationship between tourism development (measured by different statistics) and economicgrowth but do not state how much of the economic growth is a consequence of tourismdevelopment. The methodology proposed in this research promises to more adequately gauge theimpact of tourism on economic growth than other methodologies.
INTRODUCTION
 
One of the chief reasons that governments support and promote tourism throughout theworld is that it has a positive impact upon economic growth and development. Tourism shouldgenerate employment and income, lead to a positive tourism balance of payments, stimulate thesupplying sectors of tourism, and lead to a generally increased level of economic activity in thecountry. Thus, tourism should have an impact on the frequently used quantitative measure of theeconomic development, gross domestic product (GDP). As a result, a specialized literature hasdeveloped to measure the impact of tourism upon GDP to deal with measuring how tourismcontributes to economic growth.However, the problem of measuring the economic impacts of tourism requires a broader view on the analysis of the interaction between tourism and GDP. For example, the increase of tourism share in GDP may be a result of the stagnation of other industries and/or their replacement/ousting by tourism. Therefore, as an economic benefit of tourism we do not perceivethe GDP generated by tourism and its share in country’s GDP but the stimulation of the economicgrowth by tourism (in line with recent studies discussed below). This research note is an attemptto measure more adequately the impact of tourism upon economic growth than previous models,allowing for a more accurate measure for the impact of tourism on the economy.
LITERATURE REVIEW
1
 
Stanislav Ivanov, Ph. D. International College – Albena 3, Bulgaria St., 9300 Dobrich, Bulgariae-mail: stanislav_h_ivanov@yahoo.com
2
Craig Webster, Ph.D., College of Tourism & Hotel Management P.O.Box 20281, Larnaka Ave, Aglangia, 2150 Nicosia, Cyprus, e-mail: craig@cothm.ac.cy
 
 
 
22
Because of the importance of tourism in the economy and the hopes of governments thattourism will lead to economic growth and development, there is a substantial literature, to dealwith the topic. As a result, there are many publications treating the contribution of tourism toGDP, in which the absolute value of tourism GDP, the share of tourism in GDP and their changesover time are discussed /Archer & Fletcher (1996), Biçak & Altinary (1996), Evensen (1998),Sharpley (2001), WTTC (2006)/. There are also a number of articles proposing variousmethodologies in order to deal with the measurement of the impact of tourism upon the economy.One leading study on the impact of tourism and economic development is by Proença andSoukiazis (2005). In their investigation, the correlation between the bed capacity of Portugueseregions and the regional economic growth measured by GDP per capita growth. They find that1% increase in accommodation capacity in tourism sector induces 0,01% increase in per capitaincome. Tourism also increases the convergence rate of per capita income in Portuguese regions.Using a different methodology, Lanza and Pigliaru (1999) examine the touristspecialization of the country and its effect of the economic growth based on Lucas’s two-sector endogenous growth model. The authors state that countries with endowments of suitable naturalresources large relative to the size of their labour force are likely to develop a comparativeadvantage in tourism and will grow faster than those who specialise in the manufacturing sector (p. 12).In a similar fashion, Brau
et al.
(2003) further discuss the problem observing thecorrelation between the tourism specialization of the country (the ratio between internationaltourism receipts and GDP at market prices) and the real per capita GDP growth rate. They findthat small tourism countries grew faster during the period 1980-1995 than countries from OECD,oil producers, least developed countries or other small economies, and conclude that albeitsmallness of a country is detrimental to growth, the opposite is true if it is combined with touristspecialization.Further, Eugenio-Martin
et al.
(2004) consider the relationship between tourism andeconomic growth for Latin American countries for the period 1985-1998 with an analysis basedon a panel data approach. The authors show that the growth in the number of tourists per capita produces a positive effect on the economic growth of the countries with low and medium levelsof income per capita, but not in the group of rich countries. This finding suggests that the increasein the number of tourists’ arrivals in a country offers an opportunity for economic growth whilecountries are developing, but not when countries are already developed (p. 11).In addition, Balaguer and Cantavella-Jordá (2002) construct a model, which includes thereal gross domestic product, international tourism receipts in real terms, and the real effectiveexchange rate. They find that earnings from international tourism affect positively the Spanisheconomic growth and a long-run stable relationship between economic growth and tourismexpansion exists. Vietze and Freytag (2005) investigate the influence of biodiversity on economicgrowth. They show that the relationship is not direct but through the positive effect biodiversityhas on inbound tourism receipts per capita.The common characteristic of 
all 
above-mentioned empirical studies is that they examinethe relationship between tourism and economic growth with the help of econometric models – cross-country or cross-regional data. They all find that tourism stimulates positively the economicgrowth. However, their common disadvantage is that they do not say
how much of the economic growth is, in practice, attributable to tourism
. In this regard, the aim of the current paper is to present a methodology to measure the impact of tourism on economic growth based ondisaggregating the economic growth into two parts – economic growth generated by tourism andgenerated by other industries.
 
 
23
 
METHODOLOGY
 An impact is considered an economic benefit or cost if it increases the welfare of local population. Thus, economic growth should increase the welfare for the local population, althoughcertain segments will benefit more than others. In this regard in current paper we use the growthof real GDP per capita
 g 
as a measure of economic growth.The growth of the real GDP per capita
 g 
is:(1) 100.1
0)(1)(
0001
 ⎠ ⎞⎝ ⎛ =
 N  N  g 
 pq pq
,where
)(
01
 pq
is the GDP in constant prices,
)(
00
 pq
- the GDP in the base year,
 N 
is the averagesize of the population, index 1 denote current period, index 0 is the base period.We disaggregate the nominator of (1) to separate the tourism GDP in constant prices
 pq
o
)(
1
from the GDP in constant prices of other industries
ii pq
o
)(
1
, and tourism GDP in base period
 pq
o
)(
0
from GDP of other sectors in base period
ii pq
o
)(
0
:(2)100.
0)(0)(0)(1)(1)(
00011
 ⎠ ⎞⎝ ⎛ +=
 N  N  N  N  N  g 
ooooo
 pqii pq pqii pq pq
 We regroup the expressions in the nominator and come to:(3) 100.
0)(0)(1)(ˆ0)(0)(1)(
001001
 ⎠ ⎞⎝ ⎛ +=
 N  N  N  N  N  N  g 
oooooo
 pqii pqii pq g  pq pq pq
44 344 21
 The first expression in (3) shows this part of the growth of real GDP per capita that is aconsequence of tourism development, i.e. the impact of tourism on economic growth (Ivanov,2005):(4)100.
0)(0)(1)(
001
 N  N  N  g 
ooo
 pq pq pq
=
.

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