QUIRINO STATE UNIVERSITY

DIFFUN CAMPUS
Diffun, 3401 Quirino
COLLEGE OF HOSPITALITY INDUSTRY MANAGEMENT

MODULE 3
The Economic and Political Impact of Tourism

Competencies
1. Explain the fundamental concepts of economic to denote its benefits to tourism.
2. Create a flow chat that illustrate how the multiplier concept works in the tourism
and hospitality industry
3. Investigate the potential economic problems that can be created by tourism
4. Discuss the importance of tourism in the Philippines economic development
5. Identify the functions of the leading government offices directly involved to the
tourism industry.

Discussion
I. Tourism for Economic Growth and Vitality

Economics is the “social science that seeks to understand the choices

people make in using their scarce resources to meet their wants”

For tourists, these scarce resources are money, available time, and the
physical energy to travel. A small amount of any of these three resources will
decrease tourists’ ability to travel, whereas a large amount of these three
resources will increase tourists’ ability to travel. Scarce resources for promoters
and suppliers of tourism businesses are human resources (the availability and
quality of tourism service employees) and financial resources (the amount of
money that the developer can raise by borrowing money or by selling stock).
Scarce resources for communities or countries are the amount and variety of
their natural resources and the pool of human resources available at differing
skill levels. Scarce resources for governments are primarily tax revenues that can
be used (1) to develop natural and human resources productively and (2) to pay
for the many services that governments can provide their citizens.

Comparative Advantage
Many towns and cities, states/provinces, even entire nations, have
determined that development of their visitor-inducing resources can add to the
economic well-being of local residents. Economic decisions are often based on a
concept called comparative advantage.

Tourism can be said to have a comparative advantage over other industries

if it yields a better return from the region’s human and natural resource inputs
than another industry would. Leaders of many communities believe this
comparative advantage exists because of the many economic, social, and
environmental benefits tourism offers. Let’s take a closer look at how comparative
advantage might favor tourism development.

Tourism may have a comparative advantage over other industries in two

ways. First, the region may be especially appealing to tourists because

• it has features that are highly attractive,

• it may be easily accessible to many potential tourists,
• it has the necessary infrastructure, and
• it has an abundant labor force to serve in the tourism industry.
 QUIRINO STATE UNIVERSITY
DIFFUN CAMPUS
Diffun, 3401 Quirino
COLLEGE OF HOSPITALITY INDUSTRY MANAGEMENT

In other words, the area may have the necessary ingredients for both the
demand and the supply of tourism. Not all destinations are able to achieve this
balance, and investment in tourism as an industry is not always an appropriate
solution if existing industries in the region begin to falter.

Second, tourism may also be the best industry to develop if there are no
other alternatives. For example, many island economies are based on tourism
because these small nations have little else of economic value to offer the world.
Its citizens, therefore, are best able to achieve a better standard of living through
employment in tourism businesses. Owing to very limited natural resources
(other than beauty), the islanders have few, if any, industrial alternatives since
almost all supplies and materials must be shipped in. So, tourism has the
comparative advantage because the island country is at a comparative
disadvantage for all other industries. Since islands have unique natural, cultural,
and social attractiveness, tourism development rather than other economic
development alternatives has been shown to play an important role in explaining
the economic growth of these economies.

The Role of Tourism in the Economic Development

1. The tourist is a goods consumer and a services beneficiary. Thus, tourism

can support economic development of both the local community and the
economy of a country, through earnings from domestic and foreign
visitors. (Bunghez 2016, p.3)
2. Tourism stimulate economic growth by increasing the number of available
jobs in a tourist destination, both directly and indirectly, within the
companies which provide services for tourists. A large and diversified
workforce with a varied skill profile is required in the tourism sector. Jobs
involved in direct administration of hotels, restaurants, stores and
transportation. The creation of new employment opportunities results in
an increase in the standard of living of the local population, which, in turn,
leads to an increase in consumer spending. (Bunghez 2016, p.3)
3. A tourist destination can bring important revenues to the State budget in
the form of taxes and fees paid by companies who operate around such
attractions.
4. Tourism also boosts the export of local products. It is estimated that 15-
20% of the tourist expenditure is spent for gifts, clothing and souvenirs.
(…) In many tourist destinations, there are markets that sell local crafts.
This provides a source of income for local produces and creates an
interesting shopping experience for tourists. (Kotler, Bowen, & Markens
2014)

II. The Multiplier Concept

Why are tourism expenditures important to an area? And just how big a
benefit do they have? One of the most common ideas of the economic impact of
tourism is called the multiplier concept. Money is added to an area when someone
from outside its borders buys a good or service produced within the area. In
addition, this new money to the area is re-spent, generating additional value.
Tourism is usually a very good source of new money for an area because visitors
travel to the area and “leave” their money behind as they buy goods and services
during their visit.

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 QUIRINO STATE UNIVERSITY
DIFFUN CAMPUS
Diffun, 3401 Quirino
COLLEGE OF HOSPITALITY INDUSTRY MANAGEMENT

Figure 3.1 The Multiplier Effect

The total economic impact of tourist spending is determined by the contribution

of three elements. The first is the direct impact. It measures the effects of the first
round in the monetary circuit, which are derived from tourists (e.g. the ratio
between restaurant expenses for raw materials, auxiliaries, staff salaries and the
currency amount spent by one consumer in the restaurant). The next element is
that of the indirect impact. It measures the derivative effects of additional rounds
caused by the recirculation of the tourist initial monetary unit (e.g. the purchase
of goods and services by firms in sectors that contributed to the supply of raw
materials to the restaurant, necessary in order to provide the food services
requested by the visitor). The third element is the induced (stimulated) impact. It
measures the derivative effects caused by a tourism company’s employees who
spend a portion of their wages in other sectors (e.g. employees of a hotel spend a
part of their salary to purchase clothing, food, etc. from the local trade network;
owners and employees of other commercial establishments, for their part, spend
a portion of their income for the purchase of other goods and services in the area
in which they live and activate). Concluding, the total economic impact is equal
to the effects of the direct impact plus the indirect impact, plus the induced
impact of tourist spending. Hence, the tourism multiplier effect is the sum of the
three impacts reported (divided) by the direct impact. (Snak, Baron, & Neacșu,
2003)
III. Potential Problems in Tourism-Based Economies

Having a diversified economy means that an area is not overly reliant on

any one industry. Consider an agricultural region that faces a drought. A
diversified economy allows the area to financially recover faster because other
industries will support the economy even if agriculture fails. Like all industries,
tourism has the potential for negative as well as positive impacts.
Overdependence on tourism can lead to a dangerous lack of economic diversity,
so that a major event affecting tourism can threaten an area’s economy. Tourism
revenues can be quickly and severely diminished by a variety of crisis events. Five
of the most common and influential types of crises are:
1. International war or conflict
2. Acts of terrorism, especially those involving tourists
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 QUIRINO STATE UNIVERSITY
DIFFUN CAMPUS
Diffun, 3401 Quirino
COLLEGE OF HOSPITALITY INDUSTRY MANAGEMENT

3. A major criminal act or crime wave, especially against tourists

4. A natural disaster that causes substantial damage to natural
resources or tourism infra-or superstructure
5. Epidemics of diseases that are highly contagious

Tourism in the Economic Balance

Determining whether the total economic impact of tourism will be positive
or negative is not an easy task. Many decision makers are turning to cost–benefit
analysis for help. In cost–benefit analysis, dollar values are assigned to the
benefits of tourism (such as increased tax revenues and increased employment
opportunities) as well as the costs associated with tourism (such as the increased
need for utilities, schools, and police protection). If the value of the positive
impacts (the benefits) is greater than the value of the negative impacts (the costs),
the total economic impact of tourism is positive. If the costs are larger than the
benefits, then tourism may not be the economic engine it is often believed to be.
To be as thorough as possible, decision makers have tried to quantify difficult-
to-value pluses and minuses (such as increased entertainment options for
residents and increased crowding and traffic jams) to include these benefits and
costs in the equation.

IV. The Importance of Tourism in the Philippines Economic Development

As mentioned in the Journal of Philippine Statistics (2011) Tourism in the
Philippines is a major economic contributor to the Philippine economy. The
tourism industry is recognized by the government as an important contributor to
the generation of foreign exchange earnings, investments, revenue, employment,
and to the growth of the country’s output. The inclusion of tourism as a major
pillar in the Medium-Term Philippine Development Plan (MTPDP) has given
priority to the tourism sector by promoting the Philippines as a premier tourist
destination and investment site. If developed in a sustainable manner, indeed it
can be a powerful economic growth engine for the country. The opportunities that
tourism presents encourage entrepreneurship and stimulate business. Tourism-
related industries spawn or give impetus to other industries. Hotels, restaurants,
and shops spur the construction industry; restaurants create demand for farm
products and agricultural produce; and souvenir shops and retail establishments
in the area promote the handicraft industry. The resultant expansion or
improvement in infrastructures such as roads, airports, seaports, transportation
systems, and in a cleaner environment bring in foreign investments in the form
of more and better resorts and support amenities like hotels, restaurants, and
entertainment establishments.

V. The Role of Government in the Tourism

Governments, from the local to the national level, can and often do play
an important role in tourism development. Why do governments devote scarce
funds to the promotion and development of tourism? Tourism can provide many
economic benefits. First, a wide variety of jobs are created through the
development of the hotels, restaurants, retail shops, and other facilities and
services required to satisfy the needs of travelers. Second, additional jobs are
generated to serve the needs of the employees of the tourism industry. These
jobholders earn wages that, in turn, are re-spent in the local economy, creating
the multiplier concept. Third, and may be most important from a government
perspective, revenues are boosted by taxing the goods and services that visitors
buy. Taxing visitor shifts a portion of the tax burden from local residents to
tourists. Communities and other governmental units commonly tax hotel rooms,
restaurant meals, and gasoline, and often add passenger facility charges on
departing flights from the local airport. These tax revenues can then be used to
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 QUIRINO STATE UNIVERSITY
DIFFUN CAMPUS
Diffun, 3401 Quirino
COLLEGE OF HOSPITALITY INDUSTRY MANAGEMENT

further develop and promote tourism or, as is common, to improve the quality of
life by funding services for local citizens.
National and state/provincial governments can support tourism
development by performing many activities. These can include the collection of
tourism information, regulation of tourism-related businesses such as airlines,
international promotion of tourism, encouragement of development of tourist
areas (especially by funding infrastructure or providing government-backed
loans), and development of tourism policy.
Governments can also aid tourism development by financing necessary
infrastructure such as roads and airports and by offering government-backed
low-interest loans to private developers who develop superstructure facilities. For
example, travelers are often surprised to learn that they must pay a departure
tax in many locations to fund airport operations and improvements. In other
instances, many local governments, aided through state funds, have attempted
to revitalize inner-city areas and turn them into leisure, entertainment, and
shopping meccas. Local governments can also sponsor “hallmark tourist events”
such as the Super Bowl or a World’s Fair to generate increased visits and gain
publicity for the region that can pay off in the future.

References
Cook, Hsu et al Tourism. The Business of Travel 6 th Edition Pearson Prentice Hall
2017

Corina Larisa Bunghez (2016), “The Importance of Tourism to a Destination's

Economy”, Journal of Eastern Europe Research in Business & Economics, Vol. 2016
(2016), Article ID 143495, DOI: 10.5171/2016.143495

Tourism Highlights, (2015). UNWTO, p. 2

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