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TOUR 50- TOURISM AND HOSPITALITY

MANAGEMENT 1
Module 3: The Economics of Tourism
And Hospitality

This module belongs to:

Compiled by:
Gianina Nonieca P. Aquino
Instructor
________________________________
Updated by:
JEFFREY B. AGUILA

 Preface

This module intends to discuss the role and impact of tourism and hospitality
industry in the economic aspect of a country. It will also explore the positive and
negative effects brought about by the industry in terms of the income generated,
employment opportunities, contributions to the local and national economy as well
the development of the private sector versus the issues on leakage, inflation of
prices and foreign ownership and management.

 Table of Contents

Learning Objectives ………………………………………………………………………1

Instructions to the learner ………………………………………………………….……1

Pre-Test ……………………………………………………………………………………..2

Learning Topics: The Economics of Tourism and Hospitality

A. The Role of Tourism and Hospitality in Economic Development …………..3

B. Economic Impacts ……………………….……………………………………..4

1. Positive Economic Impacts …………………………………………….4

2. Negative Economic Impacts ……………………………………………6

C. Direct and Secondary Effects ……………………….…………………………7

D. Tourism Multiplier .……………………………………………………………….7

E. Maximizing the Economic Effects of Tourism and Hospitality ………………8

Post-Test …………………………………………………………………………………..10

Key to Correction ………………………………………………………………………..11

References ………………………………………………………………………………..11

 LEARNING OBJECTIVES

After the completion of this module, the student will be able to:

1. explain the role of tourism in economic development;

2. analyze the positive and negative economic impacts of tourism on the
destination area;
3. differentiate between the direct effects from secondary effects of tourist
expenditure on the economy of the host area;
4. elaborate the meaning of tourism multiplier and its effect on the economy of
the host community; and
5. propose strategies to maximize the economic benefits brought about by the
tourism and hospitality industry.

INSTRUCTIONS TO THE LEARNER

• Answer the pre-test questions before reading the learning topics covered in this
module.

• The pre-test will serve as a diagnostic exam which will gauge the level of your
knowledge regarding the topics.

• Make sure to read the lecture notes thoroughly and jot down unfamiliar terms and
take time to research its definitions by any means possible.

• Several learning activities and supplementary readings are required for some
topics which will further enhance your comprehension and understanding about the
subject matter so make sure to accomplish them.

• You may also be asked to watch video clips related to certain topics so please be
mindful of footnotes regarding the links to such learning materials.

• Do not forget to answer the post-test after completing this module since it is one of
the tools in assessing what you have learned from the included topics.

• Should there be any clarification or queries, feel free to communicate your

concerns with your instructor through any means possible and within the specified
consultation hour/period.!

 PRE-TEST

TRUE or FALSE. Write the word True is the statement is correct, and False if
otherwise.
_______________1. Tourism is an invisible export which differs from international
trade in many ways.
_______________2. Many countries have decided to abolish tourism activities as a
means to increase foreign exchange earnings because they weren’t able to produce
investments necessary to finance economic growth.
_______________3. Tourist expenditures also increase the level of economic activity
in the host area directly.
_______________4. When travelers outside the destination spend on goods and
services within the destination, tourism acts as an import industry by bringing in
revenues from outside sources.
_______________5. Tourism brings many more non-monetary benefits and costs
than other export industries such as social, cultural and environmental benefits and
costs.
_______________6. According to the OECD, tourism has a major opportunity for
growth for countries that are at the intermediate stage of economic development.
_______________7. Indirect employment includes jobs that are immediately
associated with the tourism and hospitality industry such as hotel staff, restaurant
personnel and travel agents.
_______________8. Tourism is a single and monopolized industry, focused only on
providing their guests and clients with travel services.
_______________9. One of the negative economic impacts of tourism and
hospitality industry is its contribution to government revenues.
_______________10. Tourist expenditures received as income by businesses such
as hotels, restaurants, transportation sector, tour operators and retail shops serving
tourist have a direct effect on the economy of the host area.!

 THE ECONOMICS OF TOURISM AND HOSPITALITY

“Economics is everywhere, and understanding economics can help you make better
decisions and lead a happier life.”
- Tyler Cowen

A. THE ROLE OF TOURISM AND HOSPITALITY IN ECONOMIC DEVELOPMENT

Several developing countries have used tourism development as an

alternative to help economic growth. The reason for this are; (1) there is a demand
for international travel in developed countries; (2) the income from developed
countries increased with the demand for tourism also increases at a faster rate.; (3)
developing countries need foreign exchange to aid their economic development.

The Organization for the Economic Corporation and Development (OECD)

has concluded that tourism has a major opportunity for growth for countries that are
at the intermediate stage of economic development and require more foreign
exchange earnings.

Tourism is an invisible export which differs from international trade in many ways.

1. In tourism, the consumer collects the product from the exporting country there
by eliminating the freight cost for export, except in cases in which the airline
used are those of the tourist receiving countries.

2. The demand for pleasure travels purely dependent on non-economic factors

such as local disturbances, political unrest and changes the fashion ability of
resort/countries created mostly by media coverage. At the same time
international tourism is bot price elastic and income elastic. This means that
changes in price and income will also change the demand for pleasure
travels.

3. By using specific fiscal measure, 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 foreign trade markets. Also, tourist is allowed to buy in domestic
markets at the same price as the same as the local residents.

 4. Tourism is a multifaceted industry that directly affects several sector in the

economy such as hotels, shops, restaurants, local transport firm,
entertainment establishments, handicraft producers and indirectly 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.

B. ECONOMIC IMPACTS

When travelers outside the destination spend on goods and services within
the destination, tourism 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 as a means to increase
foreign exchange earnings to produce investment necessary to finance economic
growth.

Tourism’s economic impact on a destination area can be immense since it

provides a source of income, employment and foreign exchange.

Positive Economic Impacts

1. Foreign exchange earnings - One of the biggest benefits of tourism is the

ability to make money through foreign exchange earnings. Tourism
expenditures generate income to the host economy. The money that the
country makes from tourism can then be reinvested in the economy. How a
destination manages their finances differs around the world; some
destinations may spend this money on growing their tourism industry further,
some may spend this money on public services such as education or
healthcare.

2. Contribution to government revenues - Tourism can help to raise money

that it then invested elsewhere by the government. There are two main ways
that this money is accumulated. Direct contributions are generated by taxes
on incomes from tourism employment and tourism businesses and things
such as departure taxes.

 3. Employment generation - The rapid expansion of international tourism has

led to significant employment creation. From hotel managers to theme park
operatives to cleaners, tourism creates many employment
opportunities. Tourism supports some 7% of the world’s workers.There are
two types of employment in the tourism industry: direct and indirect.

• Direct employment includes jobs that are immediately associated with the
tourism industry. This might include hotel staff, restaurant staff or taxi drivers, to
name a few.

• Indirect employment includes jobs which are not technically based in the
tourism industry, but are related to the tourism industry

4. Contribution to local economies - All of the money raised, whether through

formal or informal means, has the potential to contribute to the local economy.
If sustainable tourism is demonstrated, money will be directed to areas that
will benefit the local community most. There may be pro-poor tourism
initiatives (tourism which is intended to help the poor) or volunteer
tourism projects. The government may reinvest money towards public
services and money earned by tourism employees will be spent in the local
community. This is known as the multiplier effect.

"# Development of the Private Sector - The private sector has continuously
developed within the tourism industry and owning a business within the
private sector can be extremely profitable; making this a positive economic
impact of tourism. Every destination is different with regards to how they
manage the development of the private sector in tourism. Some destinations
do not allow multinational organizations for fear that they will steal business
and thus profits away from local people. This has been the case in Italy
wherein one cannot find a collectible Starbucks mug since it does not allow
the company to open up any branch in their country because they are very
proud of their individually-owned , local coffee shops.!

 Negative Economic Impacts

1. Leakage - Economic leakage in tourism is when money spent does not remain in
the country but ends up elsewhere; therefore, limiting the economic benefits of
tourism to the host destination. The biggest culprits of economic leakage are
multinational and internationally-owned corporations, all-inclusive holidays and
enclave tourism.

2. Infrastructure cost - Tourism development can cost the local government and
local taxpayers a great deal of money. Money spent in these areas may reduce
government money needed in other critical areas such as education and health.

3. Increase in prices/ Inflation - One of the most obvious economic impacts of

tourism is that the very presence of tourism increases prices in the local area.
Increasing demand for basic services and goods from tourists will often cause
price hikes that negatively impact local residents whose income does not increase
proportionately.

4. Economic dependence of the local community on tourism - Many countries

run the risk of becoming too dependent on tourism Whilst this can work out well, it
is also risky business. If for some reason tourism begins to lack in a destination,
then it is important that the destination has alternative methods of making
money. If they don’t, then they run the risk of being in severe financial difficulty if
there is a decline in their tourism industry

5. Foreign Ownership and Management - As enterprise in the developed world

becomes increasingly expensive, many businesses choose to go abroad. Whilst
this may save business money, it is usually not so beneficial for the economy of
the host destination. Foreign companies often bring with them their own staff, thus
limiting the economic impact of increased employment. They will usually also
export a large proportion of their income to the country where they are based.

 C. DIRECT AND SECONDARY EFFECTS

In order to measure the economic impact of tourism on the destination are, it

is important to know the direst and secondary effects of the visitor expenditures on
the economy of the area.

Tourist expenditures received as income by businesses such as hotels,

restaurants, transportation sector, tour operators and retail shops serving tourist
have a direct effect on the economy of the host area. The term direct means that the
income is received directly. Indirect or secondary effects means that the money paid
by tourist to business 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.

D. TOURISM MULTIPLIER

The term multiplier is used to describe the total effects 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 tourism to estimate the tourist
expenditures on the economy of the country.

A tourist makes an initial expenditure into destination. This expenditure is

received as income by local tour operators handicrafts store owners, hoteliers and
taxi drivers. In the first round of transactions, a hotelier my use some of the money
received to buy some supplies pay more wages and retain some profit. The income
in the second round may be spent or saved, while the employee who has received
payment for services rendered my spend some of it on rent an on some food, and
third round of sending goes for such things as seed, fertilizers and important raw
materials.

 E. MAXIMIZING THE ECONOMIC EFFECTS OF TOURISM AND HOSPITALITY

Some economic growth theories have been proposed to maximize the

economic effect of tourism and hospitality within a destination area. These are the
theory of balanced growth and the theory of unbalanced growth.

Theory of Balanced Growth

• Proponents of the theory of balanced growth suggest that tourism and hospitality
should be viewed as an important part of a broad-based economy.
• 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.
• To obtain maximum economic benefit, tourism and hospitality goods and
services should be locally produced.

Theory of Unbalanced Growth

• Supporters of the theory of unbalanced growth see tourism and hospitality as
the spark to economic growth. They 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.

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 economic strategies have been adapted, such as import
substitution, incentives, and foreign exchange.

Import Subs tu on
• It imposes quotas or tariffs on the importation of goods which can be developed
locally.
• 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.

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 Incen ves
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 exemption/reductions on imported machinery, materials, and the like;
2. Reduction on 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 or part of invested capital profits
dividends, and interest subject to tax provisions; and
10. Guarantees against nationalization or appropriation.

Foreign Exchange
Many countries have placed restrictions on spending in order to maximize foreign
exchange earnings.
•They have limited the amount of their own currency that tourist 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.

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 POST-TEST

Identification. Identify what is being asked in the following statements:

______________1. It refers to all the cost of the products and services availed by a
tourist in a certain destination.

______________2. Money which are paid by tourists in businesses which are then
used for purchasing supplies and equipment necessary for production, as well as for
paying the wages of the workers.

______________3. An undesirable economic effect of tourism which results to local

residents paying more for products and services in a popular tourist destination
amongst foreign tourists.

______________4. It imposes quotas or tariffs on the importation of goods which

can be developed locally.

______________5. Proponents of this theory believed that tourism and hospitality is

the spark of economic growth and emphasizes the need to expand demand.

______________6. Some of the more common examples include tax exemptions,

tax holidays, loans, grants and subsidies.

______________7. Its objective is to integrate tourism and hospitality with other

economic activities.

______________8. One of the ways to maximize earnings is to require tourists to

pay in dollars for their hotel bills.

______________9. It is used to estimate the direct and secondary effects of tourism

to estimate the tourist expenditures on the economy of the country.

______________10. This occurs when money spent does not remain in the country
but ends up elsewhere; therefore, limiting the economic benefits of tourism to the
host destination.

 KEY TO CORRECTION

Pre-test Post-test
1. True 1. Tourist expenditures
2. False 2. Secondary effects
3. True 3. Higher prices/ inflation
4. False 4. Import substitution
5. True 5. Theory of Unbalanced Growth
6. True 6. Incentives
7. False 7. Theory of Balanced Growth
8. False 8. Foreign exchange
9. False 9. Tourism multiplier/ multiplier effect
10.True 10. Economic leakage

 Activity # 4

The economic impact of tourism and hospitality on a destination area. In not less than
5 sentences, students are expected to share their insights on the importance of tourism and
hospitality base on a particular case study. An individual written output shall be submitted by
students in the form of a reaction paper on the provided study found on the link below.
Students will be graded based on the rubric below.

https://research.lpubatangas.edu.ph/wp-content/uploads/2014/05/ERInt-EFFECTS-OF-
HERITAGE-TOURISM-TO-THE-MUNICIPALITY-OF-TAAL.pdf

Assignment Grading Rubric

Name:__________________________________
Date:_______________

Criteria Exemplary Accomplished Developing Beginning Score

4 3 2 1

Level of content Content indicates Content indicates Content indicates Shows some
(35%) synthesis of ideas, original thinking thinking and
in-depth analysis thinking and and reasoning reasoning but
and evidences develops ideas applied with most ideas are
original with sufficient and original thought on underdeveloped
thought and firm a few and
support for the evidence. ideas. unoriginal.
topic.

Organization (10%) Good organization; Organized; points Roughly organized; Poorly organized;
points are logically are somewhat points jump around no logical
ordered jumpy. progression

Development (25%) Main points well Main points well Main points are Main points lack
developed with developed present with limited d e t a i l e d
high quality and with quality detail and development.
quantity support. supporting development. Ideas are vague
Reveals high details and Some critical with little evidence
degree of critical quantity. Critical thinking is present. of critical thinking.
thinking. thinking is
weaved into
points

Grammar and Essay is free of Essay has few Most spelling, S p e l l i n g ,

mechanics (20%) distracting spelling, spelling, punctuation, and punctuation, and
punctuation, and punctuation, and grammar correct grammatical
grammatical errors; grammatical allowing reader to errors create
absent of errors allowing progress though distraction,
fragments, comma reader to follow essay. Some errors making reading
splices, and run- ideas clearly. Very remain. d i f f i c u l t ;
ons. few fragments or fragments,
run-ons comma splices,
run-ons evident.
Errors are
frequent.

 Format (5%) Meets all formal Meets format and Meets format and Fails to follow
and assignment assignment assignment format and
requirements and requirements; requirements; assignment
evidences attention margins, spacing, generally correct requirements;
to detail; all and indentations margins, spacing, incorrect margins,
margins, spacing are correct; essay and indentations; spacing and
and indentations is neat and essay is neat but indentation;
are correct; essay c o r r e c t l y may have some neatness of essay
is neat and assembled. assembly errors. needs attention.
c o r r e c t l y
assembled

Timeliness (5%) Submitted on due Submitted a day Submitted 2 days Submitted late
date and time late but with late but with w i t h o u t
permission of permission of permission of
instructor/ instructor/professor instructor/
professor professor

REFERENCES

•Cooper C., Fletcher, J., Gilbert D., Fyall,

A. And Wanhill, S. (2008). Tourism: Principles and Practices. 4th Edition England:
Pearson Education Limited.

• Lansangan-Cruz, Z., (2018). Macro Perspective of Tourism and Hospitality.

Manila: Rex Book Store Inc.

• Santos, B., and Manzano, R., (2009). Principles of Tourism 1. Quezon City: C and
E Publishing, Inc.

• Vibal, V., (2010). Principles of Tourism 1. Anvil Publishing.

• Walker, J., (2011). It’s tourism concepts and practices. USA: Pearson Education
Inc.