THE ECONOMICS OF

TOURISM
• The Role of Tourism in Economic
Development

Several developing countries have used tourism 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 also increases at a faster rate.

Third, developing countries need foreign exchange to aid their

economic development.
• The Organization for Economic Cooperation and
Development (OECD)
-has concluded that tourism provides a major opportunity for
growth for countries that are at the intermediate stage of economic
development and require more foreign exchange earnings.
• Economic Impact
- When travelers outside destination area spend on goods and
services within the destination, tourism act as an export industry by
bringing in revenues from outside sources.

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

since it provides a source of income, employment , and foreign
exchange.

• Direct and Secondary Effects

- In order to measure the economic impact of tourism on the

destination area, it is important to know the direct and secondary
effects of visitors expenditures on the economy of the area.
- Tourist expenditures received as income by business such as hotels,
restaurants, car rentals, tour operator and retail shop serving tourist
have a direct effect on the economy of the host area.

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.

- Tourism multiplier or multiplier effect is used to estimate the direct

and secondary effects of tourist expenditures on the economy of a
country.
• Cost – Benefits Ratio
- those concerned with developing the tourism industry, whether a
government or a private individual, would like to know the extent of
[potential benefits and their cost. Benefits divided by costs equal the
cost benefits ratio to arrive at these ratios, the following procedures
are these:
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 in dollars.
• Undesirable Economic Aspects of Tourism

- some undesirable economic aspects of tourism are highly prices

and economic instability. Because of additional demand and/or
increased imports , tourist purchase may result in higher prices in a
destination area.

- since pleasure travel is a discretionary item, it is subject to changes

in prices and income.

• How to Maximize the Economic Effect of

Tourism
• Growth Theories
- Some economic growth theories have been proposed to maximize
the economic effects of tourism within a destination area. These are
the theory of balanced growth and the theory of unbalanced growth.

• Economic Strategies
- The key to maximizing the economic effects of tourism is to
maximize the amount of revenue and jobs developed within the
region. To attain this objectives, some economic strategies have been
adopted such as import substitution, incentives and foreign exchange.

• 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 material.
• Incentives
- The wise use of incentives can encourage the influx of capital both
local and foreign, necessary to develop tourism supply. The most
common forms if incentives are.

1. Tax exemptions/ reductions on imported machinery, materials,

etc.
2. Reduction in company taxation by means of favorable
depreciation allowance on investments.
3. Tax holidays (limited period)
4. Guarantee of stabilization of tax conditions (for up to 20 years)
5. Grants (for up to 30 per cent of total capital costs)
• 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 tourists can bring in and take out of the
destination ensure that foreign currency is used to pay bills in the host
region.