MACRO PERSPECTIVE OF TOURISM AND HOSPITALITY

THE ECONOMICS OF TOURISM AND HOSPITALITY

MODULE IV

The Role of Tourism and Hospitality in Economic Development

Several the developing countries have used tourism and hospitality development as an
alternative to help economic growth. The reasons for this are: first, there a continuous
demand for international travel in developed countries; second as, incoe in developed
countries increases, the demand for tourism and hospitality increases as a faster rate;
and third, developing countries need foreign exchange to aid their economic
development.

The Organization for Economic Cooperation and Development (OECD) has concluded
that tourism and hospitality provide 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 are an invisible export which differs from International trade in
many ways.

1. 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.

2. The demand for pleasure travel is largely dependent on non-economic factors,

such as local disturbances, political unrest, and changes in the fashionability of
resorts/countries, created mostly by media coverage. At the same time,
international tourist and hospitality is both price elastic and income elastic. This
means that changes in price and income will change the demand for pleasure
travel.

3. By using specific fiscal measures, 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 numbers of tourists) than those
in the other foreign trade markets. Also, tourists are allowed to buy in domestic
markets at the same prices as the local residents (the exceptions are the duty-
free tourist shops operated in many Caribbean islands and elsewhere).

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 MACRO PERSPECTIVE OF TOURISM AND HOSPITALITY
THE ECONOMICS OF TOURISM AND HOSPITALITY
MODULE IV
4. Tourism and hospitality is a multifaceted industry that directly affects several
sectors in the economy such as hotels, shops, restaurants, local transport, firms,
entertainment establishments, handicraft producers, and indirectly affects many
others, such as equipment manufacturers and utilities.

5. Tourism and hospitality brings many more non-monetary benefits and costs than
other export industries, such as social, cultural and environmental benefits and
costs.

ECONOMIC IMPACT

When 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 increases 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.
The tourism and hospitality industry 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 and hospitality on the destination
area, it is important to know the direct and secondary effects of visitor expenditures on
the economy of the area. 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. The term “direct” means that the income
is received directly. Indirect or secondary effects mean that the money paid by tourists
to businesses are, in turn, used to pay for supplies, wages of workers, and other terms
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. The tourism multiplier or

ABBYGAIL G. MALONG

0956-325-7299

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 MACRO PERSPECTIVE OF TOURISM AND HOSPITALITY
THE ECONOMICS OF TOURISM AND HOSPITALITY
MODULE IV
multiplier effect is used to estimate the direct and secondary effects of tourist
expenditures on the economy of the country.

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 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

Some undesirable economic aspects of tourism and hospitality are higher prices and
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. Theses fluctuations may result in economic instability.

ABBYGAIL G. MALONG

0956-325-7299

gailmalong36@[Link]

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 MACRO PERSPECTIVE OF TOURISM AND HOSPITALITY
THE ECONOMICS OF TOURISM AND HOSPITALITY
MODULE IV
How to Maximize the Economic Effect of Tourism and Hospitality
Growth Theories
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 balance
growth and the theory of unbalanced 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 need 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.

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

Import Substitution
It imposes quotas or tariffs on the importation of goods which can be develop 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.

Objectives
The wise use of incentives can encourage the influx of capital, both local and foreign,
necessary to develop tourism an d hospitality supply. The most common forms of
incentives are:
1. tax exemption/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;

ABBYGAIL G. MALONG

0956-325-7299

gailmalong36@[Link]

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 MACRO PERSPECTIVE OF TOURISM AND HOSPITALITY
THE ECONOMICS OF TOURISM AND HOSPITALITY
MODULE IV
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 of low rates of interest;
8. provision of land freehold at nominal or little cost or low rents;
9. free and unrestricted repatriation of all or part of invested capital profit, dividends, and
interest subject to tax provisions; and
10. guarantees against nationalization or appropriation.
Before implementing an incentive strategy, a destination should:
1. examine the performance of the schemes of other countries in light of their resources
and development of objectives;
2. research the actual needs of investors;
3. design codes of investment, concessions related to specific development objectives
with precise requirements of investors ; and
4. establish targets of achievements and periodically monitor and assess the level of
realization of such targets.

Foreign Exhange

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 to ensure that foreign currency is used to
pay our 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 currency for the duration of their visit.

ABBYGAIL G. MALONG

0956-325-7299

gailmalong36@[Link]

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