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  • 1. Introduction to Tourism Economics UNIT 1: INTRODUCTION TO TOURISM ECONOMICS Chapter objectives • Understand the characteristics of economic standardized measures including GDP, FDI and BOP • Explore the general concept of economic trends such as recession and inflation, standards of living, as well as import and export activitiesThe Development of an Economic SocietyIt is a process of change that is focused on the betterment of the community, state and nation.Economic is viewed as the foundation for building a prosperous society. Thus, economicdevelopment is one of the goals for the successful country, state or city.Standardized measures of an economic development are used to identify the status of one country,state or local community. Standardized measures include: • GDP (Gross Domestic Product) • FDI (Foreign Domestic Investment) • BOP (Balance of Payments) • And othersGross Domestic Products (GDP)Gross domestic product (GDP) refers to the market value of all final goods and services producedwithin a country in a given period. GDP per capita is often considered an indicator of a countrysstandard of living; GDP per capita is not a measure of personal income.It is not to be confused with Gross National Product (GNP) which allocates production based onownership - Gross domestic product is related to national accounts, a subject in macroeconomics.A basic measurement of a country’s economic performance and is the market value of all finalgoods and services made within the borders and a nation in a year.GDP can be measured as: • The sum of value added by all producers • The sum of income claims generated in producing goods and services • The spending of final goods and services producedDetermining GDPGDP can be determined in three ways, all of which should, in principle, give the same result. Theyare the product (or output) approach, the income approach, and the expenditure approach. The mostdirect of the three is the product approach, which sums the outputs of every class of enterprise toarrive at the total.The expenditure approach works on the principle that all of the product must be bought bysomebody, therefore the value of the total product must be equal to peoples total expenditures inbuying things. The income approach works on the principle that the incomes of the productive ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 2. Introduction to Tourism Economicsfactors ("producers," colloquially) must be equal to the value of their product, and determines GDPby finding the sum of all producers incomesExample: the expenditure method:GDP = private consumption + gross investment + government spending + (exports − imports)Note: "Gross" means that GDP measures production regardless of the various uses to which thatproduction can be put. Production can be used for immediate consumption, for investment in newfixed assets or inventories, or for replacing depreciated fixed assets. "Domestic" means that GDPmeasures production that takes place within the countrys borders. In the expenditure-methodequation given above, the exports-minus-imports term is necessary in order to null out expenditureson things not produced in the country (imports) and add in things produced but not sold in thecountry (exports).Economists (since Keynes) have preferred to split the general consumption term into two parts;private consumption, and public sector (or government) spending.Two advantages of dividing total consumption this way in theoretical macroeconomics are: • Private consumption is a central concern of welfare economics. The private investment and trade portions of the economy are ultimately directed (in mainstream economic models) to increases in long-term private consumption. • If separated from endogenous private consumption, government consumption can be treated as exogenous, so that different government spending levels can be considered within a meaningful macroeconomic framework. 1. Production approach "Market value of all final goods and services calculated during 1 year." The production approach is also called as Net Product or Value added method. This method consists of three stages: • Estimating the Gross Value of domestic Output in various economic activities; • Determining the intermediate consumption, i.e., the cost of material, supplies and services used to produce final goods or services; and finally • Deducting intermediate consumption from Gross Value to obtain the Net Value of Domestic Output. Symbolically, Gross Value Added = Value of output – Value of Intermediate Consumption. Value of Output = Value of the total sales of goods and services + Value of changes in the inventories. The sum of Gross Value Added in various economic activities is known as GDP at factor cost. GDP at factor cost plus indirect taxes less subsidies on products is GDP at Producer Price. For measuring gross output of domestic product, economic activities (i.e. industries) are classified into various sectors. After classifying economic activities, the gross output of each sector is calculated by any of the following two methods: • By multiplying the output of each sector by their respective market price and adding them together and • By collecting data on gross sales and inventories from the records of companies and adding them together. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 3. Introduction to Tourism Economics Subtracting each sectors intermediate consumption from gross output, we get sectoral Gross Value Added (GVA) at factor cost. We, then add gross value of all sectors to get GDP at factor cost. Adding indirect tax less subsidies in GDP at factor cost, we get GDP at Producer Prices.2. Income approach "sum total of incomes of individual living in a country during 1 year." If GDP is calculated this way it is sometimes called Gross Domestic Income (GDI), or GDP(I). GDI should provide the same amount as the expenditure method described above. This method measures GDP by adding incomes that firms pay households for factors of production they hire- wages for labour, interest for capital, rent for land and profits for entrepreneurship. The US "National Income and Expenditure Accounts" divide incomes into five categories: • Wages, salaries, and supplementary labour income • Corporate profits • Interest and miscellaneous investment income • Farmers’ income • Income from non-farm unincorporated businesses Two adjustments must be made to get GDP: • Indirect taxes minus subsidies are added to get from factor cost to market prices. • Depreciation (or Capital Consumption Allowance) is added to get from net domestic product to gross domestic product. Total income can be subdivided according to various schemes, leading to various formulae for GDP measured by the income approach. A common one is: GDP = compensation of employees + gross operating surplus + gross mixed income + taxes less subsidies on production and imports GDP = COE + GOS + GMI + TP & M – SP & M • Compensation of employees (COE) measures the total remuneration to employees for work done. It includes wages and salaries, as well as employer contributions to social security and other such programs. • Gross operating surplus (GOS) is the surplus due to owners of incorporated businesses. Often called profits, although only a subset of total costs are subtracted from gross output to calculate GOS. • Gross mixed income (GMI) is the same measure as GOS, but for unincorporated businesses. This often includes most small businesses.3. Expenditure approach "All expenditure incurred by individual during 1 year." In economics, most things produced are produced for sale, and sold. Therefore, measuring the total expenditure of money used to buy things is a way of measuring production - This is known as the expenditure method of calculating GDP. Sweater-knitting is a small part of the economy, but if one counts some major activities such as child-rearing (generally unpaid) as production, GDP ceases to be an accurate indicator of production. Similarly, if there is a long term shift from non-market provision of services (for example cooking, cleaning, child rearing, do-it yourself repairs) to market provision of services, then ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 4. Introduction to Tourism Economics this trend toward increased market provision of services may mask a dramatic decrease in actual domestic production, resulting in overly optimistic and inflated reported GDP. This is particularly a problem for economies which have shifted from production economies to service economies.Components of GDP by expenditureComponents of U.S. GDPGDP (Y) is a sum of Consumption (C), Investment (I), Government Spending (G) and NetExports (X – M). Y = C + I + G + (X − M)Here is a description of each GDP component: • C (consumption) is normally the largest GDP component in the economy, consisting of private (household final consumption expenditure) in the economy. • I (investment) includes business investment in equipments for example and does not include exchanges of existing assets. Spending by households (not government) on new houses is also included in Investment. • G (government spending) is the sum of government expenditures on final goods and services. • X (exports) represents gross exports. GDP captures the amount a country produces, including goods and services produced for other nations consumption, therefore exports are added. • M (imports) represents gross imports. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic.Foreign Domestic InvestmentFDI is defined as a company from one country making a physical investment into building a factoryin another country – thus, it is a measure of foreign ownership of productive assets, such asfactories, mines and land.Foreign direct investment (FDI) refers to the net inflows of investment to acquire a lastingmanagement interest (10 percent or more of voting stock) in an enterprise operating in an economyother than that of the investor. It is the sum of equity capital,other long-term capital, and short-termcapital as shown in the balance of payments.It usually involves participation in management, joint-venture, transfer of technology and expertise.There are two types of FDI: inward foreign direct investment and outward foreign directinvestment, resulting in a net FDI inflow (positive or negative) and "stock of foreign directinvestment", which is the cumulative number for a given period.Direct investment excludes investment through purchase of shares. FDI is one example ofinternational factor movements. FDIs require a business relationship between a parent company andits foreign subsidiary. Foreign direct business relationships give rise to multinational corporations.The foreign direct investor may acquire voting power of an enterprise in an economy through any ofthe following methods: • by incorporating a wholly owned subsidiary or company • by acquiring shares in an associated enterprise • through a merger or an acquisition of an unrelated enterprise ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 5. Introduction to Tourism Economics • participating in an equity joint venture with another investor or enterpriseForeign direct investment incentives may take the following forms: • low corporate tax and individual income tax rates • tax holidays • other types of tax concessions • preferential tariffs • special economic zones • EPZ – Export Processing Zones • Bonded Warehouses • investment financial subsidies • soft loan or loan guarantees • free land or land subsidies • relocation & expatriation subsidies • job training & employment subsidies • infrastructure subsidies • R&D support • derogation from regulations (usually for very large projects)Balance of PaymentsBalance of payments (BOP) accounts are an accounting record of all monetary transactionsbetween a country and the rest of the world. These transactions include payments for the countrysexports and imports of goods, services, financial capital, and financial transfers.The BoP accounts summarize international transactions for a specific period, usually a year, and areprepared in a single currency, typically the domestic currency for the country concerned. Sources offunds for a nation, such as exports or the receipts of loans and investments, are recorded as positiveor surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded asnegative or deficit items. When all components of the BOP accounts are included they must sum tozero with no overall surplus or deficit.For example, if a country is importing more than it exports, its trade balance will be in deficit, butthe shortfall will have to be counter-balanced in other ways – such as by funds earned from itsforeign investments, by running down central bank reserves or by receiving loans from othercountries. While the overall BOP accounts will always balance when all types of payments areincluded, imbalances are possible on individual elements of the BOP, such as the current account,the capital account excluding the central banks reserve account, or the sum of the two.Imbalances in the latter sum can result in surplus countries accumulating wealth, while deficitnations become increasingly indebted. The term "balance of payments" often refers to this sum: acountrys balance of payments is said to be in surplus (equivalently, the balance of payments ispositive) by a certain amount if sources of funds (such as export goods sold and bonds sold) exceeduses of funds (such as paying for imported goods and paying for foreign bonds purchased) by thatamount.Recession and InflationsRecession ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 6. Introduction to Tourism EconomicsIn economics, a recession is a business cycle contraction, a general slowdown in economic activity.During recessions, many macroeconomic indicators vary in a similar way. Production, as measuredby gross domestic product (GDP), employment, investment spending, capacity utilization,household incomes, business profits, and inflation all fall, while bankruptcies and theunemployment rate rise.Recessions generally occur when there is a widespread drop in spending, often following an adversesupply shock or the bursting of an economic bubble. Governments usually respond to recessions byadopting expansionary macroeconomic policies, such as increasing money supply, increasinggovernment spending and decreasing taxation. A recession has many attributes that can occursimultaneously and includes declines in component measures of economic activity (GDP) such asconsumption, investment, government spending, and net export activity.These summary measures reflect underlying drivers such as employment levels and skills,household savings rates, corporate investment decisions, interest rates, demographics, andgovernment policies.Economist Richard C. Koo wrote that under ideal conditions, a countrys economy should have thehousehold sector as net savers and the corporate sector as net borrowers, with the governmentbudget nearly balanced and net exports near zero. When these relationships become imbalanced,recession can develop within the country or create pressure for recession in another country. Policyresponses are often designed to drive the economy back towards this ideal state of balance. A severe(GDP down by 10%) or prolonged (three or four years) recession is referred to as an economicdepression, although some argue that their causes and cures can be different.InflationIn economics, inflation is a rise in the general level of prices of goods and services in an economyover a period of time. When the general price level rises, each unit of currency buys fewer goodsand services. Consequently, inflation also reflects an erosion in the purchasing power of money – aloss of real value in the internal medium of exchange and unit of account in the economy.A chief measure of price inflation is the inflation rate, the annualized percentage change in ageneral price index (normally the Consumer Price Index) over time.Inflations effects on an economy are various and can be simultaneously positive and negative.Negative effects of inflation include a decrease in the real value of only money held and only othermonetary items only when they are not inflation-adjusted daily in terms of a Daily Consumer PriceIndex over time; e.g. all government inflation-indexed bonds in many countries are inflation-adjusted daily (they trade daily) in terms of a Daily CPI which is a lagged, daily interpolation of themonthly published Consumer Price Index.Uncertainty over future inflation may discourage investment and savings, and high inflation maylead to shortages of goods if consumers begin hoarding out of concern that prices will increase inthe future.Inflation-adjusting the entire money supply (excluding bank notes and coins which generally makeup about seven per cent of the money supply in an advanced economy) would result in zero cost ofinflation (not zero inflation) in the entire economy (excluding in bank notes and coins) undercomplete co-ordination.Positive effects include ensuring central banks can adjust nominal interest rates (intended tomitigate recessions), and encouraging investment in non-monetary capital projects. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 7. Introduction to Tourism EconomicsToday, most economists favor a low, steady rate of inflation.Low (as opposed to zero or negative) inflation reduces the severity of economic recessions byenabling the labor market to adjust more quickly in a downturn, and reduces the risk that a liquiditytrap prevents monetary policy from stabilizing the economy.The task of keeping the rate of inflation low and stable is usually given to monetary authorities.Generally, these monetary authorities are the central banks that control monetary policy through thesetting of interest rates, through open market operations, and through the setting of banking reserverequirements.Standards of LivingStandard of living is generally measured by standards such as real (i.e. inflation adjusted) incomeper person and poverty rate. A more realistic measure is the number of people who have access tofree subsistence land. Other measures such as access and quality of health care, income growthinequality and educational standards are also used. Examples are access to certain goods (such asnumber of refrigerators per 1000 people), or measures of health such as life expectancy.It is the ease by which people living in a time or place are able to satisfy their needs and/or wants.Standard of living refers to the level of wealth, comfort, material goods and necessities available toa certain socioeconomic class in a certain geographic area. The standard of living includes factorssuch as income, quality and availability of employment, class disparity, poverty rate, quality andaffordability of housing, hours of work required to purchase necessities, gross domestic product,inflation rate, number of vacation days per year, affordable (or free) access to quality healthcare,quality and availability of education, life expectancy, incidence of disease, cost of goods andservices, infrastructure, national economic growth, economic and political stability, political andreligious freedom, environmental quality, climate and safety.The standard of living is closely related to quality of life. The idea of a standard may be contrastedwith the quality of life, which takes into account not only the material standard of living, but alsoother more intangible aspects that make up human life, such as leisure, safety, cultural resources,social life, physical health, environmental quality issues etc. More complex means of measuringwell-being must be employed to make such judgements, and these are very often political, thuscontroversial.Even between two nations or societies that have similar material standards of living, quality of lifefactors may in fact make one of these places more attractive to a given individual or group.However, there can be problems even with just using numerical averages to compare materialstandards of living, as opposed to, for instance, a Pareto index (a measure of the breadth of incomeor wealth distribution). Standards of living are perhaps inherently subjective.As an example, countries with a very small, very rich upper class and a very large, very poor lowerclass may have a high mean level of income, even though the majority of people have a low"standard of living". This mirrors the problem of poverty measurement, which also tends towardsthe relative. This illustrates how distribution of income can disguise the actual standard of living.Likewise Country A, a perfectly socialist country with a planned economy with very low averageper capita income would receive a higher score for having lower income inequality than Country Bwith a higher income inequality, even if the bottom of Country Bs population distribution had ahigher per capita income than Country A. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 8. Introduction to Tourism EconomicsReal examples of this include former East Germany compared to former West Germany or NorthKorea compared to South Korea. In each case, the socialist country has a low income discrepancy(and therefore would score high in that regard), but lower per capita incomes than a large majorityof their neighboring counterpart. This can be avoided by using the measure of income at variouspercentiles of the population rather than a highly relative and controversial overall incomeinequality measure.Import and ExportImportThe term import is derived from the conceptual meaning as to bring in the goods and services intothe port of a country. The buyer of such goods and services is referred to an "importer" who isbased in the country of import whereas the overseas based seller is referred to as an "exporter".Thus an import is any good (e.g. a commodity) or service brought in from one country to anothercountry in a legitimate fashion, typically for use in trade. It is a good that is brought in from anothercountry for sale. Import goods or services are provided to domestic consumers by foreignproducers."Imports" consist of transactions in goods and services (sales, barter, gifts or grants) from non-residents residents to residents. - The exact definition of imports in national accounts includes andexcludes specific "borderline" cases.A general delimitation of imports in national accounts is given below: • An import of a good occurs when there is a change of ownership from a non-resident to a resident; this does not necessarily imply that the good in question physically crosses the frontier. However, in specific cases national accounts impute changes of ownership even though in legal terms no change of ownership takes place (e.g. cross border financial leasing, cross border deliveries between affiliates of the same enterprise, goods crossing the border for significant processing to order or repair). Also smuggled goods must be included in the import measurement. • Imports of services consist of all services rendered by non-residents to residents. In national accounts any direct purchases by residents outside the economic territory of a country are recorded as imports of services; therefore all expenditure by tourists in the economic territory of another country are considered as part of the imports of services. Also international flows of illegal services must be included.There are two basic types of import: • Industrial and consumer goods • Intermediate goods and servicesCompanies import goods and services to supply to the domestic market at a cheaper price and betterquality than competing goods manufactured in the domestic market. Companies import productsthat are not available in the local market. There are three broad types of importers: • Looking for any product around the world to import and sell. • Looking for foreign sourcing to get their products at the cheapest price. • Using foreign sourcing as part of their global supply chain.Export ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 9. Introduction to Tourism EconomicsThis term export is derived from the conceptual meaning as to ship the goods and services out ofthe port of a country. The seller of such goods and services is referred to as an "exporter" who isbased in the country of export whereas the overseas based buyer is referred to as an "importer".In International Trade, "exports" refers to selling goods and services produced in home country toother markets. Any good or commodity, transported from one country to another country in alegitimate fashion, typically for use in trade. Export goods or services are provided to foreignconsumers by domestic producersIn national accounts "exports" consist of transactions in goods and services (sales, barter, gifts orgrants) from residents to non-residents.A general delimitation of exports in national accounts is given below: • An export of a good occurs when there is a change of ownership from a resident to a non- resident; this does not necessarily imply that the good in question physically crosses the frontier. However, in specific cases national accounts impute changes of ownership even though in legal terms no change of ownership takes place (e.g. cross border financial leasing, cross border deliveries between affiliates of the same enterprise, goods crossing the border for significant processing to order or repair). Also smuggled goods must be included in the export measurement. • Export of services consist of all services rendered by residents to non-residents. In national accounts any direct purchases by non-residents in the economic territory of a country are recorded as exports of services; therefore all expenditure by foreign tourists in the economic territory of a country is considered as part of the exports of services of that country. Also international flows of illegal services must be included. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 10. Introduction to Tourism Economics UNIT 2: PATTERNS OF DEMAND FOR TOURISM Chapter objectives • Discuss the historical trends in tourism economics: economic, social and infrastructural development, as well as industrialization, cross-border movement and government regulations • Understand the regional dimensions and European popularity in tourism economics • Explore seasonality aspects and its application in tourism economics • Identify the lifestyle and lifecycle determinants that may impact the tourism economicsHistorical trendsHistorical Trend Analysis (HTA) is a geomorphologic tool which utilizes the analysis of datarelating to a particular physical process or morphologic feature from different time periods, in orderto identify directional trends, and if quantifiable, rates of changes in that process or feature. Anoverview of tourism’s historical development is required in order to fully appreciate today’s moderntourism environment and to understand the challenges of the globalized economy.The history of tourism cannot be easily traced; back in the ancient years, as ancient world empiresgrew in Africa, Asia and the Middle East, the infrastructure necessary for travel such as land routesand water ways was created and vehicles and other means for travel were developed. Mosthistorians of tourism have tended to focus on Europe, from the Greeks and Romans, to the railwayand Thomas Cook in the UK.Thomas Cook has been the so called “father of the tourist trade”, since, on July 5th 1841, hearranged to take a group of about 500 members of his local “Temperance Society” from LeicesterLondon Road railway station to a rally in Loughborough, eleven miles away, having arranged withthe rail company to charge one shilling per person that included rail tickets and food for this trainjourney.When industrialization across Europe gave rise to an affluent middle class with an increasingamount of free time, tourism began to take shape as an international industry.However, for the most part of the 19th century it has been expensive and limited to a small numberof destinations. When in the 1960’s a growing number of people had disposable incomes and thedesire for “something new”, reasonably priced commercial aircrafts airplanes made internationaltravel easier; mass tourism had arrived.Economic DevelopmentEconomic development generally refers to the sustained, concerted actions of policymakers andcommunities that promote the standard of living and economic health of a specific area. Suchactions can involve multiple areas including development of human capital, critical infrastructure, ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 11. Introduction to Tourism Economicsregional competitiveness, environmental sustainability, social inclusion, health, safety, literacy, andother initiatives.Economic development typically involves improvements in a variety of indicators such as literacyrates, life expectancy, and poverty rates. Essentially, a countrys economic development is related toits human development, which encompasses, among other things, health and education. Thesefactors are, however, closely related to economic growth so that development and growth often gotogether.Social DevelopmentSocial development can be summarily described as the process of organizing human energies andactivities at higher levels to achieve greater results. Development increases the utilization of humanpotential. Social development consists of two interrelated aspects – learning and application.Society discovers better ways to fulfill its aspirations and it develops organizational mechanisms toexpress that knowledge to achieve its social and economic goals. • The process of discovery expands human consciousness. • The process of application enhances social organization.Society develops in response to the contact and interaction between human beings and theirmaterial, social and intellectual environment.Infrastructural DevelopmentInfrastructure development contributes to poverty reduction by spurring economic growth,stimulating enterprise opportunities, generating employment and providing poor people with accessto basic needs.Example: Australia’s approach to infrastructure will centre on four pillars: • Delivering sustainable transport infrastructure • Facilitating increased access to basic water and sanitation infrastructure services • Creating reliable energy services and supporting information and communication technologies • Supporting urban infrastructure planning and development.The development and maintenance of essential public infrastructure is an important ingredient forsustained economic growth and poverty reduction. Health, education, and efficient water andsanitation services help lay the groundwork for a more productive, healthy population capable ofcontributing to sustained economic growth - Likewise transport infrastructure improves access toservices and markets in rural areas.IndustrializationIndustrialization (or industrialization) is the process of social and economic change thattransforms a human group from an agrarian society into an industrial one. It is a part of a widermodernization process, where social change and economic development are closely related withtechnological innovation, particularly with the development of large-scale energy and metallurgyproduction. It is the extensive organization of an economy for the purpose of manufacturing. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 12. Introduction to Tourism EconomicsIndustrialization also introduces a form of philosophical change where people obtain a differentattitude towards their perception of nature, and a sociological process of ubiquitous rationalization.The first country to industrialize was the United Kingdom during the Industrial Revolutioncommencing in the eighteenth century. By the end of the 20th century, East Asia had become one ofthe most recently industrialized regions of the worldCross-border MovementAlso known as economic globalization - Economic globalization refers to increasing economicinterdependence of national economies across the world through a rapid increase in cross-bordermovement of goods, service, technology and capital.Whereas globalization is centered around the diminution of international trade regulations as well astariffs, taxes, and other impediments that suppresses global trade, economic globalization is theprocess of increasing economic integration between countries, leading to the emergence of a globalmarketplace or a single world market.Depending on the paradigm, economic globalization can be viewed as either a positive or a negativephenomenon. Economic globalization comprises the globalization of production, markets,competition, technology, and corporations and industries.Governmental RegulationsRegulation is administrative legislation that constitutes or constrains rights and allocatesresponsibilities. It can be distinguished from primary legislation (by Parliament or electedlegislative body) on the one hand and judge-made law on the other.Regulation mandated by a state attempts to produce outcomes which might not otherwise occur,produce or prevent outcomes in different places to what might otherwise occur, or produce orprevent outcomes in different timescales than would otherwise occur. In this way, regulations canbe seen as implementation artifacts of policy statements.Common examples of regulation include controls on market entries, prices, wages, developmentapprovals, pollution effects, employment for certain people in certain industries, standards ofproduction for certain goods, the military forces and services. The economics of imposing orremoving regulations relating to markets is analyzed in regulatory economics.Regional dimensionsRegional development is fundamentally about economic development and reforms that allowmarkets to work and individuals and communities to enhance their wellbeing. Regional tradeintegration can serve as a powerful catalyst to economic growth. Regional trade agreementscontinue to proliferate despite being economically inferior from a global perspective tonondiscriminatory trade liberalization on a most-favored-nation (MFN) basis.Multilateral liberalization and regional integration will continue to coexist in the future. The role ofregional development policy ought to be to support regions to grow while ensuring that individualsare able to best manage their transition to a more diversified economic base - to other centres thatare growing with new employment and lifestyle opportunities. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 13. Introduction to Tourism EconomicsThe choice of forming a customs union first and then acceding to the WTO (World TradeOrganization) could increase the overall level of trade protection of customs union memberscompared to their level of protection prior to the customs union. The larger the customs union themore the collective monopoly power it has in commanding a high level of protection. The incentiveto protect is particularly strong if there is a country with greater bargaining power within the regionand higher external tariff rates.The reason is that, in the case of heterogeneous countries, the higher external tariff of the dominantcountry is likely to prevail as a Common External Tariff (CET) for the group. In this case,implementation of the customs union implies that the more liberal countries will eventuallyconverge toward the higher rates.By entering first into a regional agreement, a country may increase its bargaining power inmultilateral negotiations by having a common (regional) position toward sensitive issues (e.g.,textile and agriculture), where developed countries still maintain a protectionist stance, although itis not obvious, a priori, that the outcome would reflect the preferences of custom unions’ smallermembers.Example:On September 19, 2003 Belarus, Kazakhstan, the Russian Federation, and Ukraine met in Yalta tosign a draft agreement to create a CES over 5–7 years.The process involves three stages: • the coordination of customs duties and harmonization of trade and custom regulations; • the lifting of current trade barriers and creation of the customs union; and • the liquidation of internal customs boundaries to be replaced by a common customs boundary and the creation of a supra-national regulating institution.European popularityThe history and theory of popular culture in Western Europe - Different regions, ethnicities andracial identities were represented in and by popular culture. The culture of Europe might better bedescribed as a series of multiple cultures.Whether it is a question of North as opposed to South; West as opposed to East; Orthodoxism asopposed to Protestantism as opposed to Catholicism as opposed to Secularism; many have claimedto identify cultural fault lines across the continent.There are many cultural innovations and movements, often at odds with each other, such asChristian proselytism or Humanism. Thus the question of "common culture" or "common values" isfar more complex then it seems to be.The foundation of European culture was laid by the Greeks, strengthened by the Romans, stabilizedby Christianity, reformed and modernized by the fifteenth-century Renaissance and Reformationand globalized by successive European empires between the sixteenth and twentieth centuries.Thus the European Culture developed into a very complex phenomenon of wider range ofphilosophy, Christian and secular humanism, rational way of life and logical thinking developedthrough a long age of change and formation with the experiments of enlightenment, naturalism,romanticism, science, democracy, and socialism. Because of its global connection, the Europeanculture grew with an all-inclusive urge to adopt, adapt and ultimately influence other trends ofculture. Examples of popular culture are like art, music, literature, cuisine, etc. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 14. Introduction to Tourism EconomicsSeasonalityIn statistics, many time series exhibit cyclic variation known as seasonality, periodic variation, orperiodic fluctuations. This variation can be either regular or semi regular and very common ineconomic time series. Example: retail sales tend to peak during holiday season and then declineafter the holidays.Seasonal variation is a component of a time series which is defined as the repetitive and predictablemovement around the trend line in one year or less. It is detected by measuring the quantity ofinterest for small time intervals, such as days, weeks, months or quarters. Organizations affected byseasonal variation need to identify and measure this seasonality to help with planning for temporaryincreases or decreases in labor requirements, inventory, training, periodic maintenance, and soforth.There are several main reasons for studying seasonal variation • The description of the seasonal effect provides a better understanding of the impact this component has upon a particular series. • After establishing the seasonal pattern, methods can be implemented to eliminate it from the time-series to study the effect of other components such as cyclical and irregular variations. This elimination of the seasonal effect is referred to as deseasonalizing or seasonal adjustment of data. • To project the past patterns into the future knowledge of the seasonal variations is a must for the prediction of the future trends.A decision maker or analyst can make one of the following assumptions when treating the seasonalcomponent: • The impact of the seasonal component is constant from year to year. • The seasonal effect is changing slightly from year to year. • The impact of the seasonal influence is changing dramatically.Lifestyle determinantsLifestyle is a term to describe the way a person or an animal lives. A set of behaviors, and thesenses of self and belonging which these behaviors represent, are collectively used to define a givenlifestyle. The term is defined more broadly when used in politics, marketing, and publishing.A lifestyle is a characteristic bundle of behaviors that makes sense to both others and oneself in agiven time and place, including social relations, consumption, entertainment, and dress. Thebehaviors and practices within lifestyles are a mixture of habits, conventional ways of doing things,and reasoned actions. The lifestyle determinants include: culture, economic, income, politicalenvironments, social, and demographyCultureCulture and lifestyle are the major factors affecting how we talk, dress, relate with and treat people,how we eat and live. Lifestyle affects culture and culture affects lifestyles in the society. Culturecan be known as a complex whole which includes knowledge, belief, art, law, moral, customs andany other capabilities and habits acquired by man as a member of a society.Culture is a term that has many different inter-related meanings. As mention above, the word"culture" is most commonly used in three basic senses: • Excellence of taste in the fine arts and humanities, also known as high culture ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 15. Introduction to Tourism Economics • An integrated pattern of human knowledge, belief, and behavior that depends upon the capacity for symbolic thought and social learning • The set of shared attitudes, values, goals, and practices that characterizes an institution, organization, or groupEconomicEconomics is the social science that analyzes the production, distribution, and consumption ofgoods and services. A focus of the subject is how economic agents behave or interact and howeconomies work.Microeconomics examines the behavior of basic elements in the economy, including individualagents (such as households and firms or as buyers and sellers) and markets, and their interactions.Macroeconomics analyzes the entire economy and issues affecting it, including unemployment,inflation, economic growth, and monetary and fiscal policy.Economic analysis may be applied throughout society, as in business, finance, health care, andgovernment, but also to such diverse subjects as crime, education, the family, law, politics, religion,social institutions, war, and science.IncomeIncome is the consumption and savings opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. However, for households and individuals,"income is the sum of all the wages, salaries, profits, interests payments, rents and other forms ofearnings received... in a given period of time."For firms, income generally refers to net-profit: what remains of revenue after expenses have beensubtracted. In the field of public economics, it may refer to the accumulation of both monetary andnon-monetary consumption ability, the former being used as a proxy for total income. Nationalincome, measured by statistics such as the Net National Income (NNI), measures the total incomeof individuals, corporations, and government in the economy.PoliticThe term lifestyle in politics can often be used in conveying the idea that society be accepting of avariety of different ways of life—from the perspective that differences among ways of living aresuperficial, rather than existential.Lifestyle is also sometimes used pejoratively, to mark out some ways of living as elective orvoluntary as opposed to others that are considered mainstream, unremarkable, or normative. Politicconsists of “social relations involving authority or power” and refers to the regulation of a politicalunit, and to the methods an dtactics used to formulate and apply policy. From a historicalperspective, societies in need of government have moved from the primitive to the patriarchal stateand finally to the military, the real politics of modern timesSocial ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 16. Introduction to Tourism EconomicsThe term social refers to a characteristic of living organisms as applied to populations humans andother animals. It always refers to the interaction of organisms with other organisms and to theircollective co-existence, irrespective of whether they are aware of it or not, and irrespective ofwhether the interaction is voluntary or involuntary. • The term "social" is used in many different senses, referring among other things to: • Attitudes, orientations, or behaviors which take the interests, intentions, or needs of other people into account (in contrast to anti-social behaviour) has played some role in defining the idea or the principle. • For instance terms like social realism, social justice, social constructivism, social psychology and social capital imply that there is some social process involved or considered, a process that is not there in regular, "non-social" realism, justice, constructivism, psychology, or capital.DemographicDemographics are the characteristics of a human population as used in the government, marketingor opinion research. Commonly used data are sex, race, age, income, disabilities, mobility (in termsof travel time to work or number of vehicles available), educational attainment, home ownership,employment status and even location.A demographic trend describes in a population over time i.e. the average age of a population mayincrease or decrease over time. Certain restrictions may be set in place i.e. the one child policy inChina.Marketers typically combine several variables to define a demographic profile. A demographicprofile provides enough information about the typical member of this group to create a mentalpicture of this hypothetical aggregate.Life cycle determinantsThe concept of the life cycle is widely used in social sciences - However, its meanings andapplications are diverse. Additionally, for denoting temporality in a general sense, the terms lifecycle, life span or life course are often regarded as interchangeable (O’Rand and Krecker, 1990).By considering an individuals life as a chronological sequence of stages, the life cycle can becharacterized by the occurrence of events and the length of the resulting life cycle stages. Thedevelopment of longevity and the timing of retirement are important factors shaping the life cycle.In addition to adjustments of the life cycle caused by health or disability, constraints and incentivesof the pension system are of particular importance for the evolution of life cycles; e.g., decisions onretirement age are strongly dependent and influenced by institutional factors.The design of the social security system, social policies as well as structural changes in an economyinfluence the life cycle adjustments additively to demographic changes. The additional life timeoffers opportunities to increase the length of the working life, to invest further time in education orto enjoy more time in leisureAs governmental social transfer arrangements have partially overtaken individual financial securityfunctions, policy makers have to be conscious of life cycle dynamics arising from increasing lifeexpectancy and varying retirement ages. In economic, life-cycle decisions depend on: • The cost-effectiveness of the banking sector; ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 17. Introduction to Tourism Economics • Individual income uncertainty; • The persistence of an individual productivity process; • The generosity of the social security system.The effects of higher productivity process persistence on the economy are as follows: An increasein the persistence raises expected life-time earnings of high-productivity individuals and diminishesexpected income of low-productivity individuals. The former are therefore reducing theirprecautionary savings, whereas the latter are less interested in taking loans. The overall impact onthe capital-output ratio is negative, which leads to an increase in the real interest rate. UNIT 3: MACRO DETERMINANTS OF TOURISM DEMAND Chapter objectives • Identify, explore and discuss the macro-determinants of tourism demands: disposable income, educational levels, seasonality, household size, demographics variables, the buyer decision process and travel buying behaviorMacro determinants of tourism demandDeterminants of tourism demand include the following: • Disposable income • Educational levels • Seasonality • Household size • Demographic variables • The buyer decision process • Travel buying behaviorDisposable IncomeDisposable income is total personal income minus personal current taxes. In national accountsdefinitions, personal income, minus personal current taxes equals disposable personal income.Subtracting personal outlays (which includes the major category of personal (or, private)consumption expenditure) yields personal (or, private) savings.Restated, consumption expenditure plus savings equals disposable income after accounting fortransfers such as payments to children in school or elderly parents’ living arrangements. Themarginal propensity to consume (MPC) is the fraction of a change in disposable income that isconsumed.For example, if disposable income rises by $100, and $65 of that $100 is consumed, the MPC is65%. Restated, the marginal propensity to save is 35%.Discretionary income is money remaining after all bills are paid off. It is income after subtractingtaxes and normal expenses (such as rent or mortgage, utilities, insurance, medical, transportation,property maintenance, child support, inflation, food and sundries, etc.) to maintain a certain ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 18. Introduction to Tourism Economicsstandard of living. It is the amount of an individuals income available for spending after theessentials (such as food, clothing, and shelter) have been taken care of: Discretionary income = Gross income - taxes - necessitiesDespite the definitions above, disposable income is often incorrectly used to denote discretionaryincome. Commonly, disposable income is the amount of "play money" left to spend or save. TheConsumer Leverage Ratio is the expression of the ratio of Total Household Debt to DisposableIncomeUse of discretionary income in high-income loan applicationsWhen applying for a loan (mortgage, consumer loan), lenders may take into consideration a high-income applicants discretionary income in order to assess the loan repayment capacity of theapplicant.Discretionary income provides the lender with more information on the applicants capacity to repaythan the debt-to-income ratio in the case where the applicant has a lot of debt, but also a lot ofincome, such that the percent of available income may be smaller than normal standards wouldallow, but the actual amount of money is still largeEducational LevelsEducation in its broadest, general sense is the means through which the aims and habits of a groupof people lives on from one generation to the next. Education can be defined as any act orexperience that has a formative effect on the mind, character or physical ability of an individual.Education is the process by which society deliberately transmits its accumulated knowledge, skillsand values from one generation to another – it controls decision making, lifestyle, needs, wants andetcA right to education has been created and recognized by some jurisdictions: Since 1952, Article 2 ofthe first Protocol to the European Convention on Human Rights obliges all signatory parties toguarantee the right to education. At the global level, the United Nations International Covenant onEconomic, Social and Cultural Rights of 1966 guarantees this right under its Article 13.Economics and educationIt has been argued that high rates of education are essential for countries to be able to achieve highlevels of economic growth. Empirical analyses tend to support the theoretical prediction that poorcountries should grow faster than rich countries because they can adopt cutting edge technologiesalready tried and tested by rich countries.However, technology transfer requires knowledgeable managers and engineers who are able tooperate new machines or production practices borrowed from the leader in order to close the gapthrough imitation. Therefore, a countrys ability to learn from the leader is a function of its stock of"human capital".Recent study of the determinants of aggregate economic growth have stressed the importance offundamental economic institutions and the role of cognitive skills. If more education leads to fastereconomic growth, then investments in education could pay for themselves in the long run, and ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 19. Introduction to Tourism Economicscould also play a role in reducing poverty. Such reasoning could be crucial in bolstering politicalsupport for education investments and ensuring their sustainability.The following findings are highlighted: • educational quality directly affects individual earnings • early analyses have emphasised the role of quantity of schooling for economic growth • the quality of education matters even more for economic growth • improving educational quality requires a focus on institutions and efficient education spending, not just additional resources • the need to alter institutions fundamentally is inescapableMobility LevelsIs the state of being in motion. There are many types of mobility, including: • Academic mobility – the possibility for students and teachers to move between different institutions • Economic mobility - the ability of an individual, family or some other group to improve (or lower) their economic status - usually measured in income • Social mobility – the ability of individuals within a society to move between different social levels • Population mobility – migration within a populationEconomic mobilityEconomic mobility is often measured by movement between income quintiles. Economic mobilitymay be considered a type of social mobility, which is often measured in change in income. Mobilitymay be between generations ("inter-generational") or within a person or groups lifetime ("intra-generational"). - It may be "absolute" or "relative". • Inter-generational mobility compares a person’s (or groups) income to that of her/his/their parents. • Intra-generational mobility, in contrast, refers to movement up or down over the course of a working career.Absolute mobility involves widespread economic growth and answers the question “To what extentdo families improve their incomes over a generation?” Relative mobility is specific to individuals orgroups and occurs without relation to the economy as a whole. It answers the question, "howclosely are the economic fortunes of children tied to that of their parents?" - Relative mobility is azero-sum game, absolute is not.SeasonalityIn statistics, many time series exhibit cyclic variation known as seasonality, periodic variation, orperiodic fluctuations. This variation can be either regular or semi regular and very common ineconomic time series. Example: retail sales tend to peak during holiday season and then declineafter the holidaysSeasonal variation is a component of a time series which is defined as the repetitive and predictablemovement around the trend line in one year or less. It is detected by measuring the quantity ofinterest for small time intervals, such as days, weeks, months or quarters. Organizations affected by ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 20. Introduction to Tourism Economicsseasonal variation need to identify and measure this seasonality to help with planning for temporaryincreases or decreases in labor requirements, inventory, training, periodic maintenance, and soforth.There are several main reasons for studying seasonal variation • The description of the seasonal effect provides a better understanding of the impact this component has upon a particular series. • After establishing the seasonal pattern, methods can be implemented to eliminate it from the time-series to study the effect of other components such as cyclical and irregular variations. This elimination of the seasonal effect is referred to as deseasonalizing or seasonal adjustment of data. • To project the past patterns into the future knowledge of the seasonal variations is a must for the prediction of the future trends.A decision maker or analyst can make one of the following assumptions when treating the seasonalcomponent: • The impact of the seasonal component is constant from year to year. • The seasonal effect is changing slightly from year to year. • The impact of the seasonal influence is changing dramatically.Household SizeHouseholds consisting of individuals, families, community groups, business organizations, or state.Their role in economic activity are as follows: 1. As the owners of factors of production. Factors of production or production resources are owned and provided by the household. Production factors include natural resources or land, or land, labor, capital, and expertise or entrepreneurship. Production factors is a necessary component of the company in producing certain goods and services. 2. Get a reward or remuneration of factors of production they provide. As the owners of factors of production that provides paroduksi factors, the household is entitled to remuneration from the company. Remuneration will be the income for households. Fringe benefits may include salary or wages for the owners of labor, interest for the owners of capital, rent for land owners, and entrepreneurial profit for the owner. 3. Acting as a consumer. Households requiring goods and services to meet their needs. This action causes them to act as consumers who make the consumption of goods and services produced by the company. 4. Paying taxes to the government. Taxes paid to the government from some of the income received by households. In this case, households have an obligation to the government to pay taxes in accordance with applicable regulations, and the government have the full right to demand payment of taxes from households. Household taxes paid to the government will later be used for the benefit of the general public. Thus, an indirect tax payments by households to the government benefits will be felt again by the household.Demographic Variables ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 21. Introduction to Tourism EconomicsDemographics are the characteristics of a human population as used in the government, marketingor opinion research. Commonly used data are sex, race, age, income, disabilities, mobility (in termsof travel time to work or number of vehicles available), educational attainment, home ownership,employment status and even locationA demographic trend describes in a population over time i.e. the average age of a population mayincrease or decrease over time. Certain restrictions may be set in place i.e. the one child policy inChina. Marketers typically combine several variables to define a demographic profile.A demographic profile provides enough information about the typical member of this group tocreate a mental picture of this hypothetical aggregate. Increased life expectancy and consequentlythe average age of population are the results of an accelerated economic growth in the modernperiod. It has been proven that as a general long-term trend, when GDP per capita increases due tobetter living, the average lifespan of the population and life expectancy increase too.The relationship between GDP and life expectancy may be analysed also in a reverse way. Namely,along with increased quality of life and life expectancy, we get an increase of the active life onpopulation; thus resulting an increase in the overall productive capacity of a country and thereforeof GDP per capitaThe Buyer Decision ProcessBuyer decision processes are the decision making processes undertaken by consumers in regard toa potential market transaction before, during, and after the purchase of a product or service. Moregenerally, decision making is the cognitive process of selecting a course of action from amongmultiple alternatives. - Common examples include shopping and deciding what to eat.A general model of the buyer decision process consists of the following steps: Need Information Evaluation of Purchase Post-purchase Recognition Search Alternatives Decision BehaviorProblem recognitionThe buying process starts when the buyer recognizes a problem or needInformation searchAn aroused consumer may or may not search for more information. How much searching aconsumer does will depend on the strength of the drive, the amount of initial information, the easeof obtaining more information, the value placed on additional information and the satisfaction onegets from searching.Evaluations of alternativesUnfortunately, there is no simple and single evaluation process used by all consumers or even byone consumer in all buying situations. There are several evaluation processes: ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 22. Introduction to Tourism Economics Attitude of Others Evaluation of Purchase Purchase Alternatives Intention Decision Unexpected Situational FactorsPurchase decisionIn the evaluation stage, the consumer ranks brands in the choice set and forms purchase intentions.Generally, the consumer will buy the most preferred brandPost-purchase behaviorThe marketer’s job does not end when the customer buys a product. Following a purchase, theconsumer will be satisfied and dissatisfied and will engage in post-purchase actions of significantinterest to the marketer.Travel Buying BehaviorTravel industry is undergoing massive structural reorganization – loyalty schemes, price and brandin their buying decisions. Level of Involvement in purchase decision also increasing – importanceand intensity of interest in a product in a particular situation. Buyer’s level of involvementdetermines why he/she is motivated to seek information about a certain products and brands butvirtually ignores others Information Travel Travel Travel Felt need/ collection and decision preparation satisfaction travel desire evaluation (choice and travel outcome and image between experiences evaluation alternatives)The model suggests that there are two levels of factors that have an effect on the consumer. • The first level of influences is close to the person and includes psychological influence such as perception and learning. • The second level of influences includes those, which have been developed during the socialization process and include reference groups and family influences.All these models that have been adapted for tourism offer some into the consumer behavior processinvolved during the purchase post-purchase decision stages.Consumer Decision-Making Framework ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 23. Introduction to Tourism Economics Socio- economic Cultural influences influences Motivation or Perception energizers Consumer or Decision-maker Personality/ attitude Learning Reference group Family influences influencesIn conclusion, consumer making a purchase decision will be affected by the following three (3)factors: • Personal - Unique to a particular person. Often according to demographic factors such as sex, race, age and etc • Psychological - Motive is an internal energizing force that orients a person’s activities toward satisfying a need or achieving a goal • Social - Consumer wants, learning, motives and etc are influenced by opinion leaders, person’s family, reference groups, social class and culture UNIT 4: MARKET STRUCTURE Chapter objectives • Describe and understand the market general concept and its structures • Identify and explore the competitive market: monopoly, oligopoly, and perfect competition • Discuss the definition and explanation on entrepreneurship and joint-venturesMarketA market is one of many varieties of systems, institutions, procedures, social relations andinfrastructures whereby parties engage in exchange. While parties may exchange goods andservices by barter, most markets rely on sellers offering their goods or services (including labor) inexchange for money from buyers. It can be said that a market is the process in which the prices ofgoods and services are established. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 24. Introduction to Tourism EconomicsIn mainstream economics, the concept of a market is any structure that allows buyers and sellers toexchange any type of goods, services and information. The exchange of goods or services formoney is a transaction. Market participants consist of all the buyers and sellers of a good whoinfluence its price.Markets vary in form, scale (volume and geographic reach), location, and types of participants, aswell as the types of goods and services traded. Examples include: • Physical retail markets, such as local farmers markets (which are usually held in town squares or parking lots on an ongoing or occasional basis), shopping centers and shopping malls • (Non-physical) internet markets (see electronic commerce) • Ad hoc auction markets • Markets for intermediate goods used in production of other goods and services • Labor markets • International currency and commodity markets • Stock markets, for the exchange of shares in corporations • Artificial markets created by regulation to exchange rights for derivatives that have been designed to ameliorate externalities, such as pollution permits (see carbon trading) • Illegal markets such as the market for illicit drugs, arms or pirated productsThere are two roles in markets, buyers and sellers. The market facilitates trade and enables thedistribution and allocation of resources in a society. Markets allow any tradable item to be evaluatedand priced. A market emerges more or less spontaneously or is constructed deliberately by humaninteraction in order to enable the exchange of rights (cf. ownership) of services and goods.Historically, markets originated in physical marketplaces which would often develop into — orfrom — small communities, towns and citiesMarket structureMarket structure is best defined as the organisational and other characteristics of a market.Traditionally, the most important features of market structure are: • The number of firms (including the scale and extent of foreign competition) • The market share of the largest firms (measured by the concentration ratio – see below) • The nature of costs (including the potential for firms to exploit economies of scale and also the presence of sunk costs which affects market contestability in the long term) • The degree to which the industry is vertically integrated - vertical integration explains the process by which different stages in production and distribution of a product are under the ownership and control of a single enterprise. A good example of vertical integration is the oil industry, where the major oil companies own the rights to extract from oilfields, they run a fleet of tankers, operate refineries and have control of sales at their own filling stations. • The extent of product differentiation (which affects cross-price elasticity of demand) • The structure of buyers in the industry (including the possibility of monopsony power) • The turnover of customers (sometimes known as “market churn”) – i.e. how many customers are prepared to switch their supplier over a given time period when market ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 25. Introduction to Tourism Economics conditions change. The rate of customer churn is affected by the degree of consumer or brand loyalty and the influence of persuasive advertising and marketingIn economics, market structure (also known as the number of firms producing identical products). • Monopolistic competition, also called competitive market, where there are a large number of firms, each having a small proportion of the market share and slightly differentiated products. • Oligopoly, in which a market is dominated by a small number of firms that together control the majority of the market share. • Duopoly, a special case of an oligopoly with two firms. • Oligopsony, a market where many sellers can be present but meet only a few buyers. • Monopoly, where there is only one provider of a product or service. • Natural monopoly, a monopoly in which economies of scale cause efficiency to increase continuously with the size of the firm. A firm is a natural monopoly if it is able to serve the entire market demand at a lower cost than any combination of two or more smaller, more specialized firms. • Monopsony, when there is only one buyer in a market. • Perfect competition is a theoretical market structure that features unlimited contestability (or no barriers to entry), an unlimited number of producers and consumers, and a perfectly elastic demand curve.Competitive marketMonopolistic competition is a type of imperfect competition such that competing producers sellproducts that are differentiated from one another as good but not perfect substitutes (such as frombranding, quality, or location).In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores theimpact of its own prices on the prices of other firms. In a monopolistically competitive market,firms can behave like monopolies in the short run, including by using market power to generateprofit. In the long run, however, other firms enter the market and the benefits of differentiationdecrease with competition; the market becomes more like a perfectly competitive one where firmscannot gain economic profit.In practice, however, if consumer rationality/innovativeness is low and heuristics are preferred,monopolistic competition can fall into natural monopoly, even in the complete absence ofgovernment intervention.Monopolistically competitive markets have the following characteristics: • There are many producers and many consumers in the market, and no business has total control over the market price. • Consumers perceive that there are non-price differences among the competitors products. • There are few barriers to entry and exit. • Producers have a degree of control over price.There are six characteristics of monopolistic competition (MC): • Product differentiation • Many firms • Free entry and exit in the long run • Independent decision making • Market Power ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 26. Introduction to Tourism Economics • Buyers and Sellers do not have perfect information (Imperfect Information)Market powerMC firms have some degree of market power. Market power means that the firm has control overthe terms and conditions of exchange. An MC firm can raise it prices without losing all itscustomers. The firm can also lower prices without triggering a potentially ruinous price war withcompetitors.The source of an MC firms market power is not barriers to entry since they are low. Rather, an MCfirm has market power because it has relatively few competitors, those competitors do not engage instrategic decision making and the firms sells differentiated product. Market power also means thatan MC firm faces a downward sloping demand curve - The demand curve is highly elastic althoughnot "flat"MonopolyA monopoly (from Greek monos μόνος (alone or single) + polein πωλεῖν (to sell) exists when aspecific person or enterprise is the only supplier of a particular commodity. Monopolies are thuscharacterized by a lack of economic competition to produce the good or service and a lack of viablesubstitute goods. The verb "monopolise" refers to the process by which a company gains muchgreater market share than what is expected with perfect competition.A monopoly is distinguished from a monopsony, in which there is only one buyer of a product orservice ; a monopoly may also have monopsony control of a sector of a market. Likewise, amonopoly should be distinguished from a cartel (a form of oligopoly), in which several providersact together to coordinate services, prices or sale of goods. When not coerced legally to dootherwise, monopolies typically maximize their profit by producing fewer goods and selling them athigher prices than would be the case for perfect competition.Sometimes governments decide legally that a given company is a monopoly that doesnt serve thebest interests of the market and/or consumers. Governments may force such companies to divideinto smaller independent corporations as was the case of United States v. AT&T, or alter itsbehavior as was the case of United States v. Microsoft, to protect consumers. Monopolies can beestablished by a government, form naturally, or form by mergers.A monopoly is said to be coercive when the monopoly actively prohibits competitors by usingpractices (such as underselling) which derive from its market or political influence. There is oftendebate of whether market restrictions are in the best long-term interest of present and futureconsumers.Characteristics • Profit Maximiser: Maximizes profits. • Price Maker: Decides the price of the good or product to be sold. • High Barriers to Entry: Other sellers are unable to enter the market of the monopoly. • Single seller: In a monopoly there is one seller of the good which produces all the output. Therefore, the whole market is being served by a single company, and for practical purposes, the company is the same as the industry. • Price Discrimination: A monopolist can change the price and quality of the product. He sells more quantities charging less price for the product in a very elastic market and sells less quantities charging high price in a less elastic market. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 27. Introduction to Tourism EconomicsSources of monopoly powerMonopolies derive their market power from barriers to entry – circumstances that prevent or greatlyimpede a potential competitors ability to compete in a market.There are three major types of barriers to entry; economic, legal and deliberate. • Economic barriers: Economic barriers include economies of scale, capital requirements, cost advantages and technological superiority. o Economies of scale: Monopolies are characterised by decreasing costs for a relatively large range of production. Decreasing costs coupled with large initial costs give monopolies an advantage over would-be competitors. o Capital requirements: Production processes that require large investments of capital, or large research and development costs or substantial sunk costs limit the number of companies in an industry o Technological superiority: A monopoly may be better able to acquire, integrate and use the best possible technology in producing its goods while entrants do not have the size or finances to use the best available technology o No substitute goods: A monopoly sells a good for which there is no close substitute. The absence of substitutes makes the demand for the good relatively inelastic enabling monopolies to extract positive profits. o Control of natural resources: A prime source of monopoly power is the control of resources that are critical to the production of a final good. o Network externalities: The use of a product by a person can affect the value of that product to other people. This is the network effect. There is a direct relationship between the proportion of people using a product and the demand for that product. • Legal barriers: Legal rights can provide opportunity to monopolise the market of a good. Intellectual property rights, including patents and copyrights, give a monopolist exclusive control of the production and selling of certain goods. Property rights may give a company exclusive control of the materials necessary to produce a good. • Deliberate actions: A company wanting to monopolise a market may engage in various types of deliberate action to exclude competitors or eliminate competition. Such actions include collusion, lobbying governmental authorities, and forceOligopolyAn oligopoly is a market form in which a market or industry is dominated by a small number ofsellers (oligopolists). The word is derived, by analogy with "monopoly", from the Greek ὀλίγοι(oligoi) "few" + πωλεῖν (polein) "to sell". Because there are few sellers, each oligopolist is likely tobe aware of the actions of the others. The decisions of one firm influence, and are influenced by, thedecisions of other firms.Strategic planning by oligopolists needs to take into account the likely responses of the other marketparticipants. Oligopolistic competition can give rise to a wide range of different outcomes - In somesituations, the firms may employ restrictive trade practices (collusion, market sharing etc.) to raiseprices and restrict production in much the same way as a monopoly.Where there is a formal agreement for such collusion, this is known as a cartel - A primary exampleof such a cartel is OPEC which has a profound influence on the international price of oil. Firms ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 28. Introduction to Tourism Economicsoften collude in an attempt to stabilize unstable markets, so as to reduce the risks inherent in thesemarkets for investment and product development.There are legal restrictions on such collusion in most countries. There does not have to be a formalagreement for collusion to take place (although for the act to be illegal there must be actualcommunication between companies)–for example, in some industries there may be anacknowledged market leader which informally sets prices to which other producers respond, knownas price leadership.In other situations, competition between sellers in an oligopoly can be fierce, with relatively lowprices and high production. This could lead to an efficient outcome approaching perfectcompetition.The competition in an oligopoly can be greater than when there are more firms in an industry if, forexample, the firms were only regionally based and did not compete directly with each other.Characteristics • Profit maximisation conditions: An oligopoly maximises profits by producing where marginal revenue equals marginal costs. • Ability to set price: Oligopolies are price setters rather than price takers. • Entry and exit: Barriers to entry are high. The most important barriers are economies of scale, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy nascent firms. Additional sources of barriers to entry often result from government regulation favoring existing firms making it difficult for new firms to enter the market. • Number of firms: "Few" – a "handful" of sellers. There are so few firms that the actions of one firm can influence the actions of the other firms. • Long run profits: Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering market to capture excess profits. • Product differentiation: Product may be homogeneous (steel) or differentiated (automobiles). • Perfect knowledge: Assumptions about perfect knowledge vary but the knowledge of various economic actors can be generally described as selective. Oligopolies have perfect knowledge of their own cost and demand functions but their inter-firm information may be incomplete. Buyers have only imperfect knowledge as to price, cost and product quality. • Interdependence: The distinctive feature of an oligopoly is interdependence. Oligopolies are typically composed of a few large firms. Each firm is so large that its actions affect market conditions. Therefore the competing firms will be aware of a firms market actions and will respond appropriately. This means that in contemplating a market action, a firm must take into consideration the possible reactions of all competing firms and the firms countermoves.Perfect CompetitionIn economic theory, perfect competition describes markets such that no participants are largeenough to have the market power to set the price of a homogeneous product. Because the conditionsfor perfect competition are strict, there are few if any perfectly competitive markets. Still, buyersand sellers in some auction-type markets, say for commodities or some financial assets, mayapproximate the concept.Perfect competition serves as a benchmark against which to measure real-life and imperfectlycompetitive markets. Generally, a perfectly competitive market exists when every participant is a"price taker", and no participant influences the price of the product it buys or sells. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 29. Introduction to Tourism EconomicsSpecific characteristics may include: • Infinite buyers and sellers – Infinite consumers with the willingness and ability to buy the product at a certain price, and infinite producers with the willingness and ability to supply the product at a certain price. • Zero entry and exit barriers – It is relatively easy for a business to enter or exit in a perfectly competitive market. • Perfect factor mobility - In the long run factors of production are perfectly mobile allowing free long term adjustments to changing market conditions. • Perfect information - Prices and quality of products are assumed to be known to all consumers and producers. • Zero transaction costs - Buyers and sellers incur no costs in making an exchange (perfect mobility). • Profit maximization - Firms aim to sell where marginal costs meet marginal revenue, where they generate the most profit. • Homogeneous products – The characteristics of any given market good or service do not vary across suppliers. • Non-increasing returns to scale - Non-increasing returns to scale ensure that there are sufficient firms in the industry.In the short term, perfectly-competitive markets are not productively efficient as output will notoccur where marginal cost is equal to average cost, but allocatively efficient, as output will alwaysoccur where marginal cost is equal to marginal revenue, and therefore where marginal cost equalsaverage revenue. In the long term, such markets are both allocatively and productively efficient.Under perfect competition, any profit-maximizing producer faces a market price equal to itsmarginal cost.This implies that a factors price equals the factors marginal revenue product. This allows forderivation of the supply curve on which the neoclassical approach is based. (This is also the reasonwhy "a monopoly does not have a supply curve.") The abandonment of price taking createsconsiderable difficulties to the demonstration of existence of a general equilibrium except underother, very specific conditions such as that of monopolistic competition.EntrepreneurshipEntrepreneurship is the act of being an entrepreneur, which can be defined as "one whoundertakes innovations, finance and business acumen in an effort to transform innovations intoeconomic goods".This may result in new organizations or may be part of revitalizing mature organizations inresponse to a perceived opportunity. The most obvious form of entrepreneurship is that of startingnew businesses (referred as Startup Company); however, in recent years, the term has beenextended to include social and political forms of entrepreneurial activity.When entrepreneurship is describing activities within a firm or large organization it is referred to asintra-preneurship and may include corporate venturing, when large entities spin-off organizations . ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 30. Introduction to Tourism EconomicsEntrepreneurial activities are substantially different depending on the type of organization andcreativity involved. Entrepreneurship ranges in scale from solo projects (even involving theentrepreneur only part-time) to major undertakings creating many job opportunities.Many "high value" entrepreneurial ventures seek venture capital or angel funding (seed money) inorder to raise capital to build the business. Angel investors generally seek annualized returns of 20-30% and more, as well as extensive involvement in the business. Many kinds of organizations nowexist to support would-be entrepreneurs including specialized government agencies, businessincubators, science parks, and some NGOs.Joint-venturesA joint venture (JV) is a business agreement in which parties agree to develop, for a finite time, anew entity and new assets by contributing equity. They exercise control over the enterprise andconsequently share revenues, expenses and assets. There are other types of companies such as JVlimited by guarantee, joint ventures limited by guarantee with partners holding shares.With individuals, when two or more persons come together to form a temporary partnership forthe purpose of carrying out a particular project, such partnership can also be called a joint venturewhere the parties are "co-venturers". The venture can be for one specific project only - when the JVis referred to more correctly as a consortium (as the building of the Channel Tunnel) - or acontinuing business relationship. The consortium JV (also known as a cooperative agreement) isformed where one party seeks technological expertise or technical servicearrangements, franchise and brand use agreements, management contracts, rental agreements, forone-time contracts. The JV is dissolved when that goal is reached.A joint venture takes place when two parties come together to take on one project. In a jointventure, both parties are equally invested in the project in terms of money, time, and effort to buildon the original concept. While joint ventures are generally small projects, major corporations alsouse this method in order to diversify. A joint venture can ensure the success of smaller projects forthose that are just starting in the business world or for established corporations. Since the cost ofstarting new projects is generally high, a joint venture allows both parties to share the burden of theproject, as well as the resulting profits.Since money is involved in a joint venture, it is necessary to have a strategic plan in place. In short,both parties must be committed to focusing on the future of the partnership, rather than just theimmediate returns. Ultimately, short term and long term successes are both important. In order toachieve this success, honesty, integrity, and communication within the joint venture are necessary.Partner selectionWhile the following offers some insight to the process of joining up with a committed partner toform a JV, it is often difficult to determine whether the commitments come from a known anddistinguishable party or an intermediary. This is particularly so when the language barrier exists andone is unfamiliar with local customs, especially in approaches to government, often the decidingbody for the formation of a JV or dispute settlement.The ideal process of selecting a JV partner emerges from: • screening of prospective partners • short listing a set of prospective partners and some sort of ranking • due diligence – checking the credentials of the other party • availability of appreciated or depreciated property contributed to the joint venture ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 31. Introduction to Tourism Economics • the most appropriate structure and invitation/bid • foreign investor buying an interest in a local companyCompanies are also called JVs in cases where there are dominant partners together withparticipation of the public. There may also be cases where the public shareholding is substantial butthe founding partners retain their identity. These companies may be public or private companies.Further consideration relates to starting a new legal entity ground up. Such an enterprise issometimes called an incorporated JV, one packaged with technology contracts (knowhow, patents,trademarks and copyright), technical services and assisted-supply arrangements.The consortium JV (also known as a cooperative agreement) is formed where one party seekstechnological expertise or technical service arrangements, franchise and brand use agreements,management contracts, rental agreements, for one-time contracts, e.g., for construction projects.They dissolve the JV when that goal is reached.Company incorporationA JV can be brought about in the following major ways: • Foreign investor buying an interest in a local company • Local firm acquiring an interest in an existing foreign firm • Both the foreign and local entrepreneurs jointly forming a new enterprise • Together with public capital and/or bank debt UNIT 5: THE THEORY OF PRICE DETERMINATION Chapter objectives • Outline the definition of pricing and understand about price sensitivity • Identify and explain the different types of pricing strategies • Discuss about the different types of pricing methods and price discounting measurements • Explore the demand and supply model: demand and supply curve, as well as demand and supply price elasticity ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 32. Introduction to Tourism EconomicsPricingPricing is the process of determining what a company will receive in exchange for its products.Pricing factors are manufacturing cost, market place, competition, market condition, and quality ofproduct. Pricing is also a key variable in microeconomic price allocation theory.Price is the only revenue generating element amongst the four Ps, the rest being cost centers.Pricing is the manual or automatic process of applying prices to purchase and sales orders, based onfactors such as: a fixed amount, quantity break, promotion or sales campaign, specific vendor quote,price prevailing on entry, shipment or invoice date, combination of multiple orders or lines, andmany others.The needs of the consumer can be converted into demand only if the consumer has the willingnessand capacity to buy the product. Thus pricing is very important in marketing.What a price should do?A well chosen price should do three things: • achieve the financial goals of the company (e.g., profitability) • fit the realities of the marketplace (Will customers buy at that price?) • support a products positioning and be consistent with the other variables in the marketing mix o price is influenced by the type of distribution channel used, the type of promotions used, and the quality of the product o price will usually need to be relatively high if manufacturing is expensive, distribution is exclusive, and the product is supported by extensive advertising and promotional campaigns o a low price can be a viable substitute for product quality, effective promotions, or an energetic selling effort by distributorsFrom the marketers point of view, an efficient price is a price that is very close to the maximumthat customers are prepared to pay.Nine Laws of Price Sensitivity & Consumer Psychology • Reference Price Effect Buyer’s price sensitivity for a given product increases the higher the product’s price relative to perceived alternatives. Perceived alternatives can vary by buyer segment, by occasion, and other factors. • Difficult Comparison Effect Buyers are less sensitive to the price of a known / more reputable product when they have difficulty comparing it to potential alternatives. • Switching Costs Effect The higher the product-specific investment a buyer must make to switch suppliers, the less price sensitive that buyer is when choosing between alternatives. • Price-Quality Effect Buyers are less sensitive to price the more that higher prices signal higher quality. Products for which this effect is particularly relevant include: image products, exclusive products, and products with minimal cues for quality. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 33. Introduction to Tourism Economics • Expenditure Effect Buyers are more price sensitive when the expense accounts for a large percentage of buyers’ available income or budget. • End-Benefit Effect The effect refers to the relationship a given purchase has to a larger overall benefit, and is divided into two parts: Derived demand: The more sensitive buyers are to the price of the end benefit, the more sensitive they will be to the prices of those products that contribute to that benefit. Price proportion cost: The price proportion cost refers to the percent of the total cost of the end benefit accounted for by a given component that helps to produce the end benefit (e.g., think CPU and PCs). The smaller the given components share of the total cost of the end benefit, the less sensitive buyers will be to the components price. • Shared-cost Effect The smaller the portion of the purchase price buyers must pay for themselves, the less price sensitive they will be. • Fairness Effect Buyers are more sensitive to the price of a product when the price is outside the range they perceive as “fair” or “reasonable” given the purchase context. • The Framing Effect Buyers are more price sensitive when they perceive the price as a loss rather than a forgone gain, and they have greater price sensitivity when the price is paid separately rather than as part of a bundle.Pricing mistakesMany companies make common pricing mistakes. Bernsteins article "Supplier Pricing Mistakes“outlines several which include: • Weak controls on discounting • Inadequate systems for tracking competitor selling prices and market share • Cost-Up pricing • Price increases poorly executed • Worldwide price inconsistencies • Paying sales representatives on dollar volume vs. addition of profitability measuresPricing strategiesThe firms pricing objectives must be identified in order to determine the optimal pricing. Commonobjectives include the following: • Current profit maximization - seeks to maximize current profit, taking into account revenue and costs. Current profit maximization may not be the best objective if it results in lower long-term profits. • Current revenue maximization - seeks to maximize current revenue with no regard to profit margins. The underlying objective often is to maximize long-term profits by increasing market share and lowering costs. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 34. Introduction to Tourism Economics • Maximize quantity - seeks to maximize the number of units sold or the number of customers served in order to decrease long-term costs as predicted by the experience curve. • Maximize profit margin - attempts to maximize the unit profit margin, recognizing that quantities will be low. • Quality leadership - use price to signal high quality in an attempt to position the product as the quality leader. • Partial cost recovery - an organization that has other revenue sources may seek only partial cost recovery. • Survival - in situations such as market decline and overcapacity, the goal may be to select a price that will cover costs and permit the firm to remain in the market. In this case, survival may take a priority over profits, so this objective is considered temporary. • Status quo - the firm may seek price stabilization in order to avoid price wars and maintain a moderate but stable level of profit.For new products, the pricing objective often is either to maximize profit margin or to maximizequantity (market share). While there is no single recipe to determine pricing, the following is ageneral sequence of steps that might be followed for developing the pricing of a new product: • Develop marketing strategy - perform marketing analysis, segmentation, targeting, and positioning. • Make marketing mix decisions - define the product, distribution, and promotional tactics. • Estimate the demand curve - understand how quantity demanded varies with price. • Calculate cost - include fixed and variable costs associated with the product. • Understand environmental factors - evaluate likely competitor actions, understand legal constraints, etc. • Set pricing objectives - for example, profit maximization, revenue maximization, or price stabilization (status quo). • Determine pricing - using information collected in the above steps, select a pricing method, develop the pricing structure, and define discounts.Price SkimmingSkim pricing attempts to "skim the cream" off the top of the market by setting a high price andselling to those customers who are less price sensitive. Skimming is a strategy used to pursue theobjective of profit margin maximization. Skimming is most appropriate when: • Demand is expected to be relatively inelastic; that is, the customers are not highly price sensitive. • Large cost savings are not expected at high volumes, or it is difficult to predict the cost savings that would be achieved at high volume. • The company does not have the resources to finance the large capital expenditures necessary for high volume production with initially low profit margins.Price PenetrationPenetration pricing pursues the objective of quantity maximization by means of a low price. It ismost appropriate when: • Demand is expected to be highly elastic; that is, customers are price sensitive and the quantity demanded will increase significantly as price declines. • Large decreases in cost are expected as cumulative volume increases. • The product is of the nature of something that can gain mass appeal fairly quickly. • There is a threat of impending competition. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 35. Introduction to Tourism EconomicsOther Types of PricingPremium PricingUse a high price where there is a uniqueness about the product or service. This approach is usedwhere a a substantial competitive advantage exists. Such high prices are charge for luxuries such asCunard Cruises, Savoy Hotel rooms, and Concorde flights.Economy PricingThis is a no frills low price. The cost of marketing and manufacture are kept at a minimum.Supermarkets often have economy brands for soups, spaghetti, etc.Psychological PricingThis approach is used when the marketer wants the consumer to respond on an emotional, ratherthan rational basis. For example price point perspective 99 cents not one dollar.Optional Product PricingCompanies will attempt to increase the amount customer spend once they start to buy. Optionalextras increase the overall price of the product or service. For example airlines will charge foroptional extras such as guaranteeing a window seat or reserving a row of seats next to each other.Captive Product PricingWhere products have complements, companies will charge a premium price where the consumer iscaptured. For example a razor manufacturer will charge a low price and recoup its margin (andmore) from the sale of the only design of blades which fit the razor.Product Bundle PricingHere sellers combine several products in the same package. This also serves to move old stock.Videos and CDs are often sold using the bundle approach.Promotional PricingPricing to promote a product is a very common application. There are many examples ofpromotional pricing including approaches such as BOGOF (Buy One Get One Free).Geographical PricingGeographical pricing is evident where there are variations in price in different parts of the world.For example rarity value, or where shipping costs increase price.Value PricingThis approach is used where external factors such as recession or increased competition forcecompanies to provide value products and services to retain sales e.g. value meals at McDonalds.Pricing methodsTo set the specific price level that achieves their pricing objectives, managers may make use ofseveral pricing methods. These methods include: • Cost-plus pricing - set the price at the production cost plus a certain profit margin. • Target return pricing - set the price to achieve a target return-on-investment. • Value-based pricing - base the price on the effective value to the customer relative to alternative products. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 36. Introduction to Tourism Economics • Psychological pricing - base the price on factors such as signals of product quality, popular price points, and what the consumer perceives to be fair.In addition to setting the price level, managers have the opportunity to design innovative pricingmodels that better meet the needs of both the firm and its customers.Price discountThe normally quoted price to end users is known as the list price. This price usually is discountedfor distribution channel members and some end users.There are several types of discounts, as outlined below. • Quantity discount - offered to customers who purchase in large quantities. • Cumulative quantity discount - a discount that increases as the cumulative quantity increases. Cumulative discounts may be offered to resellers who purchase large quantities over time but who do not wish to place large individual orders. • Seasonal discount - based on the time that the purchase is made and designed to reduce seasonal variation in sales. For example, the travel industry offers much lower off-season rates. Such discounts do not have to be based on time of the year; they also can be based on day of the week or time of the day, such as pricing offered by long distance and wireless service providers. • Cash discount - extended to customers who pay their bill before a specified date. • Trade discount - a functional discount offered to channel members for performing their roles. For example, a trade discount may be offered to a small retailer who may not purchase in quantity but nonetheless performs the important retail function. • Promotional discount - a short-term discounted price offered to stimulate sales.Environmental factorsPricing must take into account the competitive and legal environment in which the companyoperates. From a competitive standpoint, the firm must consider the implications of its pricing onthe pricing decisions of competitors. For example, setting the price too low may risk a price warthat may not be in the best interest of either side.Setting the price too high may attract a large number of competitors who want to share in theprofits.From a legal standpoint, a firm is not free to price its products at any level it chooses. For example,there may be price controls that prohibit pricing a product too high.Pricing it too low may be considered predatory pricing or "dumping" in the case of internationaltrade. Offering a different price for different consumers may violate laws against pricediscrimination. Finally, collusion with competitors to fix prices at an agreed level is illegal in manycountries.The demand modelIn economics, demand is the desire to own anything, the ability to pay for it, and the willingness topay. The term demand signifies the ability or the willingness to buy a particular commodity at agiven point of time. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 37. Introduction to Tourism EconomicsElements of the Law of Demand - As Melvin and Boyes note the law of demand is defined as; thequantity of a well-defined good or service that: • People are willing and able to buy. • During a particular period of time. • Decreases/increases as the price of that good or service rises/falls • All other factors remain constant.Innumerable factors and circumstances could affect a buyers willingness or ability to buy a good.Some of the more common factors are: • Goods own price: The basic demand relationship is between potential prices of a good and the quantities that would be purchased at those • Price of related goods: The principal related goods are complements and substitutes. A complement is a good that is used with the primary good. • Personal Disposable Income: In most cases, the more disposable income (income after tax and receipt of benefits) you have the more likely you buy. • Tastes or preferences: The greater the desire to own a good the more likely you are to buy the good. • Consumer expectations about future prices and income : If a consumer believes that the price of the good will be higher in the future he is more likely to purchase the good now.Demand CurveEconomists record demand on a demand schedule and plot it on a graph as a demand curve that isusually downward sloping. The downward slope reflects the relationship between price and quantitydemanded: as price decreases, quantity demanded increases.In principle, each consumer has a demand curve for any product that he or she would considerbuying, and the consumers demand curve is equal to the marginal utility (benefit) curve. When thedemand curves of all consumers are added up, the result is the market demand curve for thatproduct. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 38. Introduction to Tourism EconomicsIf there are no externalities, the market demand curve is also equal to the social utility (benefit)curve. Consequently, the graphical presentation is technically that of the equation P = f(Q) wheref(Q) is the inverse demand function, although the graph is referred to simply as the demand curve.Price Elasticity of DemandPED is a measure of the sensitivity of the quantity variable, Q, to changes in the price variable, P.Elasticity answers the question of the percent by which the quantity demanded will change relativeto (divided by) a given percentage change in the price. For infinitessimal changes the formula forcalculating PED is the absolute value of (∂Q/∂P)×(P/Q).Determinants of PEDThe overriding factor in determining PED is the willingness and ability of consumers after a pricechanges to postpone immediate consumption decisions concerning the good and to search forsubstitutes (wait and look).The greater the incentive the consumer has to delay consumption and search for substitutes and themore readily available substitutes are the more elastic the demand will be. Specific factors are: • Availability of substitutes: The more choices that are available, the more elastic is the demand for a good. • Necessity: With a true necessity a consumer has neither the willingness nor the ability to postpone consumption. • Importance in terms of proportion of income spent on a good : Most consumers have both the willingness and ability to postpone the purchase of big ticket items. If an item constitutes a significant portion of ones income, it is worth ones time to search for substitutes. • Duration: The more time a consumer has to search for substitute goods, the more elastic the demand. • Breadth of definition: how specifically the good is defined. For example, the demand for automobiles is less elastic than the demand for Toyotas, which is in turn less elastic than the demand for Red Toyota Priuses. • Availability of information concerning substitute goods: The easier it is for a consumer to locate the substitute goods, the more willing he will be to undertake the search, and the more elastic demand will be.The supply modelIn economics, supply is the amount of some product producers are willing and able to sell at agiven price all other factors being held constant. Usually, supply is plotted as a supply curveshowing the relationship of price to the amount of product businesses are willing to sell.In economics the term supply has a special meaning. It can be defined in the following. • A supply schedule is a table which shows how much one or more firms will be willing to supply at particular prices.The supply schedule shows the quantity of goods that a supplier would be willing and able to sell atspecific prices under the existing circumstances. Some of the more important factors affecting ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 39. Introduction to Tourism Economicssupply are the goods own price, the price of related goods, production costs, technology andexpectations of sellers.Innumerable factors and circumstances could affect a sellers willingness or ability to produce andsell a good. Some of the more common factors are: • Goods own price: The basic supply relationship is between the price of a good and the quantity supplied. • Price of related goods: For purposes of supply analysis related goods refer to goods from which inputs are derived to be used in the production of the primary good. • Conditions of Production: The most significant factor here is the state of technology. If there is a technological advancement in ones goods production, the supply increases. • Expectations: Sellers expectations concerning future market condition can directly affect supply • Price of inputs: Inputs include land, labor, energy and raw materials. • Number of suppliers: the market supply curve is the horizontal summation of the individual supply curves. • Government policies and regulations: Government intervention can have a significant effect on supply.Supply CurveThe relationship of price and quantity supplied can be exhibited graphically as the supply curve.The curve is generally positively sloped. The curve depicts the relationship between two variablesonly; price and quantity supplied. All other factors affecting supply are held constant. However,these factors are part of the supply curve and are present in the intercept or constant termPrice Elasticity of SupplyPrice elasticity of supply measures the responsiveness of quantity supplied to changes in price, asthe percentage change in quantity supplied induced by a one percent change in price.Significant determinants include: ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 40. Introduction to Tourism EconomicsReaction time: The PES coeffiecient will largely be determined by how quickly producers react toprice changes by increasing (decreasing) production and delivering (cutting deliveries of) goods tothe market. • Complexity of Production: Much depends on the complexity of the production process. • Time to respond: The more time a producer has to respond to price changes the more elastic the supply. For example, a cotton farmer cannot immediately respond to an increase in the price of soybeans. • Excess capacity: A producer who has unused capacity can quickly respond to price changes in his market assuming that variable factors are readily available. • Inventories: A producer who has a supply of goods or available storage capacity can quickly respond to price changes. UNIT 6: ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 41. Introduction to Tourism Economics THE ECONOMIC CONTRIBUTION OF TOURISM INTERNATIONALLY Chapter objectives • Discuss on international regulations of tourism economics development • Understand the general concept of free market • Outline and explain the application of deregulation of airlines towards tourism economics • Explore the definition and explanation on: partnerships, mergers and acquisition, as well as conglomerateInternational regulationsInternational tourism relies on a high degree of communication and cooperation among nations withrespect to this complex network of laws, regulations, and policies. The regulations provides anoverview of international developments on information privacyReviews current trade-related regulations of discusses their effects on developing countries. Forexample; International Animal Export Regulations, International Regulations for PreventingCollisions at Sea 1972, etc.Some government interventions which shape the environment for tourism as an internationalindustry cannot be avoided: the policies on visas, customs and access for airlines; transport andcommunications infrastructure within the countries; taxation and customs duty rules.An Imaginative Country of Alpina A skier who wants to visit Alpina USA Alpina Alpina’s foreign visitors policy Political and trade relations between Tourism-related laws, regulations, and USA restrictions will have a great impact of Bilateral air tourism activities. agreements Where to stay and visit Cuba, Libya, North Korea Skier will pay many direct and indirect taxes.International Regulatory Institutions ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 42. Introduction to Tourism EconomicsThe WToO and WTTC are sectoral pressure groups, supporting tourism, collecting data, andexchanging information. The WToO was established in 1974, with UN agency status, and financedby the UNDP. Its scope was explained by its former name, the International Union of OfficialTravel Organisations.The WTTC is an association of private companies in the industry, established in 1990. Theindividual industry components of tourism, transport and hotels, have international organisations,ranging from the powerful industrial cartel, IATA for airlines, to groups of hotels and travel agents.Countries’ restrictions on services only came under international regulation in the 1990s, fifty yearsafter goods came under the GATT.Some services were so restricted by individual countries, both within countries and in trade, thatagreed limits on restrictions were difficult to achieve (financial services, most notably), while otherswere considered of their nature so local that restrictions were regarded as unnecessary (exceptthrough restrictions on foreign investment).Tourism includes examples of both: transport services, both sea and air, have traditionally beenamong the most regulated and protected; specific services to tourists in a country are inherentlylocal. Regulation of tourism is more usually indirect (or through non-trade measures) and these maynot have been seen as GATS-regulated by negotiators.In future WTO negotiations (starting with the next Round, to begin following the ministerialmeeting of November-December 1999), the lack of completely notified schedules and the difficultto use systems of classifications may make negotiations difficult.Not only is there still lack of clear information about countries’ rules, but even for those servicesand types which are notified, there is no agreed method of quantifying and thus comparing thestrictness of restrictions and therefore the benefits to be gained by trading partners from changes.(While countries may have information about their own restrictions, the lack of quantification also,of course, means that there is no way for countries to measure the costs or benefits to themselves ofchanging their own restrictions.)The only method used in measuring the outcome of the WTO negotiations was counting: thenumber of services included; the numbers of subdivisions of services or of modes of supplyThe developed countries’ objective for the next round is to increase liberalisation of services, andspecifically to require all countries to include more than one service - This may mean that there isrelatively little pressure to liberalise restrictions on tourism.Free marketA free market is a competitive market where prices are determined by supply and demand. A free-market economy is one within which all markets are unregulated by any parties other than marketparticipants.Free markets contrast sharply with controlled markets or regulated markets, in which governmentsmore actively regulate prices and/or supplies, directly or indirectly. In its purest form, thegovernment plays a neutral role in its administration and legislation of economic activity, neitherlimiting it (by regulating industries or protecting them from internal/external market pressures) noractively promoting it (by owning economic interests or offering subsidies to businesses or R&D).A free market is not to be confused with a perfect market where individuals have perfectinformation and there is perfect competition. Advocates of a free market traditionally consider the ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 43. Introduction to Tourism Economicsterm to imply that the means of production is under private, and not state control or co-operativeownership.This is the contemporary use of the term "free market" by economists and in popular culture; theterm has had other uses historically. In the marketplace, the price of a good or service helpscommunicate consumer demand to producers and thus directs the allocation of resources towardsatisfaction of consumers as well as investors.In a free market, the system of prices is the emergent result of a vast number of voluntarytransactions, rather than of political decrees as in a controlled market. The freer the market, themore prices will reflect consumer habits and demands, and the more valuable the information inthese prices are to all players in the economy. Through free competition between vendors for theprovision of products and services, prices tend to decrease, and quality tends to increase.In a free-market economy, money would not be monopolized by legal tender laws or by a centralbank, in order to receive taxes from the transactions or to be able to issue loans. The meaning of"free" market has varied over time and between economists, the ambiguous term "free" facilitatingreuse.To illustrate the ambiguity: classical economists such as Adam Smith believed that an economyshould be free of monopoly rents, while proponents of laissez faire believe that people should befree to form monopolies. In this article "free market" is largely identified with laissez faire, thoughalternative senses are discussed in this section and in criticism. The identification of the "freemarket" with "laissez faire" was notably used in the 1962 Capitalism and Freedom, by economistMilton Friedman, which is credited with popularizing this usage.Deregulation of airlinesAirline deregulation is the process of removing entry and price restrictions on airlines affecting, inparticular, the carriers permitted to serve specific routes. A new form of regulation has beendeveloped to some extent to deal with problems such as the allocation of the limited number of slotsavailable at airports.Various solutions have been proposed, including, for the first time since 1978, federal control oversome of the prices charged and routes served by major airlines with a view of increasing price andcost competition. Although finding solutions to some problems, airline deregulation, for the mostpart, has created mixed results.Deregulation has provided some financial benefits to the average traveler. Airline services werehistorically heavily regulated, in part because of concerns about monopoly and oligopoly arisingfrom the fact that in most cases, only a small number of airlines provided direct flights between agiven "city pair".In the U.S., the airline deregulation began in 1978. It was a part of a sweeping reduction in priceand entry controls in United States transportation begun with initiatives in the NixonAdministration, carried out through the Ford and Carter Administrations, and followed up on in theReagan Administration.Many other countries have since deregulated their domestic markets, and a similar process hasapplied to airline markets within the European Union. Many international airline markets remainsubject to regulation ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 44. Introduction to Tourism EconomicsThe need for deregulationAs jets were integrated into the market in the late 1950s and early 1960s, the industry experienceddramatic growth. By the mid-1960s, they were carrying roughly 100 million passengers and by themid 1970s, over 200 million Americans had traveled by air. This steady increase in air travel beganplacing serious strains on the ability of federal regulators to cope with the increasingly complexnature of air travel.At the same time, beginning in 1969, there were changes in basic economic conditions and inaircraft technology triggered a sudden decline in the industrys performance. The onset of highinflation, low economic growth, falling productivity, rising labor costs and higher fuel costsdevastated the airlines.PartnershipsA partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-basedorganizations, schools, governments, and varied combinations thereof, have always been andremain commonplace.In the most frequently associated instance of the term, a partnership is formed between one or morebusinesses in which partners (owners) co-labor to achieve and share profits and losses (see businesspartners). Partnerships are also common regardless of and among sectors. Non-profit, religious, andpolitical organizations, may partner together to increase the likelihood of each achieving theirmission and to amplify their reach.Partnerships present the involved parties with special challenges that must be navigated untoagreement. Overarching goals, levels of give-and-take, areas of responsibility, lines of authority andsuccession, how success is evaluated and distributed, and often a variety of other factors must all benegotiated. Once agreement is reached, the partnership is typically enforceable by civil law,especially if well documented.Partners who wish to make their agreement affirmatively explicit and enforceable typically draw upArticles of Partnership. It is common for information about formally partnered entities to be madepublic, such as through a press release, a newspaper ad, or public records laws.While partnershipsstand to amplify mutual interests and success, some are considered ethically problematic.Governmentally recognized partnerships may enjoy special benefits in tax policies. Amongdeveloped countries, for example, business partnerships are often favored over corporations intaxation policy, since dividend taxes only occur on profits before they are distributed to thepartners.However, depending on the partnership structure and the jurisdiction in which it operates, owners ofa partnership may be exposed to greater personal liability than they would as shareholders of acorporation.In such countries, partnerships are often regulated via anti-trust laws, so as to inhibit monopolisticpractices and foster free market competition. Enforcement of the laws, however, is often widelyvariable. Domestic partnerships recognized by governments typically enjoy tax benefits, as well.Mergers and acquisitions ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 45. Introduction to Tourism EconomicsMergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporatefinance and management dealing with the buying, selling, dividing and combining of differentcompanies and similar entities that can help an enterprise grow rapidly in its sector or location oforigin, or a new field or new location, without creating a subsidiary, other child entity or using ajoint venture.The distinction between a "merger" and an "acquisition" has become increasingly blurred in variousrespects (particularly in terms of the ultimate economic outcome), although it has not completelydisappeared in all situations.AcquisitionAn acquisition is the purchase of one business or company by another company or other businessentity. Consolidation occurs when two companies combine together to form a new enterprisealtogether, and neither of the previous companies survives independently.Acquisitions are divided into "private" and "public" acquisitions, depending on whether theacquiree or merging company (also termed a target) is or is not listed on public stock markets. Anadditional dimension or categorization consists of whether an acquisition is friendly or hostile.Achieving acquisition success has proven to be very difficult, while various studies have shown that50% of acquisitions were unsuccessful.The acquisition process is very complex, with many dimensions influencing its outcome. In the caseof a friendly transaction, the companies cooperate in negotiations; in the case of a hostile deal, theboard and/or management of the target is unwilling to be bought or the targets board has no priorknowledge of the offer."Acquisition" usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, asmaller firm will acquire management control of a larger and/or longer-established company andretain the name of the latter for the post-acquisition combined entity - This is known as a reversetakeover.Another type of acquisition is the reverse merger, a form of transaction that enables a privatecompany to be publicly listed in a relatively short time frame. A reverse merger occurs when aprivately held company (often one that has strong prospects and is eager to raise financing) buys apublicly listed shell company, usually one with no business and limited assets.There are also a variety of structures used in securing control over the assets of a company, whichhave different tax and regulatory implications: • The buyer buys the shares, and therefore control, of the target company being purchased. Ownership control of the company in turn conveys effective control over the assets of the company, but since the company is acquired intact as a going concern, this form of transaction carries with it all of the liabilities accrued by that business over its past and all of the risks that company faces in its commercial environment. • The buyer buys the assets of the target company . The cash the target receives from the sell- off is paid back to its shareholders by dividend or through liquidation. A buyer often structures the transaction as an asset purchase to "cherry-pick" the assets that it wants and leave out the assets and liabilities that it does not. This can be particularly important where foreseeable liabilities may include future, unquantified damage awards such as those that ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 46. Introduction to Tourism Economics could arise from litigation over defective products, employee benefits or terminations, or environmental damage.Distinction between mergers and acquisitionsAlthough often used synonymously, the terms merger and acquisition mean slightly differentthings.This paragraph does not make a clear distinction between the legal concept of a merger (withthe resulting corporate mechanics, statutory merger or statutory consolidation, which have nothingto do with the resulting power grab as between the management of the target and the acquirer) andthe business point of view of a "merger", which can be achieved independently of the corporatemechanics through various means such as "triangular merger", statutory merger, acquisition, etc.When one company takes over another and clearly establishes itself as the new owner, the purchaseis called an acquisition. From a legal point of view, the target company ceases to exist, the buyer"swallows" the business and the buyers stock continues to be traded.Motives behind M&AThe dominant rationale used to explain M&A activity is that acquiring firms seek improvedfinancial performance. The following motives are considered to improve financial performance: • Economy of scale: This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins. • Economy of scope: This refers to the efficiencies primarily associated with demand-side changes, such as increasing or decreasing the scope of marketing and distribution, of different types of products. • Increased revenue or market share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices. • Cross-selling: For example, a bank buying a stock broker could then sell its banking products to the stock brokers customers, while the broker can sign up the banks customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary products. • Synergy: For example, managerial economies such as the increased opportunity of managerial specialization. Another example are purchasing economies due to increased order size and associated bulk-buying discounts. • Taxation: A profitable company can buy a loss maker to use the targets loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to "shop" for loss making companies, limiting the tax motive of an acquiring company. • Geographical or other diversification: This is designed to smooth the earnings results of a company, which over the long term smoothens the stock price of a company, giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 47. Introduction to Tourism Economics • Resource transfer: resources are unevenly distributed across firms (Barney, 1991) and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources. • Vertical integration: Vertical integration occurs when an upstream and downstream firm merge (or one acquires the other). There are several reasons for this to occur. One reason is to internalise an externality problem. A common example of such an externality is double marginalization. Double marginalization occurs when both the upstream and downstream firms have monopoly power and each firm reduces output from the competitive level to the monopoly level, creating two deadweight losses. Following a merger, the vertically integrated firm can collect one deadweight loss by setting the downstream firms output to the competitive level. This increases profits and consumer surplus. A merger that creates a vertically integrated firm can be profitable. • Hiring: some companies use acquisitions as an alternative to the normal hiring process. This is especially common when the target is a small private company or is in the startup phase. • Absorption of similar businesses under single management : similar portfolio invested by two different mutual funds (Ahsan Raza Khan, 2009) namely united money market fund and united growth and income fund, caused the management to absorb united money market fund into united growth and income fund.However, on average and across the most commonly studied variables, acquiring firms financialperformance does not positively change as a function of their acquisition activity. Therefore,additional motives for merger and acquisition that may not add shareholder value include: • Diversification: While this may hedge a company against a downturn in an individual industry it fails to deliver value, since it is possible for individual shareholders to achieve the same hedge by diversifying their portfolios at a much lower cost than those associated with a merger. • Managers hubris: managers overconfidence about expected synergies from M&A which results in overpayment for the target company. • Empire-building: Managers have larger companies to manage and hence more power. • Managers compensation: In the past, certain executive management teams had their payout based on the total amount of profit of the company, instead of the profit per share, which would give the team a perverse incentive to buy companies to increase the total profit while decreasing the profit per share (which hurts the owners of the company, the shareholders)ConglomeratesA conglomerate is a combination of two or more corporations engaged in entirely differentbusinesses that fall under one corporate structure (a corporate group), usually involving a parentcompany and several (or many) subsidiaries. Often, a conglomerate is a multi-industry company.Conglomerates are often large and multinational.Conglomerates were popular in the 1960s due to a combination of low interest rate(s) and arepeating bear/bull market, which allowed the conglomerates to buy companies in leveragedbuyouts, sometimes at temporarily deflated values. As long as the target company had profitsgreater than the interest on the loans, the overall return on investment (ROI) of the conglomerateappeared to grow. Also, the conglomerate had a better ability to borrow in the money market, orcapital market, than the smaller firm at their community bank. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 48. Introduction to Tourism EconomicsAdvantages • Diversification results in a reduction of investment risk. • A downturn suffered by one subsidiary, for instance, can be counterbalanced by stability, or even expansion, in another division. - For example, if Berkshire Hathaways construction materials business has a bad year, the loss might be offset by a good year in its insurance business. This advantage is enhanced by the fact that the business cycle affects industries in different ways. Financial Conglomerates have very different compliance requirements from insurance or reinsurance solo entities or groups. There are very important opportunities that can be exploited, to increase shareholder value. • A conglomerate creates an internal capital market if the external one is not developed enough. Through the internal market, different parts of conglomerate allocate capital more effectively. • A conglomerate can show earnings growth, by acquiring companies whose shares are more discounted than its own.Disadvantages • The extra layers of management increase costs. • Accounting disclosure is less useful information, many numbers are disclosed grouped, rather than separately for each business. The complexity of a conglomerates accounts make them harder for managers, investors and regulators to analyze, and makes it easier for management to hide things. • Conglomerates can trade at a discount to the overall individual value of their businesses because investors can achieve diversification on their own simply by purchasing multiple stocks. The whole is often worth less than the sum of its parts. • Culture clashes can destroy value. • Inertia prevents development of innovation • Lack of focus, and inability to manage unrelated businesses equally well.Some cite the decreased cost of conglomerate stock (a phenomenon known as conglomeratediscount) as evidential of these disadvantages, while other traders believe this tendency to be amarket inefficiency, which undervalues the true strength of these stocks. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 49. Introduction to Tourism Economics UNIT 7: THE ECONOMIC CONTRIBUTION OF TOURISM NATIONALLY Chapter objectives • Understand the government actions, and process of public policy and its roles as an academic discipline • Explore on competition in tourism economy as public policy • Analyze about tourism economic policyPublic policyPublic policy as government action is generally the principled guide to action taken by theadministrative or executive branches of the state with regard to a class of issues in a mannerconsistent with law and institutional customs.In general, the foundation is the pertinent national and substantial constitutional law andimplementing legislation such as the US Federal code. Further substrates include both judicialinterpretations and regulations which are generally authorized by legislation.Other scholars define it as a system of "courses of action, regulatory measures, laws, and fundingpriorities concerning a given topic promulgated by a governmental entity or its representatives.“Public policy is commonly embodied "in constitutions, legislative acts, and judicial decisions."Government ActionsShaping public policy is a complex and multifaceted process that involves the interplay ofnumerous individuals and interest groups competing and collaborating to influence policymakers toact in a particular way. These individuals and groups use a variety of tactics and tools to advancetheir aims, including advocating their positions publicly, attempting to educate supporters andopponents, and mobilizing allies on a particular issue.In this context, advocacy can be defined as attempting to influence public policy through education,lobbying, or political pressure. Advocacy groups often attempt to educate the general public as wellas public policy makers about the nature of problems, what legislation is needed to addressproblems, and the funding required providing services or conducting research.As An Academic DisciplineAs an academic discipline, public policy brings in elements of many social science fields andconcepts, including economics, sociology, political economy, program evaluation, policy analysis,and public management, all as applied to problems of governmental administration, management,and operations.At the same time, the study of public policy is distinct from political science or economics, in itsfocus on the application of theory to practice. While the majority of public policy degrees aremasters and doctoral degrees, several universities also offer undergraduate education in publicpolicy. Traditionally, the academic field of public policy focused on domestic policy. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 50. Introduction to Tourism EconomicsHowever, the wave of economic globalization, which ensued in the late 20th and early 21stcenturies, created a need for a subset of public policy that focuses on global governance, especiallyas it relates to issues that transcend national borders such as climate change, terrorism, nuclearproliferation, and economic development. Consequently, many traditional public policy schools hadto tweak their curricula to adjust to this new policy landscape.In contrast, some specialty schools that were conceived to be "international policy" schools fromthe start had less of an adjustment to make. These programs typically require mastery of a secondlanguage and take a cross-cultural approach to public policy to address national and cultural biases.The ProcessWhen new public policies are created, there are generally three key things involved in the process: • the problem, • the player, and • the policy.The problem is the issue that needs to be addressed, the player is the individual or group that isinfluential in forming a plan to address the problem in question, and the policy is the finalizedcourse of action decided upon by the government.Typically the general public will make the government aware of an issue through writing letters andemails, or making phone calls, to local government leaders; the issue is then brought forward duringgovernment meetings and the process for creating new public policies begins.The rational model for the public policy-making process can typically be divided into three steps:agenda-setting, option-formulation, and implementation. • Within the agenda-setting stage, the agencies and government officials meet to discuss the problem at hand. • In the second stage, option-formulation, alternative solutions are considered and final decisions are made regarding the best policy. • Consequently, the decided policy is implemented during the final stage; in most cases, once public policies are in place, they are widely open to interpretation by non-governmental players, including those in the private sector.Implied within this model is the fact that the needs of the society are a priority for the playersinvolved in the policy-making process; also, it is believed that the government will follow throughon all decisions made by the final policy. Unfortunately, those who frame the issue to be addressedby policy often exert an enormous amount of influence over the entire process through theirpersonalities, personal interests, political affiliations, and so on. The bias is extenuated by theplayers involved.The final outcome of the process, as well as its implementation, is therefore not as effective as thatwhich could result from a purely rational process. Overall, however, public policy continues to be avital tool in addressing social concerns.Competition as public policyCompetition law, known in the United States as antitrust law, is law that promotes or maintainsmarket competition by regulating anti-competitive conduct by companies. The business practices of ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 51. Introduction to Tourism Economicsmarket traders, guilds and governments have always been subject to scrutiny, and sometimes severesanctions.Since the 20th century, competition law has become global. The two largest and most influentialsystems of competition regulation are United States antitrust law and European Union competitionlaw. National and regional competition authorities across the world have formed internationalsupport and enforcement networks.Modern competition law has historically evolved on a country level to promote and maintaincompetition in markets principally within the territorial boundaries of nation-states. Nationalcompetition law usually does not cover activity beyond territorial borders unless it has significanteffects at nation-state level. Countries may allow for extraterritorial jurisdiction in competitioncases based on so-called effects doctrine.The protection of international competition is governed by international competition agreements.In 1945, during the negotiations preceding the adoption of the General Agreement on Tariffs andTrade (GATT) in 1947, limited international competition obligations were proposed within theCharter for an International Trade Organization. These obligations were not included in GATT,but in 1994, with the conclusion of the Uruguay Round of GATT Multilateral Negotiations, theWorld Trade Organization (WTO) was created. The Agreement Establishing the WTO included arange of limited provisions on various cross-border competition issues on a sector specific basisPrincipleCompetition law, or antitrust law, has three main elements: • Prohibiting agreements or practices that restrict free trading and competition between businesses. This includes in particular the repression of free trade caused by cartels. • Banning abusive behavior by a firm dominating a market, or anti-competitive practices that tend to lead to such a dominant position. Practices controlled in this way may include predatory pricing, tying, price gouging, refusal to deal, and many others. • Supervising the mergers and acquisitions of large corporations, including some joint ventures. Transactions that are considered to threaten the competitive process can be prohibited altogether, or approved subject to "remedies" such as an obligation to divest part of the merged business or to offer licenses or access to facilities to enable other businesses to continue competing.Substance and practice of competition law varies from jurisdiction to jurisdiction. Protecting theinterests of consumers (consumer welfare) and ensuring that entrepreneurs have an opportunity tocompete in the market economy are often treated as important objectives. Competition law isclosely connected with law on deregulation of access to markets, state aids and subsidies, theprivatization of state owned assets and the establishment of independent sector regulators, amongother market-oriented supply-side policies. In recent decades, competition law has been viewed as away to provide better public services.International ExpansionBy 2008 111 countries had enacted competition laws, which is more than 50 percent of countrieswith a population exceeding 80,000 people. 81 of the 111 countries had adopted their competitionlaws in the past 20 years, signaling the spread of competition law following the collapse of theSoviet Union and the expansion of the European Union. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 52. Introduction to Tourism EconomicsEnforcementThere is considerable controversy among WTO members, in green, whether competition law shouldform part of the agreements. At a national level competition law is enforced through competitionauthorities, as well as private enforcement. In the European Union, the Modernizations Regulation1/2003 means that the European Commission is no longer the only body capable of publicenforcement of European Community competition law. This was done in order to facilitate quickerresolution of competition-related inquiries.In 2005 the Commission issued a Green Paper on Damages actions for the breach of the ECantitrust rules, which suggested ways of making private damages claims against cartels easier.Antitrust administration and legislation can be seen as a balance between: • Guidelines which are clear and specific to the courts, regulators and business but leave little room for discretion that prevents the application of laws from resulting in unintended consequences. • Guidelines which are broad, hence allowing administrators to sway between improving economic outcomes versus succumbing to political policies to redistribute wealth.PracticeCollusion and cartelCollusion is an agreement between two or more persons, sometimes illegal and therefore secretive,to limit open competition by deceiving, misleading, or defrauding others of their legal rights, or toobtain an objective forbidden by law typically by defrauding or gaining an unfair advantage. It is anagreement among firms to divide the market, set prices, or limit production. It can involve "wagefixing, kickbacks, or misrepresenting the independence of the relationship between the colludingparties". In legal terms, all acts affected by collusion are considered void.A cartel is a formal (explicit) agreement among competing firms. It is a formal organization ofproducers and manufacturers that agree to fix prices, marketing, and production. Cartels usuallyoccur in an oligopolistic industry, where there is a small number of sellers and usually involvehomogeneous products.Cartel members may agree on such matters as price fixing, total industry output, market shares,allocation of customers, allocation of territories, bid rigging, establishment of common salesagencies, and the division of profits or combination of these. The aim of such collusion (also calledthe cartel agreement) is to increase individual members profits by reducing competition.Dominance and monopolyWhen firms hold large market shares, consumers risk paying higher prices and getting lower qualityproducts than compared to competitive markets. However, the existence of a very high market sharedoes not always mean consumers are paying excessive prices since the threat of new entrants to themarket can restrain a high-market-share firms price increases.Competition law does not make merely having a monopoly illegal, but rather abusing the power thata monopoly may confer, for instance through exclusionary practices. First it is necessary todetermine whether a firm is dominant, or whether it behaves “to an appreciable extentindependently of its competitors, customers and ultimately of its consumer”. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 53. Introduction to Tourism EconomicsUnder EU law, very large market shares raise a presumption that a firm is dominant, which may berebuttal. If a firm has a dominant position, then there is "a special responsibility not to allow itsconduct to impair competition on the common market".The economists depiction of deadweight loss to efficiency that monopolies cause:Mergers and acquisitionsA merger or acquisition involves, from a competition law perspective, the concentration ofeconomic power in the hands of fewer than before. This usually means that one firm buys out theshares of another. The reasons for oversight of economic concentrations by the state are the same asthe reasons to restrict firms who abuse a position of dominance, only that regulation of mergers andacquisitions attempts to deal with the problem before it arises, ex ante prevention of marketdominance.Competition law requires that firms proposing to merge gain authorization from the relevantgovernment authority. The theory behind mergers is that transaction costs can be reduced comparedto operating on an open market through bilateral contracts. Concentrations can increase economiesof scale and scope.However often firms take advantage of their increase in market power, their increased market shareand decreased number of competitors, which can adversely affect the deal that consumers get.Merger control is about predicting what the market might be like, not knowing and making ajudgment.Public sector regulationPublic sector industries, or industries which are by their nature providing a public service, areinvolved in competition law in many ways similar to private companies. Under EU law, Articles106 and 107 TFEU create exceptions for the assured achievement of public sector service provision.Many industries, such as railways, electricity, gas, water and media have their own independentsector regulators.These government agencies are charged with ensuring that private providers carry out certain publicservice duties in line of social welfare goals. For instance, an electricity company may not beallowed to disconnect someones supply merely because they have not paid their bills up to date,because that could leave a person in the dark and cold just because they are poor. Instead the ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 54. Introduction to Tourism Economicselectricity company would have to give the person a number of warnings and offer assistance untilgovernment welfare support kicks in.Intellectual property, innovation and competitionIntellectual property and competition have become increasingly intertwined. On the one hand, it isbelieved that promotion of innovation through enforcement of intellectual rights promotescompetitiveness, while on the other the contrary may be the consequence. The question rests onwhether it is legal to acquire monopoly through accumulation of intellectual property.In which case, the judgment needs to decide between giving preference to intellectual rights ortowards promoting competitiveness: • Should antitrust laws accord special treatment to intellectual property • Should intellectual rights be revoked or not granted when antitrust laws are violated.Concerns also arise over anti-competitive effects and consequences due to: • Intellectual properties that are collaboratively designed with consequence of violating antitrust laws (intentionally or otherwise) • The further effects on competition when such properties are accepted into industry standards • Cross-licensing of intellectual property. • Bundling of intellectual rights to long term business transactions or agreements to extend the market exclusiveness of intellectual rights beyond their statutory duration. • Trade secrets, if they remain a secret, having an eternal length of life.Tourism economic policyTourism, a large, complex and fragmented industry which is still very difficult to define andmeasure, is a key component of the service economy. Tourism, which has expanded dramaticallyover the past 30 years, looks set to continue growing as societies become more mobile andprosperous.Claims of tourism’s economic significance give the industry greater respect among the businesscommunity, public officials and the public in general. This often translates into decisions or publicpolicies that are favorable to tourism. Community support is important for tourism, as it is anactivity that affects the entire communityTourism businesses depend extensively on each other as well as on other businesses, governmentand residents of the local community. Tourism’s economic impacts are therefore an importantconsideration in state, regional and community planning and economic development. An economicimpact analysis will assess the contribution of tourism activity to a region’s economy.The basic questions as economic impact study usually addresses are: • How much do tourists spend in the area? • What portion of sales by local businesses is due to tourism? • How much income does tourism generate for households and businesses in the area? • How many jobs in the area does tourism support? • How much tax revenue is generated from tourism?Tourism has a variety of economic impacts. Tourists contribute to sales, profits, jobs, tax revenueand income in a particular area. The most direct effects occur within the primary tourism sectors –lodging/accommodation, dining, transportations, amusement and rental trade. Through secondaryeffects, tourism affects most sectors of the economy. An economic impact analysis of tourism ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 55. Introduction to Tourism Economicsactivity normally focuses on changes in sales, income, and employment in a region resulting fromtourism activity. UNIT 8: TOURIST-GENERATING AND RECEIVING COUNTRIES Chapter objectives • Identify the tourist-generating countries and flows of visitors measurements • Explore the different forms of tourism and differences between international and domestic visitors • Outline the tourist expenditures patterns and destination development as international tourism destinationTourist-generating countriesTourism is a huge industry - It is an important pillar of many economies that generates billions ofdollars annually. Without revenues from tourism even the worlds strongest and most prosperouscountries could shake. Despite the economic downturn, which has stopped many people fromtraveling, the worlds most popular destinations still receive enormous numbers of visitors, wholeave enormous amounts of money in the pockets of their hosts.In 2008 there were 922 million tourists traveling to foreign countries (reflecting 2% growth year onyear) where they spent US$ 944 billion, according to the World Tourist Organization. Of course,2009 is to bring a decline in tourism due to the recession - in the first four months of the year therewere 8% less people traveling around our globe in comparison to the same months of 2008.Still, by 2010 international arrivals are estimated to reach 1.6 billion.Top Ten Tourist-generating Countries YEAR-TO-DATE 2011 NUMBER OF % RANK COUNTRY OF RESIDENCE ARRIVALS CHANGE 1 Canada 19,728,866 5.5 2 Mexico 12,281,142 1.7 3 United Kingdom 3,549,147 -0.4 4 Japan 2,978,460 -4.3 5 Germany 1,703,169 6.1 6 France 1,399,197 12.9 7 Brazil 1,337,525 27.5 8 South Korea 1,049,405 3.4 9 Peoples Republic of China (EXCL HK) 1,011,910 36.2 10 Australia 939,623 15.5Measuring Flows of VisitorsThe usual environment: suggested criteria ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 56. Introduction to Tourism EconomicsBecause the measurement of flows of visitors, and of all associated variables, is highly sensitive tothe definition of the usual environment, it is recommended that countries establish observablecriteria to delineated statistically the usual environment in their national context. It is furtherrecommended that neighboring countries or countries belonging to common supra-nationalorganizations consult with each other in order to apply compatible criteria and ensure compilationof comparable statistics. Some countries leave it to the informant to decide whether a trip takenqualifies as a tourism trip.However, in order o ensure comparability between informants, within the country, and overtime,National Statistics Offices are encourage to establish boundaries and statistical criteria, based on theconcept of “usual environment”, of what qualifies as a tourism trip. There are often differences indensity of population, transportation, accessibility, cultural behaviors, vicinity to national oradministrative borders, etc., between countries or sometimes within the country.These differences hinder the development of a unique world-wide statistical determination of theusual environment of an individual. Nevertheless, the determination of the usual environmentshould be based on a combination of the following criteria: • Frequency of the trips • Distance from the usual place of residence • The crossing of administrative or national borders • Duration of stayForms of TourismIn relation to an economy of reference, it is recommended that the following basic forms of tourismbe distinguished: • Domestic tourism – which comprises the activities of resident visitors within the country of reference either as a domestic trip or part of an international trip • Inbound tourism – which comprises the activities of non-resident visitors within the country of reference either as an international trip or as part of domestic trip • Outbound tourism – which comprises the activities of resident visitors outside the country of reference, either as an international trip or as part of a domestic tripThe three basic forms of tourism set forth can be combined in various ways to derive other forms oftourism. In which case, the following definitions should be used: • Internal tourism – comprises domestic tourism and inbound tourism, that is, the activities of residents and non-residents visitors within the country of reference as part of a domestic or an international trip • National tourism – comprises domestic tourism and outbound tourism, that is, the activities of resident visitors within and outside the country of reference either as part of a domestic or an international trip • International tourism – comprises inbound tourism and outbound tourism, that is, the activities of resident visitors outside the country of reference either as part of a domestic or an international trip and the activities of non-resident visitors within the country of reference as part of a domestic or an international trip (from the perspective of their country of reference)International and Domestic VisitorsInternational visitors ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 57. Introduction to Tourism EconomicsFrom the perspective of the country of reference, international travelers/visitors are either inboundvisitors (non-residents travelers/visitors making trips to the country of reference) or outboundtravelers/visitors (residents travelers/visitors making trips to a country other than the country ofreference.An international traveler, that is, traveler to or within a country different from that of his/herresidence, qualifies as an international visitor if all of the following criteria are fulfilled: • The place of destination within the country visited is outside the traveler’s usual environment; in particular travelers to their vacation homes located in a country different from that of their residence are to be treated as visitors; • The stay, or intention of stay, in the country visited should last no more than twelve months, beyond which the place in the country visited would become part of his/her usual environment • The main purpose of the trip, is other than entering in employer-employee relationship with a resident entity in the country visitedWithin arriving, resident and non-resident travelers observed at the border, it is possible to definetwo categories; that is of visitors (returning outbound visitors in the case of residents, arrivinginbound visitors in the case of non-residents) and that of other travelers that are not visitors.Visitors are characterized by their main purpose of visits, whereas other travelers are beingcharacterized by the reason for which they have been excluded from visitors that corresponds, eitherto fact of being in an employer-employee relationship (border, seasonal, and other short-termworkers) or to the fact of being within the usual environment (all other situations).A special mention needs to be regarding individuals that are changing their country of residence:they should be excluded from visitors. In principle, this refers both to those proceeding legally andto those proceeding without legal permit although it has to be recognized that it is almost alwaysimpossible to identify the latter.Tourist expenditures patternsHow tourism spending flows into economy: TOURISTS PAY FOR: TRAVEL COMPANIES PAY FOR:Lodging Wages, salaries, tips and gratuitiesDining Commission and payroll taxesEntertainment Food and beverage stocksClothing Music and entertainmentGifts and souvenir Administrative expensesPhotography Professional services and insurance premiumMedicines and medical attention Advertising and publicityJewelry Utilities: gas, water, electricity, sewerage removalTobacco Purchases of goods soldHairdressing Materials and suppliesCosmetics Repairs and maintenanceInternal transports Transportation, licenses, and taxesTours and sightseeing Capital asset repaymentMiscellaneous ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 58. Introduction to Tourism EconomicsDevelopmentThe act of developing or disclosing that which is unknown; a gradual unfolding process by whichanything is developed, as a plan or method, or an image upon a photographic plate; gradualadvancement or growth through a series of progressive changes; also, the result of developing, or adeveloped state. The United Nations Development Programme uses a more detailed definition -according to them development is to lead long and healthy lives, to be knowledgeable, to haveaccess to the resources needed for a decent standard of living and to be able to participate in the lifeof the community.Achieving human development is linked to a third perspective of development which views it asfreeing people from obstacles that affect their ability to develop their own lives and communities.Development, therefore, is empowerment: it is about local people taking control of their own lives,expressing their own demands and finding their own solutions to their problems.Developed CountryA developed country can be defined through economic growth and security. Most commonly thecriteria for evaluating the degree of development is to look at gross domestic product (GDP), theper capita income, level of industrialization, amount of widespread infrastructure and generalstandard of living. Which criteria, and which countries are classified as being developed, are acontentious issue.According to the International Monetary Fund, advanced economies comprise 65.8% of globalnominal GDP and 52.1% of global GDP (PPP) in 2010. Countries not fitting such definitions areclassified as developing countries or undeveloped countries. Terms similar to developed countryinclude "advanced country", "industrialized country", "more developed country" (MDC), "moreeconomically developed country" (MEDC), "Global North country", "first world country", and"post-industrial country".The term industrialized country may be somewhat ambiguous, as industrialization is an ongoingprocess that is hard to define. The term MEDC is one used by modern geographers to specificallydescribe the status of the countries referred to: more economically developed.The first industrialized country was the United Kingdom, followed by Belgium, Germany, UnitedStates, France and other Western European countries. According to some economists such asJeffrey Sachs, however, the current divide between the developed and developing world is largely aphenomenon of the 20th century. Economic criteria have tended to dominate discussions.One such criterion is income per capita; countries with high gross domestic product (GDP) percapita would thus be described as developed countries. Another economic criterion isindustrialization; countries in which the tertiary and quaternary sectors of industry dominate wouldthus be described as developed.More recently another measure, the Human Development Index (HDI), which combines aneconomic measure, national income, with other measures, indices for life expectancy and educationhas become prominent. This criterion would define developed countries as those with a very high(HDI) rating. However, many anomalies exist when determining "developed" status by whichevermeasure is used. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 59. Introduction to Tourism EconomicsDeveloping CountryA developing country, also known as a less-developed country, is a nation with a low level ofmaterial well-being. Since no single definition of the term developing country is recognizedinternationally, the levels of development may vary widely within so-called developing countries.Some developing countries have high average standards of living.Countries with more advanced economies than other developing nations, but which have not yetfully demonstrated the signs of a developed country, are categorized under the term newlyindustrialized countries.Kofi Annan, former Secretary General of the United Nations, defined a developed country asfollows."A developed country is one that allows all its citizens to enjoy a free and healthy life in a safeenvironment."The World Bank classifies countries into four income groups. These are set each year on July 1.Economies were divided according to 2008 GNI per capita using the following ranges of income: • Low income countries had GNI per capita of US$1,005 or less. • Lower middle income countries had GNI per capita between US$1,006 and US$3,975. • Upper middle income countries had GNI per capita between US$3,976 and US$12,275. • High income countries had GNI above US$12,276.The World Bank classifies all low- and middle-income countries as developing but notes, "The useof the term is convenient; it is not intended to imply that all economies in the group areexperiencing similar development or that other economies have reached a preferred or final stage ofdevelopment. Classification by income does not necessarily reflect development status."The development of a country is measured with statistical indexes such as income per capita (perperson) (gross domestic product), life expectancy, the rate of literacy, et cetera. The UN hasdeveloped the Human Development Index (HDI), a compound indicator of the above statistics, togauge the level of human development for countries where data is available.Developing countries are in general countries which have not achieved a significant degree ofindustrialization relative to their populations, and which have, in most cases a medium to lowstandard of living. There is a strong correlation between low income and high population growth.The terms utilized when discussing developing countries refer to the intent and to the constructs ofthose who utilize these terms.To moderate the euphemistic aspect of the word developing, international organizations have startedto use the term Less economically developed country (LEDCs) for the poorest nations which can inno sense be regarded as developing. That is, LEDCs are the poorest subset of LDCs. This maymoderate against a belief that the standard of living across the entire developing world is the same.The concept of the developing nation is found, under one term or another, in numerous theoreticalsystems having diverse orientations — for example, theories of decolonization, liberation theology,Marxism, anti-imperialism, and political economy.Criticism of the term developing country ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 60. Introduction to Tourism EconomicsThere is criticism of the use of the term ‘developing country’. The term implies inferiority of adeveloping country or undeveloped country compared to a developed country, which manycountries dislike. It assumes a desire to ‘develop’ along the traditional Western model of economicdevelopment which a few countries, such as Cuba and Bhutan, have chosen not to follow.The term developing implies mobility and does not acknowledge that development may be indecline or static in some countries, particularly in southern African states worst affected byHIV/AIDS. In such cases, the term developing country may be considered a euphemism. The termimplies homogeneity between such countries, which vary widely.Developing Countries As International Tourism DestinationsWhile the majority of international tourism occurs within a relatively small number of developedcountries, developing countries have increased their market share considerably since the early1970s . However, international tourist arrivals are spread very unequally among developingcountries.The main reasons for this are the varying degrees of safety, accessibility and availability, standardof tourism infrastructure, tour operator links and connections, and historical and political links tothe main generating areas.While tourism to developing countries is growing more rapidly than global tourism, there are largedifferences between regions and countries2 (Table 1).Table 2 provides a more detailed breakdown of arrivals by country. A number of key featurescharacterise these destinations: • All are middle-income countries (either upper or lower middle income) • The majority are located in, or adjacent to, the main generating areas of Europe, North America, Japan. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 61. Introduction to Tourism Economics • A large number are featured by European, American and Asian tour-operators as mainstream package holidays (e.g. Mexico, Turkey, Thailand, Malaysia, Tunisia, Morocco, Puerto Rico, Dominican Republic).However, high volumes of arrivals also take place in countries that are not package holidaydestinations (e.g. Central and Eastern Europe3). Here a high percentage of arrivals are independenttravellers, business travellers and those visiting friends or relations (VFR).This situation is not static, however. Table 3 highlights the developing countries that have grownrapidly in terms of international arrivals in the last decade – many of which are low-incomecountries.The highest growth rates are shown by South East Asia, although in many cases these can beexplained by the very low starting point. Cambodia, Lao PDR and Myanmar, in particular, receivedfew tourists in 1990 and although numbers are still not high in 2000 the rate of growth appearsspectacular.This table also highlights strong tourism growth in African countries. These figures are rather moresignificant than those for South-East Asia given a higher starting point – particularly for SouthAfrica. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 62. Introduction to Tourism EconomicsUnderdeveloped CountryUnderdevelopment is a term often used to refer to economic underdevelopment, symptoms ofwhich include lack of access to job opportunities, health care, drinkable water, food, education andhousing.At the 1948 Conference of FAO the term was already current. Underdevelopment takes place whenresources are not used to their full socio-economic potential, with the result that local or regionaldevelopment is slower in most cases than it should be. Furthermore, it results from the complexinterplay of internal and external factors that allow less developed countries only a lop-sideddevelopment progression.Underdeveloped nations are characterized by a wide disparity between their rich and poorpopulations, and an unhealthy balance of trade. The economic and social development of manydeveloping countries has not been even. They have an unequal trade balance which results fromtheir dependence upon primary products (usually only a handful) for their export receipts.These commodities are often: • in limited demand in the industrialized countries (for example: tea, coffee, sugar, cocoa, bananas); • vulnerable to replacement by synthetic substitutes (jute, cotton, etc.); or • are experiencing shrinking demand with the evolution of new technologies that require smaller quantities of raw materials (as is the case with many metals).Prices cannot be raised as this simply hastens the use of replacement synthetics or alloys, nor canproduction be expanded as this rapidly depresses prices. Consequently, the primary commoditiesupon which most of the developing countries depend are subject to considerable short-term pricefluctuation, rendering the foreign exchange receipts of the developing nations unstable andvulnerable. Development thus remains elusive.The world consists of a group of rich nations and a large number of poor nations. It is usually heldthat economic development takes place in a series of capitalist stages and that today’sunderdeveloped countries are still in a stage of history through which the now developed countries ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 63. Introduction to Tourism Economicspassed long ago. The countries that are now fully developed have never been underdeveloped in thefirst place, though they might have been undeveloped. UNIT 9: THE IMPACTS OF TOURISM INDUSTRY ON A LOCALITY Chapter objectives • Explore and discuss the impacts of tourism industry on a locality: local job creation, trade and wealth, stabilization of the economy (fiscal policy and monetary policy), local income and businessesLocal job creationGlobalisation has become a key force of change in all OECD countries. It is making our economiesmore open, bringing new opportunities, new markets and new wealth - But it also demands morerapid adjustment to change. The accomplishment of strategic restructuring is often required, so thatworkers are not displaced or excluded from the labour market and so that no localities are left to lagbehind or decline.Local development and job creation initiatives first emerged in the early 1980s as a direct responseto a new phenomenon of high, persistent and concentrated unemployment, which national policiesappeared unable to defeat on their own. Since then local initiatives have continued to spread andevolve - They represent an important mechanism for responding to a number of broad forcesaffecting our economies and societies today.These forces include the globalisation of markets, new technologies, the transfer of policy powersfrom central to local governments and partners, the rise of civil society and the renewed interest inequitable and sustainable development. If implemented properly, local development initiatives canbolster national efforts to create employment, tackle poverty and improve governance.While the content of local development efforts varies, from the promotion of entrepreneurship tothe battle against exclusion in distressed areas, they share a characteristic working method. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 64. Introduction to Tourism EconomicsThey mobilise local people and agencies in the design and implementation of initiatives that aremore tailored to local needs. Their intiatives may be funded by individual regions or cities, butequally they may be part of national government programmes that are executed in partnership withlocal agencies.Although local development and job creation policies are not as old as many other areas ofgovernment intervention, there is nevertheless a large stock of knowledge that can already be drawnon from across the regions of the OECD. And there is undeniably a strong demand on the groundfor an exchange of knowledge on best practices and on the lessons from these experiences, both tohelp with new policies and to increase the scale and effectiveness of existing ones.What about self-employment?Governments have sought to encourage self-employment for a variety of reasons, including toreduce welfare dependency and to increase entrepreneurial activity more generally. Self-employment programmes help community development and discourage informal economicactivities. They are not a panacea for unemployment, as typically only a small fraction of theunemployed – usually less than 5% – will participate in such schemes.However, these programmes can provide a cost-effective alternative to income support, even whenone considers their inherent deadweight costs (where self-employment would have happenedanyway without the programme). Furthermore, the programmes clearly add to the long-termemployability of those who participate, even if their businesses fail.Trade and wealthRedistribution of wealthRedistribution of wealth is the transfer of income, wealth or property from some individuals toothers caused by a social mechanism such as taxation, monetary policies, welfare, nationalization,charity, and divorce or tort law.Most often it refers to progressive redistribution, from the rich to the poor, although it may alsorefer to regressive redistribution, from the poor to the rich. The desirability and effects ofredistribution are actively debated on ethical and economic grounds. Some countries, such as theUnited States, have a particular history of it. All demographic groups—even those not usuallyassociated with wealth redistribution such as Republicans and the wealthy—desired a more equaldistribution of wealth than the status quo."Types of redistributionToday, income redistribution occurs in some form in most democratic countries. Progressiveincome redistribution diminishes the amount of income one individual or corporation receives,while at the same time benefitting others. In a progressive income tax system, a high income earnerwill pay a higher tax rate than a low income earner. A steeper progressive income tax results inmore equal distribution of income and wealth across the board.Property redistribution is a term applied to various policies involving taxation or nationalization ofproperty, or of regulations ordering owners to make their property available to others. Publicprograms and policy measures involving redistribution of property include eminent domain, landreform and inheritance tax. Two popular types of governmental redistribution of wealth areSubsidies and Vouchers (such as food stamps). ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 65. Introduction to Tourism EconomicsWhile the persons receiving redistributions from such programs may prefer to be directly givencash, these programs may be more palatable to society, as it gives society some measure of controlover how the funds are spent. The objectives of income redistribution are varied and almost alwaysinclude the funding of public services. Supporters of redistributive policies argue that less stratifiedeconomies are more socially just.One basis for redistribution is the concept of distributive justice and wealth. One premise ofredistribution is that money should be distributed to benefit the poorer members of society, and thatthe rich have an obligation to assist the poor, thus creating a more financially egalitarian society.This argument rests on the social welfare function, or the concept that society’s utility is made up insome way through the utilities of its individuals.Stabilization of the economyEconomic stability refers to an absence of excessive fluctuations in the macro-economy. Aneconomy with fairly constant output growth and low and stable inflation would be consideredeconomically stable.An economy with frequent large recessions, a pronounced business cycle, very high or variableinflation, or frequent financial crises would be considered economically unstable - The UnitedStates or Greece is an example of an unstable economy. Perhaps most importantly, the federalgovernment guides the overall pace of economic activity, attempting to maintain steady growth,high levels of employment, and price stability.By adjusting spending and tax rates (fiscal policy) or managing the money supply and controllingthe use of credit (monetary policy), it can slow down or speed up the economys rate of growth - inthe process, affecting the level of prices and employment.Fiscal Policy and Economic StabilizationIn economics and political science, fiscal policy is the use of government expenditure and revenuecollection (taxation) to influence the economy. Fiscal policy can be contrasted with the other maintype of macroeconomic policy, monetary policy, which attempts to stabilize the economy bycontrolling interest rates and spending.The two main instruments of fiscal policy are government expenditure and taxation. Changes in thelevel and composition of taxation and government spending can impact the following variables inthe economy: • Aggregate demand and the level of economic activity; • The pattern of resource allocation; • The distribution of income.Fiscal policy refers to the use of the government budget to influence the first of these: economicactivity.Stances of fiscal policyThe three possible stances of fiscal policy are neutral, expansionary and contractionary. Thesimplest definitions of these stances are as follows: ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 66. Introduction to Tourism Economics • A neutral stance of fiscal policy implies a balanced economy. Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity. • An expansionary stance of fiscal policy involves government spending exceeding tax revenue. • A contractionary fiscal policy occurs when government spending is lower than tax revenue.However, these definitions can be misleading because, even with no changes in spending or taxlaws at all, cyclical fluctuations of the economy cause cyclical fluctuations of tax revenues and ofsome types of government spending, altering the deficit situation; these are not considered to bepolicy changes.Monetary PolicyMonetary policy is the process by which the monetary authority of a country controls the supply ofmoney, often targeting a rate of interest for the purpose of promoting economic growth andstability.The official goals usually include relatively stable prices and low unemployment. Monetary theoryprovides insight into how to craft optimal monetary policy - It is referred to as either beingexpansionary or contractionary, where an expansionary policy increases the total supply of moneyin the economy more rapidly than usual, and contractionary policy expands the money supply moreslowly than usual or even shrinks it. • Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. • Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values.Monetary policy differs from fiscal policy, which refers to taxation, government spending, andassociated borrowing.Types of monetary policyIn practice, to implement any type of monetary policy the main tool used is modifying the amountof base money in circulation. The monetary authority does this by buying or selling financial assets(usually government obligations).These open market operations change either the amount of money or its liquidity (if less liquidforms of money are bought or sold). The multiplier effect of fractional reserve banking amplifiesthe effects of these actions. Constant market transactions by the monetary authority modify thesupply of currency and this impacts other market variables such as short term interest rates and theexchange rate.The distinction between the various types of monetary policy lies primarily with the set ofinstruments and target variables that are used by the monetary authority to achieve their goals. Monetary Policy: Target Market Variable: Long Term Objective:Inflation Targeting Interest rate on overnight debt A given rate of change in the CPIPrice Level Targeting Interest rate on overnight debt A specific CPI number ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 67. Introduction to Tourism EconomicsMonetary Aggregates The growth in money supply A given rate of change in the CPIFixed Exchange Rate The spot price of the currency The spot price of the currencyGold Standard The spot price of gold Low inflation as measured by the gold priceMixed Policy Usually interest rates Usually unemployment + CPI changeThe different types of policy are also called monetary regimes, in parallel to exchange rateregimes.A fixed exchange rate is also an exchange rate regime; The Gold standard results in a relativelyfixed regime towards the currency of other countries on the gold standard and a floating regimetowards those that are not.Targeting inflation, the price level or other monetary aggregates implies floating exchange rateunless the management of the relevant foreign currencies is tracking exactly the same variables(such as a harmonized consumer price index).Local income and businessesBusinesses and public organizations are increasingly interested in the economic impacts of tourismat national, state, and local levels. One regularly hears claims that tourism supports X jobs in anarea or that a festival or special event generated Y million dollars in sales or income in acommunity.“Multiplier effects” are often cited to capture secondary effects of tourism spending and show thewide range of sectors in a community that may benefit from tourism. Tourism’s economic benefitsare touted by the industry for a variety of reasons. Claims of tourism’s economic significance givethe industry greater respect among the business community, public officials, and the public ingeneral. This often translates into decisions or public policies that are favorable to tourism.Community support is important for tourism, as it is an activity that affects the entire community.Tourism businesses depend extensively on each other as well as on other businesses, governmentand residents of the local community. Economic benefits and costs of tourism reach virtuallyeveryone in the region in one way or another. Economic impact analyses provide tangible estimatesof these economic interdependencies and a better understanding of the role and importance oftourism in a region’s economy.Tourism activity also involves economic costs, including the direct costs incurred by tourismbusinesses, government costs for infrastructure to better serve tourists, as well as congestion andrelated costs borne by individuals in the community. Community decisions over tourism ofteninvolve debates between industry proponents touting tourism’s economic impacts (benefits) anddetractors emphasizing tourism’s costs.Sound decisions rest on a balanced and objective assessment of both benefits and costs and anunderstanding of who benefits from tourism and who pays for it. Tourism’s economic impacts aretherefore an important consideration in state, regional and community planning and economicdevelopment. Economic impacts are also important factors in marketing and management decisions. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 68. Introduction to Tourism EconomicsCommunities therefore need to understand the relative importance of tourism to their region,including tourism’s contribution to economic activity in the area.There are several other categories of economic impacts that are not typically covered in economicimpact assessments, at least not directly.For example: • Changes in prices - tourism can sometimes inflate the cost of housing and retail prices in the area, frequently on a seasonal basis. • Changes in the quality and quantity of goods and services – tourism may lead to a wider array of goods and services available in an area (of either higher or lower quality than without tourism). • Changes in property and other taxes – taxes to cover the cost of local services may be higher or lower in the presence of tourism activity. • Economic dimensions of “social” and “environmental” impacts - There are also economic consequences of most social and environmental impacts that are not usually addressed in an economic impact analysis.Direct, Indirect and Induced EffectsA standard economic impact analysis traces flows of money from tourism spending, first tobusinesses and government agencies where tourists spend their money and then to : • other businesses - supplying goods and services to tourist businesses, • households – earning income by working in tourism or supporting industries, and • government - through various taxes and charges on tourists, businesses and householdsFormally, regional economists distinguish direct, indirect, and induced economic effects. Indirectand induced effects are sometimes collectively called secondary effects. Any of these impacts maybe measured as gross output or sales, income, employment, or value added. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 69. Introduction to Tourism Economics UNIT 10: ECONOMIC ASPECTS OF TOURISM ATTRACTIONS Chapter objectives • Identify and analyze the economic aspects of tourism attractions: public ownership, private ownership, and privatization • Differentiate between voluntary and commercial sectors • Outline the pricing policy that can be apply in tourism economics • Discuss about visitor management and visitor management technologyPublic ownershipState ownership, also called public ownership, government ownership or state property, areproperty interests that are vested in the state, rather than an individual or communities. Stateownership may refer to state ownership or control of any asset, industry, or enterprise at any level,national, regional or local (municipal); or to common (full-community) non-state ownership. Theprocess of bringing an asset into public ownership is called nationalization or municipalization.In primarily market-based economies, government-owned assets are often managed and run likejoint-stock corporations with the government owning a controlling stake of the shares - This modelis often referred to as a state-owned enterprise.A government-owned corporation (sometimes state-owned enterprise, SOE) may resemble a not-for-profit corporation as it may not be required to generate a profit. Governments may also useprofitable entities they own to support the general budget. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 70. Introduction to Tourism EconomicsSOEs may or may not be expected to operate in a broadly commercial manner and may or may nothave monopolies in their areas of activity. The creation of a government-owned corporation(corporatization) from other forms of government ownership may be a precursor to privatization.User rightsWhen ownership of a resource is vested in the state, or any branch of the state such as a localauthority, individual use "rights" are based on the states management policies, though these rightsare not property rights as they are not transmissible.For example, if a family is allocated an apartment that is state owned, it will have been granted atenancy of the apartment, which may be lifelong or inheritable, but the management and controlrights are held by various government departmentsPublic propertyThere is a distinction to be made between state ownership and public property. The former mayrefer to assets operated by a specific organization of the state used exclusively by their operators orthat organization, such as a research laboratory, while public property refers to assets and resourcesthat are available to the entire public for use, such as a public parkPrivate ownershipIs the tangible and intangible things owned by individuals or firms over which their owners haveexclusive and absolute legal rights, and can only be transferred with the owner’s consent. Privateproperty is the right of persons and firms to obtain, own, control, employ, dispose of, and bequeathland, capital, and other forms of property.Private property is distinguishable from public property, which refers to assets owned by a state,community or government rather than by individuals or a business entity. Private property emergedas the dominant form of property in the means of production and land during the IndustrialRevolution in the early 18th century, displacing feudal property, guilds, cottage industry and craftproduction, which were based on ownership of the tools for production by individual laborers orguilds of craftspeople.Private property can take the form of real estate, homes, factories, automobiles, capital, patents andcopyrights. Marxists and socialists distinguish between "private property" and "personal property",defining the former as the means of production in reference to private enterprise based on socializedproduction and wage labor; and the latter as consumer goods or goods produced by an individual.The concept of property is not equivalent to that of possession; property refers to a socially-constructed circumstance conferred upon individuals or collective entities by the state, whereaspossession is a physical phenomenon.Personal property versus the means of productionIn political and economic theory, the distinction between private property in personal goods andprivate property in the means of production is important. In general, personal property is part ofyour person and includes property from which you have the right to exclude others. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 71. Introduction to Tourism EconomicsFrom the socialist perspective, private property refers to capital or means of production that isowned by a business or few individuals and operated for their profit. Personal property refers totangible items and possessions individuals own, such as consumer goods.From the Marxist perspective, private property is a social relationship, not a relationship betweenperson and thing - In capitalism there is little distinction between personal and private property.PrivatizationPrivatization is the incidence or process of transferring ownership of a business, enterprise,agency, public service or property from the public sector (the state or government) to the privatesector (businesses that operate for a private profit) or to private non-profit organizations. The termis also used in a quite different sense, to mean government out-sourcing of services to private firms,e.g. functions like revenue collection, law enforcement, and prison management.The term "privatization" also has been used to describe two unrelated transactions. • The first is a buyout, by the majority owner, of all shares of a public corporation or holding companys stock, privatizing a publicly traded stock, and often described as private equity. • The second is a demutualization of a mutual organization or cooperative to form a joint stock company.Privatisation generally is believed to improve the output, profits and efficiency of the organisationsthat are privatised.There are four main methods of privatization: • Share issue privatization (SIP) - selling shares on the stock market • Asset sale privatization - selling an entire organization (or part of it) to a strategic investor, usually by auction or by using the Treuhand model • Voucher privatization - distributing shares of ownership to all citizens, usually for free or at a very low price. • Privatization from below - Start-up of new private businesses in formerly socialist countries.Choice of sale method is influenced by the capital market, political and firm-specific factors. SIPsare more likely to be used when capital markets are less developed and there is lower incomeinequality. Share issues can broaden and deepen domestic capital markets, boosting liquidity and(potentially) economic growth, but if the capital markets are insufficiently developed it may bedifficult to find enough buyers, and transaction costs (e.g. underpricing required) may be higher.For this reason, many governments elect for listings in the more developed and liquid markets, forexample Euronext, and the London, New York and Hong Kong stock exchanges. As a result ofhigher political and currency risk deterring foreign investors, asset sales occur more commonly indeveloping countries.Voucher privatization has mainly occurred in the transition economies of Central and EasternEurope, such as Russia, Poland, the Czech Republic, and Slovakia. Additionally, Privatization frombelow is/has been an important type of economic growth in transition economies.Voluntary sectors (non-profit sectors)The voluntary sector or community sector (also non-profit sector) is the sphere of social activityundertaken by organizations that are for non-profit and non-governmental. This sector is also called ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 72. Introduction to Tourism Economicsthe third sector, in reference to the public sector and the private sector. Civic sector is anotherterm for the sector, emphasizing the sectors relationship to civil society.Country-specific definitions: • France - Discourse on the "third sector" began in the 1970s in France as a result of the crisis in the welfare state. • Japan - In Japan since the 1980s, the third sector (第三セクター daisan sekutā) refers to joint corporations invested both by the public sector and private sector. • United Kingdom - The Cabinet Office of the British government until 2010 had an Office of the Third Sector that defined the "third sector" as "the place between State and (the) private sector” • India - In India this sector is commonly called the "joint sector", and includes the industries run in partnership by the state and Private Sector - here the private sector is responsible to the state when it comes to handling. • Israel - In Israel this sector is commonly called the "Third Sector", ( in Hebrew: ‫המגזר‬ ‫ )השלישי‬and generally refers to non-profit organizations (NPOs) and non-governmental organizations (NGOs) with the line between the two quite fine. These organizations generally fill a gap in the existing government or municipal service provision.Significance to society and the economyThe presence of a large non-profit sector is sometimes seen as an indicator of a healthy economy inlocal and national financial measurements. With a growing number of non-profit organizationsfocused on social services, the environment, education and other unmet needs throughout society,the nonprofit sector is increasingly central to the health and well-being of society.According to a recent study by Johns Hopkins University, the Netherlands has the largest thirdsector of 20 countries across Europe. • In Ireland the non-profit sector accounts for 8.8% of GDP. • In Sweden, the nonprofit sector is attributed with fostering a nationwide social change towards progressive economic, social and cultural policies, while in Italy the third sector is increasingly viewed as a primary employment source for the entire country.Problems with definitionsThere are considerable problems with terminology, however. Although the voluntary, communityand not-for-personal profit sectors are frequently taken to comprise the "Third Sector" each of thesesectors or sub-sectors have quite different characteristics.The community sector is assumed to comprise volunteers (unpaid) whilst the voluntary sector areconsidered (confusingly) to employ staff working for a social or community purpose. In additionhowever, the not-for-personal-profit sector is also considered to include social firms (such ascooperatives and mutuals) and more recently governmental institutions (such as HousingAssociations) that have been spun off from government, although still operating fundamentally aspublic service delivery organisations.These other types of institutions may be considered to be quasi-private or quasi-public sector ratherthan stemming from direct community benefit motivations.Concerns ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 73. Introduction to Tourism EconomicsThere have been long-ranging arguments regarding the financial accountability of the nonprofitsector throughout Western society. There is also ongoing concern whether the nonprofit sector willunequally draw retiring workers from the private sector as the currently large Baby Boomers age.Development of the third sector, it is argued, is linked to restructuring of the welfare state andfurther globalization of that process through neo-liberal strategies of the Washington consensus.Commercial sectorsIn economics, the private sector is that part of the economy, sometimes referred to as the citizensector, which is run by private individuals or groups, usually as a means of enterprise for profit, andis not controlled by the state. By contrast, enterprises that are part of the state are part of the publicsector; private, non-profit organizations are regarded as part of the voluntary sector . • Firms that are not engaged in farming, manufacturing and transportation. • Consists of business establishments that are not engaged in transportation or in manufacturing or other types of industrial activities (agriculture, mining, or construction). • Commercial establishments include hotels, motels, restaurants, wholesale businesses, retail stores, laundries, and others service enterprise; religious and non-profit organizations; health, social and educational institutions; and Federal, State and local governmentsA variety of legal structures exist for private sector business organizations, depending on thejurisdiction in which they have their legal domicile. Individuals can conduct business withoutnecessarily being part of any organization.The main types of businesses in the private sector are: • Sole proprietor or sole trader • Partnership, either limited or unlimited liability • Private Limited Company or LTD-limited liability, with private shares • Public Limited Company – shares are open to the public. Two examples are: o Franchise – business owner pays a corporation to use their name, receives spec for the business o Workers cooperative – all workers have equal pay, and make joint business decisionsIn countries where the private sector is regulated or even forbidden, some types of private businesscontinue to operate within them.Pricing policyCan be defined as the policy by which a company determines the wholesale and retail prices for itsproducts or services. Merely raising prices is not always the answer, especially in a poor economy.Too many businesses have been lost because they priced themselves out of the marketplace. Onestrategy does not fit all, so adopting a pricing strategy is a learning curve when studying the needsand behaviors of customers and clients.The factors that businesses must consider in determining pricing policy can be summarised in fourcategories:1. Costs In order to make a profit, a business should ensure that its products are priced above their total average cost. In the short-term, it may be acceptable to price below total cost if this price ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 74. Introduction to Tourism Economics exceeds the marginal cost of production – so that the sale still produces a positive contribution to fixed costs.2. Competitors If the business is a monopolist, then it can set any price. At the other extreme, if a firm operates under conditions of perfect competition, it has no choice and must accept the market price. The reality is usually somewhere in between. In such cases the chosen price needs to be very carefully considered relative to those of close competitors.3. Customers Consideration of customer expectations about price must be addressed. Ideally, a business should attempt to quantify its demand curve to estimate what volume of sales will be achieved at given prices4. Business Objectives Possible pricing objectives include: a. To maximise profits b. To achieve a target return on investment c. To achieve a target sales figure d. To achieve a target market share e. To match the competition, rather than lead the marketPricing Factors to Consider • Determine primary and secondary market segments . This helps you better understand the offerings value to consumers. Segments are important for positioning and merchandising the offering to ensure maximized sales at the established price point. • Assess the products availability and near substitutes . Underpricing hurts your product as much as overpricing does. If the price is too low, potential customers will think it cant be that good. This is particularly true for high-end, prestige brands. • Survey the market for competitive and similar products . Consider whether new products, new uses for existing products, or new technologies can compete with or, worse, leapfrog your offering. Examine all possible ways consumers can acquire your product. • Examine market pricing and economics . A paid, ad-free site should generate more revenue than a free ad-supported one, for example. In considering this option, remember to incorporate the cost of forgone revenue, especially as advertisers find paying customers more attractive. • Calculate the internal cost structure and understand how pricing interacts with the offering . By undervaluing its offering, the client missed an opportunity to increase registrations and, hence, advertising revenues with a product that effectively had no development costs. • Test different price points if possible . This is important if you enter a new or untapped market, or enhance an offering with consumer-oriented benefits. Interestingly, the middle price yielded greater revenue over time, as it generated more customers to whom other related products could be marketed. • Monitor the market and your competition continually to reassess pricing . Market dynamics and new products can influence and change consumer needs. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 75. Introduction to Tourism EconomicsVisitor managementVisitor management refers to tracking the usage of a public building or site. By gatheringincreasing amounts of information, a visitor management system can record the usage of thefacilities by specific visitors and provide documentation of visitor’s whereabouts.Because a visitor management system provides a record of building use, these systems arefrequently used to complement building security systems and access control systems. Aselectronic visitor management systems become more common and more powerful, these systemsare taking over many of the functions of building security and access control.Many different vendors provide visitor management software and systems.ControversyThe amount of data recorded by a modern visitor management system is formidable, and issues ofinformation privacy have created controversy regarding the use of these visitor managementsystems. However, terrorist activities, school violence and child protection issues have acted asrallying points for support of comprehensive visitor management systems in sensitive locations.Database security, both at the national level and at the level of the end-user of an electronic securitysystem is a critical concern for privacy advocates. They argue that as the level of informationaccessed, gathered and retained increases, additional security measures to protect the informationitself should be put in place.Also at issue is the level of security given to the access cards themselves. Some privacy advocatespoint to experiments done by researchers that crack the security of RFID cards, sometimes used aspart of a visitor management system - If the security of these types of cards can be compromised,this would allow identity thieves to pilfer personal information.Proponents of an information rich visitor management system point to increased school security asone substantial benefit. As more parents demand action from the schools that will protect childrenfrom sexual predators, some school districts are turning to modern visitor management systems thatnot only track a visitor’s stay, but also check the visitor’s information against national and localcriminal databases.According to the supporters of enhanced visitor management systems, the same database searchcapabilities could be used to protect sensitive areas potential threats such as terrorists of criminalactivity.Visitor Management TechnologiesPen and paper visitor management systemA pen and paper visitor management system records basic information about visitors to a publicbuilding or site in a log book. Typical information found in an entry includes the visitor’s name,reason for the visit, date and check in and check out times.A pen and paper visitor management system’s main positive feature is low up-front cost. Trainingto use the system is minimal, and the equipment required to implement this visitor managementsystem is cheap and readily available. Some systems use a simple book format where visitorssimply enter their details on marked rows. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 76. Introduction to Tourism EconomicsComputer visitor management systemsBasic computer or electronic visitor management systems use a computer network to monitor andrecord visitor information. As computer processing power, digital video and information gatheringtechnology have improved, electronic visitor management systems have added photo ID capability,database searching, automatic door access and other functions.An electronic visitor management system improves upon most of the negative points of a pen andpaper system. Visitor ID can be checked against national and local databases, as well as in-housedatabases for potential security problems.Many visitor management systems feature searchable visitor information databases; Photo ID cardscan be custom printed for one-time only or continuing use; Swipe cards speed the security screeningprocess.Visitor management softwareSeveral desktop-based visitor management software applications are currently available. Theseapplications typically consist of three fundamental components: a) visitor registration, b) visitor badge printing, and c) reporting functionality.Some of the applications are capable of automatically capturing visitor information directly from avisitors driver license, passport or other government issued identification document.Visitor management software as a serviceAnother alternative to visitor management software is an on-line, web based visitor managementsystem offered as a service.The advantage of using a software as a service vs. a desktop-based application is immediatedeployment and full access through the internet from any computer. This solution is perfect formulti tenant buildings with tenants on individual networks, as well as Enterprise corporations withglobal locations. Because theres no on-site software to install, the system is highly scalable andrapidly deployed. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 77. Introduction to Tourism Economics UNIT 11: POSITIVE ECONOMIC IMPACTS OF TOURISM Chapter objectives • Explore the different types of tourism multiplier effects and their characteristics • Differentiate between direct and indirect economic effects • Discuss the employment factors in tourism economics • Outline the tourists receipts in terms of the foreign exchange earningsTourism multiplier effectsTourism multiplier effect can be defined as the expansion of a countrys money supply that resultsfrom banks being able to lend. The size of the multiplier effect depends on the percentageof deposits that banks are required to hold as reserves.In other words, it is money used to create more money and is calculated by dividing total bankdeposits by the reserve requirement. Tourism not only creates jobs in the tertiary sector, it alsoencourages growth in the primary and secondary sectors of industry.This is known as the multiplier effect which in its simplest form is how many times money spent bya tourist circulates through a countrys economy. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 78. Introduction to Tourism EconomicsThe generator’s of economic impact: Multiplier Visitors Effect Their ExpendituresThe tourist multiplier effect: ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 79. Introduction to Tourism EconomicsMoney spent in a hotel helps to create jobs directly in the hotel, but it also creates jobs indirectlyelsewhere in the economy. The hotel, for example, has to buy food from local farmers, who mayspend some of this money on fertiliser or clothes. The demand for local products increases astourists often buy souvenirs, which increases secondary employment.The multiplier effect continues until the money eventually leaks from the economy throughimports - the purchase of goods from other countries.Direct and indirect economic effectDirect effectDirect effect is the easiest to understand because they result from the visitor spending money intourist enterprises and providing a living for the owners and managers and creating job foremployees. The direct economic effects are those that occur at front-line tourism-relatedestablishments. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 80. Introduction to Tourism EconomicsTherefore, when tourists spend their money in hotels, restaurants, transportation and communicationservices and retail outlets, for example, this will create direct income, output, government revenueand employment effects, as well as requiring some direct imports of goods and services. The directeffects are generally less than the volume of tourism receipts because of the expenditures thatimmediately leak out of the economy under studyIndirect effectThe indirect economic effects are those subsequent effects as a result of the direct economic effects.For instance, when the tourist spends money in a restaurant, the restaurant will spend some of themoney it receives on food and beverage supplies, some of it on transport, heating and lighting,accountancy and other business services, and so on.This visitor expenditure give rise to an income, in turn, leads to a chain of expenditure-income-expenditure, and so on until leakages bring the chain to a halt. All of these subsequent activities areclassified as indirect effects, as are those economic effects created as the suppliers to these otherindustries find the demands for their services increasing.It is often the case that these subsequent demands for goods and services within the local economyresult in further demands upon the front-line tourism-related establishments, such as when anintermediate supplier increases its demands for hotel and food and beverage services.In this case there will be further subsequent rounds of spending and this will continue, with theamount of money circulating getting smaller at each successive round of activity as money leaks outof the economy in the form of savings and imports, until the amount of money circulating in theeconomy as a result of the initial tourism spending becomes negligible.Induced effectThe induced effects occur because at the direct and indirect levels of economic impact, income willaccrue to residents of the local economy. Some of this money will be saved and leak out of thesystem, but some of it will be spent on goods and services within the local economy and this willgenerate further rounds of economic activity. This additional activity and its subsequent effectsreflect the induced effects of the initial change in tourist spending.This ratio reflects direct, indirect and induced impactsA distinction may be drawn between partial and complete multiplier effects. The former refers tothe multiplier effect associated with a single productive sector (industry) of the economy, so that if ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 81. Introduction to Tourism Economicsthe demand for that specific industrys output changes then the total impact, taking account of thesecondary effects generated by changes in its output needs, can be estimated.However, the latter (complete) multipliers refer to the economic impacts of changes in the level anddistribution of tourism spending across all sectors of the local economy. They are, in effect, aweighted average of the partial multipliers where the weights are determined by the distribution ofspending. It should also be noted that changes in tourism spending also create predictable changesin the volume of imported goods and services.These can be estimated in the same way as any of the other economic indicators noted earlier.The multiplier concept is an invaluable tool for use by those involved in the policy formulation andplanning of tourism development. Multiplier values will provide information relating to humanresource requirements, government revenue, imports and income level changes that are essential iftourism is going to be developed and maintained in an optimal fashion.Sizes of MultipliersThe size of the multipliers depends on four basic factors:(1) The overall size and economic diversity of the regions economy. Regions with large, diversifiedeconomies producing many higher order goods and services will have high multipliers ashouseholds and business can find most of the goods and services they need locally.(2) The geographic extent of the region and its role within the broader region. Regions of a largegeographic extent will have higher multipliers, all other things equal, than small areas astransportation costs will tend to inhibit imports. Regions that serve as central places for thesurrounding area will also have higher multipliers than more isolated areas.(3) The nature of the economic sectors under consideration. Multipliers vary across different sectorsof the economy based on the mix of labor and other inputs and the propensity of each sector to buygoods and services from within the region. Tourism-related businesses tend to be labor intensive.They therefore tend to have larger induced rather than indirect effects.(4) The year. A multiplier represents the characteristics of the economy at a single point in time.Multipliers for a given region may change over time in response to changes in the economicstructure as well as price changes. When using regional economic models or multipliers, spendingchanges are usually price adjusted to the model year. Employment multipliers and ratios are morelikely to change over time than sales or income multipliers, as they are more sensitive to generalprice inflation.Types of MultipliersChange may be measured in several ways. Some community leaders may be primarily concernedwith employment or income while others may want to estimate the total value added to the localeconomy. Since multipliers are simple ratios of total to initial change, numerous economicmultipliers are easy to calculate.Four multipliers are commonly used to assess impacts of an initial increase in production resultingfrom an increase in sales, usually called final demand in multiplier analysisThe four (4) are: • Output ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 82. Introduction to Tourism Economics • Employment • Income • Value added multipliersOutput multipliersThe output multiplier estimates the total change in local sales, including the initial $1 of salesoutside the area, resulting from a $1 increase in sales outside of the study area (final demand).Multiplying the increase in sales of the exporting industry by the output multiplier provides anestimate of the total increase in sales for the study area, including the $1 export sales. The outputmultiplier is used to assess the interdependence of sectors in the local economy.Employment multipliersCommunities often wish to know the number of jobs that will be created as a result of a neweconomic activity. The employment multiplier measures the total change in employment resultingfrom an initial change in employment of an exporting industry. The additional employment in thenew activity multiplied by the employment multiplier for the industry provides an estimate of thetotal new jobs created in the area of study (i.e., county, district, state or region).Example: Consider the example of Lumberland hiring 300 new employees if the employmentmultiplier for sawmills is 2.1. In this scenario, an additional 330 jobs (630 - 300) would be createdas a result of the 300 new jobs in Lumberland.Income multipliersThe income multiplier measures the total increase in income in the local economy resulting from a$1 increase in income received by workers in the exporting industry. Multiplying the initial changein income by the income multiplier for the industry provides an estimate of the increase in incomefor all individuals in the study area resulting from the initial growth of one industry.Consider the Lumberland sawmill example:If it is known that Lumberland will pay out new wages and salaries of $350,000 and the incomemultiplier is 2.0, then the resulting increase in income in all sectors is $700,000 ($350,000 x 2.0).For every $100 in wages Lumberland pays, an additional $100 in wages will be added to the totalpayroll of the study area.Value added multipliersThe value added multiplier provides an estimate of the additional value added to the product as aresult of this economic activity. Value added includes employee compensation, indirect businesstaxes, proprietary and other property income.Consider again the situation of Lumberland which is to produce $1 million worth of lumberproducts to be exported to Japan. The total value added that is generated from the production of thelumber products can be calculated by multiplying the value added to the lumber products times themultiplier. If the value added to the $1 million of lumber products is $360,000 and the value addedmultiplier is 2.2, then $432,000 ($360,000 x 1.2) of “value” is added to products in other industriesaffected by the increase in lumber sales.Employment ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 83. Introduction to Tourism EconomicsEmployment is a contract between two parties, one being the employer and the other being theemployee.An employee may be defined as:“A person in the service of another under any contract of hire, express or implied, oral or written,where the employer has the power or right to control and direct the employee in the materialdetails of how the work is to be performed.” - Blacks Law Dictionary page 471 (5th ed. 1979).EmployeeAn employee contributes labor and expertise to an endeavor of an employer and is usually hired toperform specific duties which are packaged into a job. In most modern economies, the term"employee" refers to a specific defined relationship between an individual and a corporation, whichdiffers from those of customer or client.Other types of employment are arrangements such as indenturing which is now highly unusual indeveloped nations but still happens elsewhere.Types of EmploymentFull-time Employees:Full-time employees work on a regular weekly basis and are expected to work a full week. Workersconsidered full-time employees usually work 40 hours per week. Full-time employees most oftenreceive employee benefits that may include vacation time, retirement fund contributions, healthbenefits, sick leave, and other benefits provided by the employer. An employee is obliged to workonly for one organization. Underlining principle is, he/she can not have any other avocation.Example: all regular employeesPart-time Employees:Employees who work considerably less than 40 hours per week are considered part-time workers.While some employee benefits may be provided, benefits are usually quite limited or reduced inproportion to the amount of time worked. Part-time employees usually work on a regular ongoingbasis - They are paid on a pro rata basis.They are entitled to the following: • annual, personal, sick leave and care’s leave; • to be paid for public holidays falling on days on which they would otherwise be working; and • Long service leave and bereavement leave.Example: Students workingTemporary Employees:Temporary workers, often called "temp" employees, are workers employed by a temporary servicebusiness. Employees usually work for a short period of time at different companies to which theyare assigned. The temporary service pays workers wages and withholds taxes, Social Security,unemployment insurance, and workers‘ compensation from paychecks like other employers do - ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 84. Introduction to Tourism EconomicsSome temporary businesses, but very few, offer benefit programs - health insurance, retirementplans, paid vacation, and sick leave.The types of workers most commonly hired by temporary services include office and clericalsupport staff, technical workers, and professionals - doctors, lawyers, and corporate executives.Temporary work arrangements often attract workers who desire work schedule flexibility, anopportunity to check out potential employers, and a means of acquiring work experience andcontacts for getting a foot in the door at a desired company.Casual:Casual employees are employed on an irregular basis as needed. They can work as many hours asagreed (between the employer and the employee). They: • have no expectation of ongoing employment; • are free to refuse offers of work; • are paid a loading (a minimum of 20 per cent, but some awards provide for a higher loading), but no personal or sick leave or annual leave entitlement; • are entitled to unpaid bereavement leave; and • Are entitled to long service leave (conditions apply).Fixed term or contract:Fixed term or contract employees are hired for a fixed period of time, for example, for a specificproject, or to replace an employee on sick leave or parental leave. You should provide the employeewith an agreement in writing that sets out the length of the employment contract. Fixed termemployees are entitled to the same annual, personal and other leave entitlements as full-timeemployees, but on a proportional basis for the period of their employment.Leased Employees:Leased employees are employed by service firms that supply workers to client companies on atemporary basis. Leased employees may be assigned to one job for perhaps a year or longer.Leased workers are hired and paid by the lease service firm, not the client companies where thework is performed.Job Share Employees:In a job share arrangement, two or more employees share one full-time job. For example, twoemployees might agree to work 20 hours each per week. Benefits provided by the employer areprorated by share. Many employers are now offering job share options to help retain employees andincrease worker satisfaction.Apprenticeships and traineeships:Apprentices are generally training to be trades people, while trainees are generally learning theskills of a non-trade occupation. Both involve: • a registered training agreement; • practical work; • learning skills on and off the job; and • rates of pay covered by an award or agreementBoth apprenticeships and traineeships lead to a nationally recognized qualification. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 85. Introduction to Tourism EconomicsProbationary period:You can use a probationary period to make sure a new employee is suitable for the job. To complywith the law when using a probationary period, or dismissing a probationary employeePiecework and commission only payment:Some employees, rather than being paid a wage or salary, are paid by: • piece work – the paying of a set amount for completing a specific task • commission – the paying of a percentage for each sale made • Retainer plus commission - the paying of a fixed amount plus commission.Tourist’s receiptsThe basic source of information regarding receipts gained by a country from tourists’ arrival andexpenditures is seen in its balance of payments accounts. This information is contained in the travelaccount part of the balance of payments statement which shows the overall position of inflows andoutflows and the final outcome arising from financial transactions of a country with the rest of theworld.Export of goods and services are comparable to exports from foreign tourism (or receipts therefrom) on account of foreign tourists visiting the host country and money spent by them during theirstay, and imports of goods and services can be compared to the imports from international tourism(or expenditure in other countries by the residents of a country going abroad)Foreign Exchange EarningsDefinition: Proceeds from the export of goods and services of a country, and the returns from itsforeign investments, denominated in convertible currencies. Foreign exchange – currency-literallyforeign money – used in settlement of international trade between countriesThe foreign exchange market (forex, FX, or currency market) is a global, worldwide-decentralized financial market for trading currencies. Financial centers around the world function asanchors of trading between a wide range of different types of buyers and sellers around the clock,with the exception of weekends. The foreign exchange market determines the relative values ofdifferent currencies. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 86. Introduction to Tourism Economics UNIT 12: NEGATIVE ECONOMIC IMPACTS OF TOURISM Chapter objectives • Analyze the negative economic impacts of tourism: dependence on tourism, interdependence, leakages, displacements, infrastructure cost, increases in prices and loss of local businessesNegative economic impacts of tourismThere are many hidden costs to tourism, which can have unfavourable economic effects on the hostcommunity. Often rich countries are better able to profit from tourism than poor ones. Whereas theleast developed countries have the most urgent need for income, employment and general rise of thestandard of living by means of tourism, they are least able to realize these benefits. Among thereasons for this are large-scale transfer of tourism revenues out of the host country and exclusionof local businesses and products.Dependence on tourismDiversification in an economy is a sign of health. If a country, or region within a country, becomesdependent for its economic survival on one industry and that industry fails then the socialconsequences can be devastating. Overdependence on one or two industries is also oftenaccompanied by underdevelopment within other sectors of the economy such as education, health,and the manufacturing and agricultural industries.The tourism industry is extremely vulnerable to economic, social, and political changes in either thegenerating or host countries. Countries with a high percentage are more at risk to any decline intourism and travel. Others are less vulnerable to the ill effects of a decline in tourism, because theireconomies are more diversified - Japan is a good example.The table below shows international tourism receipts as a per cent of export earnings for selectedcountries around the world. International Tourism Receipts: % of Export Earnings (1998)Argentina 17.2Australia 10.2Canada 03.8China 06.1Czech Republic 11.0Egypt 19.0France 07.7Germany 02.6Greece 25.4Israel 08.3 ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 87. Introduction to Tourism EconomicsWhether it is a town or a country, is in an economically vulnerable situation or position when it isdependent on the health and vigor of just one industry. Tourism revenues may fluctuates, for morethan just seasonal reasons, beyond a destination or an attraction’s ability to predict and manage sucha situationMany countries, especially developing countries with little ability to explore other resources, haveembraced tourism as a way to boost the economy. In The Gambia, for instance, 30% of theworkforce depends directly or indirectly on tourism. In small island developing states, percentagescan range from 83% in the Maldives to 21% in the Seychelles and 34% in Jamaica.Over-reliance on tourism carries risks to tourism-dependent economies: Economic recession, theimpacts of natural disasters such as tropical storms and changing tourism patterns can all have adevastating effect.InterdependenceIs a dynamic of being mutually and physically responsible to, and sharing a common set ofprinciples with others - Two states that cooperate with each other are said to be interdependent. Itcan also be defined as the interconnectedness and the reliance on one another socially,economically, environmentally and politically.Some interdependence between tourism, environment protection, and national security has alsobeen studied. Especially, possible negative impacts of tourism/tourists reflecting directly onnational living space and consequently on national security as whole.The positive effects of tourism and tourists safety for national economy are doubtless; however,pollution, loss of green areas, endangering flora and fauna, and other changes in naturalenvironment including green crime must not be overlooked. Therefore, some managing andgovernance guidelines in tourism in correlation with environmental safety and national security aresuggested.Leakages ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 88. Introduction to Tourism EconomicsThe direct income for an area is the amount of tourist expenditure that remains locally after taxes,profits, and wages are paid outside the area and after imports are purchased; these subtractedamounts are called leakage.In most all-inclusive package tours, about 80% of travellers expenditures go to the airlines, hotelsand other international companies, and not to local businesses or workers. In addition, significantamounts of income actually retained at destination level can leave again through leakage.A study of tourism leakage in Thailand estimated that 70% of all money spent by tourists ended upleaving Thailand. Estimates for other Third World countries range from 80% in the Caribbean to40% in India.There are two main ways that leakage occurs:Import leakageThis commonly occurs when tourists demand standards of equipment, food, and other products thatthe host country cannot supply. Especially in LEDC’s, food and drinks must often be imported,since local products are not up to the hotels (i.e. tourists) standards or the country simply doesnthave a supplying industry.Much of the income from tourism expenditures leaves the country again to pay for these imports.The average import-related leakage for most developing countries today is between 40% and 50%of gross tourism earnings for small economies and between 10% and 20% for most advanced anddiversified economies.Export leakageTNCs have a substantial share in the export leakage. Often, especially in poor developingdestinations, they are the only ones that possess the necessary capital to invest in the construction oftourism infrastructure and facilities. As a consequence of this, an export leakage arises whenoverseas investors who finance the resorts and hotels take their profits back to their country oforigin.DisplacementsDisplacement can happen when a tourism development occurs at the expense of another industry, orwhen a new tourism project takes customers away from an existing attraction or facility – ratherthan adding sufficient numbers of new visitors to the local tourist destination to justify theinvestment. This type of situation, where tourism development simply substitutes one form ofexpenditure and economic activity for another, is known as the displacement effect.Similar situation with the enclave tourism where by the business aim in maximising economicbenefits and limiting social and environment impacts by concentrating investments and visitors to asmall geographical area or enclave. Local businesses often see their chances to earn income fromtourists severely reduced by the creation of "all-inclusive" vacation packages.When tourists remain for their entire stay at the same cruise ship or resort, which provideseverything they need and where they will make all their expenditures, not much opportunity is leftfor local people to profit from tourism. All-inclusive hotels generate the largest amount of revenuebut their impact on the economy is smaller per dollar of revenue than other accommodation types. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  • 89. Introduction to Tourism EconomicsThe cruise ship industry provides another example of economic enclave tourism. - Non-rivercruises carried some 8.7 million international passengers in 1999. On many ships, especially in theCaribbean, guests are encouraged to spend most of their time and money on board, andopportunities to spend in some ports are closely managed and restricted.Infrastructure costTourism development can cost the local government and local taxpayers a great deal of money.Developers may want the government to improve the airport, roads and other infrastructure, andpossibly to provide tax breaks and other financial advantages, which are costly activities for thegovernment. Public resources spent on subsidized infrastructure or tax breaks may reducegovernment investment in other critical areas such as education and health.Increase in pricesIncreasing demand for basic services and goods from tourists will often cause price hikes thatnegatively affect local residents whose income does not increase proportionately. Tourismdevelopment and the related rise in real estate demand may dramatically increase building costs andland values. This makes it more difficult for local people to meet their basic daily needs.Loss of local businessesForeigners will tend to explore/exploit a developing tourism industry of a country. An increasedforeign direct investment will take place in a country. Consequencely, it will affect thelocal/domestic businesses related to tourism industry ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.