1. The Economics of
Tourism
Chapter 4
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2. • Several developing countries have used tourism development as
an alternative to help economic growth.
• Reasons:
1. There is a continuous demand for international travel in
developed countries.
2. As income in developed countries increases, the demand for
tourism also increases at a faster rate.
3. Developing countries need foreign exchange to aid their
economic development.
• The organization for Economic Cooperation and Development
(OECD) has concluded that tourism provides a major opportunity
for growth for countries that are at the intermediate stage of
economic development and require more foreign exchange
earnings. 2

3. Tourism vs. International Trade
1. The tourists get the product from the host country. No
need to use freight to deliver goods.
2. International tourism is price elastic and demand elastic.
3. Foreign exchange is manipulated (usually prices are
made lower and affordable for tourists) to attract more
tourists.
4. Tourism is multifaceted directly affecting several sectors
in the economy.
5. Tourism bring many non-monetary benefits and costs;
social, cultural, and environmental benefits and costs.
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4. Economic Impact
• Tourism brings in revenue to host destination.
• Tourist expenditures increases economic activity in host
destination
• Increases foreign exchange earnings to finance
economic growth
• Source of income for local residents
4

5. Direct and Secondary Effects
• Direct means income directly received from tourists by
businesses or service providers.
• Indirect or secondary effects means that the money
paid by tourists to businesses are in turn used to pay for
supplies, wages of workers and other items used in
producing the products or direct services bought by
tourists.
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6. Tourism Multiplier
• Multiplier is used to describe the total effect (direct and
secondary) of an external source of income introduced
into the economy.
• Tourism multiplier or multiplier effect is used to
estimate the direct and secondary effects of tourist
expenditures on the economy of a country.
• Leakages is the value of goods and services that must
be imported to service the needs of tourism.
6

7. -- Local tour
operator
-- Handicrafts
-- Hotelier
-- Services
Tourist --
-- Increased
personal
income
-- Purchase of
supplies
-- Wages
-- Spend
-- Save
-- Raw
material
-- wages
-- Rent
-- Food
-- Savings
-- Seed
-- Fertilizer
-- Imports
(leakages)
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8. Cost-Benefit Ratio
• Benefits / Cost = Cost-Benefit Ratio
1. Determine where the tourist dollar is spent
2. Determine what percentage of each expenditure leaves the
local economy
3. Derive a “multiplier effect,” a ratio applied to income that
reflects multiple spending within an economy
4. Apply the multiplier effect to the tourist expenditures to arrive
at the total benefits of tourist expenditures in dollars
5. Derive a cost-benefit ratio expressed as dollars
received/dollar spent
6. Apply the cost-benefit ratios to tourist expenditures to provide
estimates of income and costs of tourist business to a
community, for both private and public sector.
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9. Undesirable Economic Aspects of Tourism
• Higher Prices
• Economic Instability
– Additional demand and/or increased imports
– tourist purchases may result in higher prices in a
destination area.
– Subject to changes in prices and income
– Fluctuations in the money market
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10. How to Maximize the Economic Effect of
Tourism
• Growth Theories
1. Balanced Theory – suggests that tourism should be view as
an important part of a broad-based economy.
2. Unbalanced Theory – see tourism as the spark to economic
growth.
• Economic Strategies – maximize the amount of revenue and
jobs developed within the region. E.g. import substitution,
incentives and foreign exchange.
• Import Substitution – imposes quotas or tariffs on the
importation of goods.
• Incentives – it can encourage the influx of capital.
• Foreign Exchange – Revenues earned from foreign currency
spent by foreign tourists. 10