The document discusses the multiplier effect and leakages in the context of tourism. It defines the multiplier effect as the additional income and economic activity generated from the initial spending by tourists. As tourist money is spent and respent in an economy, it has ripple effects that multiply the initial spending. However, some of the money leaks out through things like imports, savings, taxes and remittances abroad, reducing the size of the multiplier effect. The document outlines different types of multipliers and expenditures, as well as models that can be used to analyze multiplier effects. It also discusses how leakages vary between developed and developing economies.

1. Topic- Multiplier Effect and Leakage
Presented by – Rajesh Ranjan
Roll No.- BHMCT/10022/16
BIRLA INSTITUTE OF
TECHNOLOGY
MESRA RANCHI

2. Multipliers or Ripple Effect
 Multipliers are a means of estimating how much extra
income is produced in an economy as a result of initial
spending or injection of cash.
 Every time money changes hand, it provides new
income and continuous series of conversions of money
spent by tourists from what economists term
"Multiplier Effect”.
 The more often a conversion occurs, the greater its
beneficial effect on the economy of the recipient
country.

3. Positive and Negative Multiplier

4. Types of expenditure
 Direct: In the case of tourism, this expenditure is made
by the tourist, government or similar agencies involved
in tourism, providing goods and services, tourism
generated exports or for tourism related investment in
an area.
 Indirect: Covers successive rounds of inter business
transactions resulting from direct expenditure.
 Induced: This is the increased consumer spending
resulting from the additional personal income
generated by direct expenditure.
 (Indirect + Induced = Secondary Expenditure)

5.  The money generated by tourist spending multiplies as
it passes through various sections of the economy. It
can be explained as follows :-
 From an initial impulse such as investment and
expenditure, there occurs one or more primary effects
such as income and expenditure.
 These primary effects in the course of a 2nd period,
produce secondary effects of the same type as the
first.The process is repeated several times in the course
of time.

6.  The multiplier makes it possible to calculate the sum
of various primary, secondary and tertiary effects of
the same type, which is then applied to the primary
effect in order to arrive at the total effect.
 For example, the money paid by the tourist in paying
his hotel bill will be used by the management to
provide for the costs which it had incurred in meeting
the demands of the visitors such as food, drink,
furnishing, laundry, electricity, entertainment etc.
 The recipients in turn use the money to meet their
financial commitments.

7.  In other words, the tourist expenditure not only
supports the tourist directly but helps indirectly to
support many other businesses.
 In this way, money may be said to be used several
times and to spread into various sectors of the
economy.

8. Advantages of multiplier effect
 Tourism not only creates jobs in the tertiary sector, it
also encourages growth in the primary and secondary
sectors of industry .
 The demand for local products increases as tourists
often but souvenirs, which increases secondary
employment.

9. Disadvantages of multiplier effect
 The Multiplier takes into account only the effects of
induced consumption on income ;it neglects the
repercussions of induced consumption on induced
investment.
 It fails to see the typical relationship between the
demand for capital goods and consumption goods, and
that the demand for capital goods is a derived demand.

10. Leakages
 The transfer of money however, is not absolute as there are
leakages. Any leakage of this kind will reduce the stream of
expenditure, which in consequence will limit and reduce
the multiplier effect.
 Leakages will be less in countries with advanced
economies, and countries less in need of foreign imports,
hence they are said to have more advanced economies.
 The developing countries should strictly control imported
items to get maximum benefits.
 The benefits otherwise accruing from tourism would be
reduced or even cancelled by leakages.

11. Other Leakages Include
 Remittance of income outside the host area, for
example foreign workers.
 Indirect and direct taxation, where the tax proceeds
are not re-spent in the host area.
 Savings out of the income received by the workers in
the host area.

12. Types Of Multipliers – Sales And Output
 Sales (Transaction) Multiplier –this measures the extra
business turnover created (direct and secondary) by an
extra unit of tourist expenditure.
 Output Multiplier –this is similar to the Sales
Multiplier but it also takes into account inventory
changes, such as the increase in stock levels by hotels,
restaurants and shops because of increased trading
activity.
 It should be noted that few researchers specify whether
or not inventory changes have been taken into account.

13. Types of Multipliers - Income
 Income Multiplier- this measures the income generated
by an extra unit of tourist expenditure. Confusion
arises over the definition of income. Many researchers
define income as disposable income accruing to
households within the area, which is available for them
to spend.
 Ratio multipliers indicate the internal linkages which
exist between various sectors of the economy, but do
not relate income generated to extra sales. Hence, on
their own, ratio multipliers are valueless as a planning
tool.

14. Types of multipliers-Employment
 Employment Multiplier – This can be expressed in one
of two ways: as a ration of the combination of direct
and secondary employment generated per additional
unit of tourist expenditure to direct employment
generated, or as the employment created by tourism
per unit of tourist expenditure.

15. Multiplier Models
Base Model :- This is very simplistic and rarely
used in practical research. It assumes that one can
divide the economy under research into export
activities and local (non-export) activities, and that
a stable relationship exists between the export and
local sectors, with these sectors linked by linear
relationships. It further assumes that unemployed
resources are available within the economy, and
that the scale of the export activities is the
determinant of the level of income and
employment within the area.

16. Multiplier Model CONT.
 Keynesian Model –this is based on identifying streams
of income and employment which are generated in
“rounds”, which diminish in geometric progression
because of leakages at each round.
 Input-Output Model – the input-output concept
analyses the economy into its sectors and expresses a
relationship these sectors in matrix form, based on the
results of research into the effects of tourist
expenditure.

17. Impact on Tourism Sector

19. Multiplier Effect and Leakage in Tourism