Notes eco

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 activities

The Development of an Economic Society

It 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, economic
development 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 others

Gross Domestic Products (GDP)

Gross domestic product (GDP) refers to the market value of all final goods and services produced
within a country in a given period. GDP per capita is often considered an indicator of a country's
standard 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 on
ownership - 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 final
goods 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 produced

Determining GDP

GDP can be determined in three ways, all of which should, in principle, give the same result. They
are the product (or output) approach, the income approach, and the expenditure approach. The most
direct of the three is the product approach, which sums the outputs of every class of enterprise to
arrive at the total.

The expenditure approach works on the principle that all of the product must be bought by
somebody, therefore the value of the total product must be equal to people's total expenditures in
buying things. The income approach works on the principle that the incomes of the productive

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factors ("producers," colloquially) must be equal to the value of their product, and determines GDP
by finding the sum of all producers' incomes
Example: 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 that
production can be put. Production can be used for immediate consumption, for investment in new
fixed assets or inventories, or for replacing depreciated fixed assets. "Domestic" means that GDP
measures production that takes place within the country's borders. In the expenditure-method
equation given above, the exports-minus-imports term is necessary in order to null out expenditures
on things not produced in the country (imports) and add in things produced but not sold in the
country (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.



Subtracting each sector's 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



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 expenditure

Components of U.S. GDP
GDP (Y) is a sum of Consumption (C), Investment (I), Government Spending (G) and Net
Exports (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 Investment

FDI is defined as a company from one country making a physical investment into building a factory
in another country – thus, it is a measure of foreign ownership of productive assets, such as
factories, mines and land.

Foreign direct investment (FDI) refers to the net inflows of investment to acquire a lasting
management interest (10 percent or more of voting stock) in an enterprise operating in an economy
other than that of the investor. It is the sum of equity capital,other long-term capital, and short-term
capital 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 direct
investment, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct
investment", which is the cumulative number for a given period.

Direct investment excludes investment through purchase of shares. FDI is one example of
international factor movements. FDIs require a business relationship between a parent company and
its 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 of
the 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



• participating in an equity joint venture with another investor or enterprise

Foreign 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 Payments

Balance of payments (BOP) accounts are an accounting record of all monetary transactions
between a country and the rest of the world. These transactions include payments for the country's
exports and imports of goods, services, financial capital, and financial transfers.

The BoP accounts summarize international transactions for a specific period, usually a year, and are
prepared in a single currency, typically the domestic currency for the country concerned. Sources of
funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive
or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as
negative or deficit items. When all components of the BOP accounts are included they must sum to
zero with no overall surplus or deficit.

For example, if a country is importing more than it exports, its trade balance will be in deficit, but
the shortfall will have to be counter-balanced in other ways – such as by funds earned from its
foreign investments, by running down central bank reserves or by receiving loans from other
countries. While the overall BOP accounts will always balance when all types of payments are
included, imbalances are possible on individual elements of the BOP, such as the current account,
the capital account excluding the central bank's reserve account, or the sum of the two.

Imbalances in the latter sum can result in surplus countries accumulating wealth, while deficit
nations become increasingly indebted. The term "balance of payments" often refers to this sum: a
country's balance of payments is said to be in surplus (equivalently, the balance of payments is
positive) by a certain amount if sources of funds (such as export goods sold and bonds sold) exceed
uses of funds (such as paying for imported goods and paying for foreign bonds purchased) by that
amount.

Recession and Inflations

Recession



In 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 measured
by gross domestic product (GDP), employment, investment spending, capacity utilization,
household incomes, business profits, and inflation all fall, while bankruptcies and the
unemployment rate rise.
Recessions generally occur when there is a widespread drop in spending, often following an adverse
supply shock or the bursting of an economic bubble. Governments usually respond to recessions by
adopting expansionary macroeconomic policies, such as increasing money supply, increasing
government spending and decreasing taxation. A recession has many attributes that can occur
simultaneously and includes declines in component measures of economic activity (GDP) such as
consumption, 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, and
government policies.

Economist Richard C. Koo wrote that under ideal conditions, a country's economy should have the
household sector as net savers and the corporate sector as net borrowers, with the government
budget 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. Policy
responses 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 economic
depression, although some argue that their causes and cures can be different.

Inflation

In economics, inflation is a rise in the general level of prices of goods and services in an economy
over a period of time. When the general price level rises, each unit of currency buys fewer goods
and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a
loss 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 a
general price index (normally the Consumer Price Index) over time.
Inflation's 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 other
monetary items only when they are not inflation-adjusted daily in terms of a Daily Consumer Price
Index 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 the
monthly published Consumer Price Index.

Uncertainty over future inflation may discourage investment and savings, and high inflation may
lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in
the future.

Inflation-adjusting the entire money supply (excluding bank notes and coins which generally make
up about seven per cent of the money supply in an advanced economy) would result in zero cost of
inflation (not zero inflation) in the entire economy (excluding in bank notes and coins) under
complete co-ordination.

Positive effects include ensuring central banks can adjust nominal interest rates (intended to
mitigate recessions), and encouraging investment in non-monetary capital projects.



Today, most economists favor a low, steady rate of inflation.

Low (as opposed to zero or negative) inflation reduces the severity of economic recessions by
enabling the labor market to adjust more quickly in a downturn, and reduces the risk that a liquidity
trap 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 the
setting of interest rates, through open market operations, and through the setting of banking reserve
requirements.

Standards of Living

Standard of living is generally measured by standards such as real (i.e. inflation adjusted) income
per person and poverty rate. A more realistic measure is the number of people who have access to
free subsistence land. Other measures such as access and quality of health care, income growth
inequality and educational standards are also used. Examples are access to certain goods (such as
number 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 to
a certain socioeconomic class in a certain geographic area. The standard of living includes factors
such as income, quality and availability of employment, class disparity, poverty rate, quality and
affordability 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 and
services, infrastructure, national economic growth, economic and political stability, political and
religious freedom, environmental quality, climate and safety.

The standard of living is closely related to quality of life. The idea of a 'standard' may be contrasted
with the quality of life, which takes into account not only the material standard of living, but also
other 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 measuring
well-being must be employed to make such judgements, and these are very often political, thus
controversial.

Even between two nations or societies that have similar material standards of living, quality of life
factors 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 material
standards of living, as opposed to, for instance, a Pareto index (a measure of the breadth of income
or 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 lower
class 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 towards
the 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 average
per capita income would receive a higher score for having lower income inequality than Country B
with a higher income inequality, even if the bottom of Country B's population distribution had a
higher per capita income than Country A.



Real examples of this include former East Germany compared to former West Germany or North
Korea 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 majority
of their neighboring counterpart. This can be avoided by using the measure of income at various
percentiles of the population rather than a highly relative and controversial overall income
inequality measure.

Import and Export

Import

The term import is derived from the conceptual meaning as to bring in the goods and services into
the port of a country. The buyer of such goods and services is referred to an "importer" who is
based 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 another
country in a legitimate fashion, typically for use in trade. It is a good that is brought in from another
country for sale. Import goods or services are provided to domestic consumers by foreign
producers.

"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 and
excludes 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 services

Companies import goods and services to supply to the domestic market at a cheaper price and better
quality than competing goods manufactured in the domestic market. Companies import products
that 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



This term export is derived from the conceptual meaning as to ship the goods and services out of
the port of a country. The seller of such goods and services is referred to as an "exporter" who is
based 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 to
other markets. Any good or commodity, transported from one country to another country in a
legitimate fashion, typically for use in trade. Export goods or services are provided to foreign
consumers by domestic producers
In national accounts "exports" consist of transactions in goods and services (sales, barter, gifts or
grants) 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.



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 economics

Historical trends

Historical Trend Analysis (HTA) is a geomorphologic tool which utilizes the analysis of data
relating to a particular physical process or morphologic feature from different time periods, in order
to identify directional trends, and if quantifiable, rates of changes in that process or feature. An
overview of tourism’s historical development is required in order to fully appreciate today’s modern
tourism 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 empires
grew in Africa, Asia and the Middle East, the infrastructure necessary for travel such as land routes
and water ways was created and vehicles and other means for travel were developed. Most
historians of tourism have tended to focus on Europe, from the Greeks and Romans, to the railway
and Thomas Cook in the UK.

Thomas Cook has been the so called “father of the tourist trade”, since, on July 5th 1841, he
arranged to take a group of about 500 members of his local “Temperance Society” from Leicester
London Road railway station to a rally in Loughborough, eleven miles away, having arranged with
the rail company to charge one shilling per person that included rail tickets and food for this train
journey.

When industrialization across Europe gave rise to an affluent middle class with an increasing
amount 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 number
of destinations. When in the 1960’s a growing number of people had disposable incomes and the
desire for “something new”, reasonably priced commercial aircrafts airplanes made international
travel easier; mass tourism had arrived.

Economic Development

Economic development generally refers to the sustained, concerted actions of policymakers and
communities that promote the standard of living and economic health of a specific area. Such
actions can involve multiple areas including development of human capital, critical infrastructure,



regional competitiveness, environmental sustainability, social inclusion, health, safety, literacy, and
other initiatives.

Economic development typically involves improvements in a variety of indicators such as literacy
rates, life expectancy, and poverty rates. Essentially, a country's economic development is related to
its human development, which encompasses, among other things, health and education. These
factors are, however, closely related to economic growth so that development and growth often go
together.

Social Development

Social development can be summarily described as the process of organizing human energies and
activities at higher levels to achieve greater results. Development increases the utilization of human
potential. Social development consists of two interrelated aspects – learning and application.

Society discovers better ways to fulfill its aspirations and it develops organizational mechanisms to
express 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 their
material, social and intellectual environment.

Infrastructural Development

Infrastructure development contributes to poverty reduction by spurring economic growth,
stimulating enterprise opportunities, generating employment and providing poor people with access
to 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 for
sustained economic growth and poverty reduction. Health, education, and efficient water and
sanitation services help lay the groundwork for a more productive, healthy population capable of
contributing to sustained economic growth - Likewise transport infrastructure improves access to
services and markets in rural areas.

Industrialization

Industrialization (or industrialization) is the process of social and economic change that
transforms a human group from an agrarian society into an industrial one. It is a part of a wider
modernization process, where social change and economic development are closely related with
technological innovation, particularly with the development of large-scale energy and metallurgy
production. It is the extensive organization of an economy for the purpose of manufacturing.



Industrialization also introduces a form of philosophical change where people obtain a different
attitude towards their perception of nature, and a sociological process of ubiquitous rationalization.
The first country to industrialize was the United Kingdom during the Industrial Revolution
commencing in the eighteenth century. By the end of the 20th century, East Asia had become one of
the most recently industrialized regions of the world

Cross-border Movement

Also known as economic globalization - Economic globalization refers to increasing economic
interdependence of national economies across the world through a rapid increase in cross-border
movement of goods, service, technology and capital.

Whereas globalization is centered around the diminution of international trade regulations as well as
tariffs, taxes, and other impediments that suppresses global trade, economic globalization is the
process of increasing economic integration between countries, leading to the emergence of a global
marketplace or a single world market.

Depending on the paradigm, economic globalization can be viewed as either a positive or a negative
phenomenon. Economic globalization comprises the globalization of production, markets,
competition, technology, and corporations and industries.

Governmental Regulations

Regulation is administrative legislation that constitutes or constrains rights and allocates
responsibilities. It can be distinguished from primary legislation (by Parliament or elected
legislative 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 or
prevent outcomes in different timescales than would otherwise occur. In this way, regulations can
be seen as implementation artifacts of policy statements.

Common examples of regulation include controls on market entries, prices, wages, development
approvals, pollution effects, employment for certain people in certain industries, standards of
production for certain goods, the military forces and services. The economics of imposing or
removing regulations relating to markets is analyzed in regulatory economics.

Regional dimensions

Regional development is fundamentally about economic development and reforms that allow
markets to work and individuals and communities to enhance their wellbeing. Regional trade
integration can serve as a powerful catalyst to economic growth. Regional trade agreements
continue to proliferate despite being economically inferior from a global perspective to
nondiscriminatory trade liberalization on a most-favored-nation (MFN) basis.

Multilateral liberalization and regional integration will continue to coexist in the future. The role of
regional development policy ought to be to support regions to grow while ensuring that individuals
are able to best manage their transition to a more diversified economic base - to other centres that
are growing with new employment and lifestyle opportunities.



The choice of forming a customs union first and then acceding to the WTO (World Trade
Organization) could increase the overall level of trade protection of customs union members
compared to their level of protection prior to the customs union. The larger the customs union the
more the collective monopoly power it has in commanding a high level of protection. The incentive
to protect is particularly strong if there is a country with greater bargaining power within the region
and higher external tariff rates.

The reason is that, in the case of heterogeneous countries, the higher external tariff of the dominant
country 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 eventually
converge toward the higher rates.

By entering first into a regional agreement, a country may increase its bargaining power in
multilateral negotiations by having a common (regional) position toward sensitive issues (e.g.,
textile and agriculture), where developed countries still maintain a protectionist stance, although it
is not obvious, a priori, that the outcome would reflect the preferences of custom unions’ smaller
members.

Example:
On September 19, 2003 Belarus, Kazakhstan, the Russian Federation, and Ukraine met in Yalta to
sign 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 popularity

The history and theory of popular culture in Western Europe - Different regions, ethnicities and
racial identities were represented in and by popular culture. The culture of Europe might better be
described as a series of multiple cultures.

Whether it is a question of North as opposed to South; West as opposed to East; Orthodoxism as
opposed to Protestantism as opposed to Catholicism as opposed to Secularism; many have claimed
to identify cultural fault lines across the continent.

There are many cultural innovations and movements, often at odds with each other, such as
Christian proselytism or Humanism. Thus the question of "common culture" or "common values" is
far more complex then it seems to be.

The foundation of European culture was laid by the Greeks, strengthened by the Romans, stabilized
by Christianity, reformed and modernized by the fifteenth-century Renaissance and Reformation
and globalized by successive European empires between the sixteenth and twentieth centuries.

Thus the European Culture developed into a very complex phenomenon of wider range of
philosophy, Christian and secular humanism, rational way of life and logical thinking developed
through a long age of change and formation with the experiments of enlightenment, naturalism,
romanticism, science, democracy, and socialism. Because of its global connection, the European
culture grew with an all-inclusive urge to adopt, adapt and ultimately influence other trends of
culture. Examples of popular culture are like art, music, literature, cuisine, etc.



Seasonality

In statistics, many time series exhibit cyclic variation known as seasonality, periodic variation, or
periodic fluctuations. This variation can be either regular or semi regular and very common in
economic time series. Example: retail sales tend to peak during holiday season and then decline
after the holidays.
Seasonal variation is a component of a time series which is defined as the repetitive and predictable
movement around the trend line in one year or less. It is detected by measuring the quantity of
interest for small time intervals, such as days, weeks, months or quarters. Organizations affected by
seasonal variation need to identify and measure this seasonality to help with planning for temporary
increases or decreases in labor requirements, inventory, training, periodic maintenance, and so
forth.

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 seasonal
component:
• 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 determinants

Lifestyle is a term to describe the way a person or an animal lives. A set of behaviors, and the
senses of self and belonging which these behaviors represent, are collectively used to define a given
lifestyle. 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 a
given time and place, including social relations, consumption, entertainment, and dress. The
behaviors and practices within lifestyles are a mixture of habits, conventional ways of doing things,
and reasoned actions. The lifestyle determinants include: culture, economic, income, political
environments, social, and demography

Culture

Culture 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. Culture
can be known as a complex whole which includes knowledge, belief, art, law, moral, customs and
any 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



• 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 group

Economic

Economics is the social science that analyzes the production, distribution, and consumption of
goods and services. A focus of the subject is how economic agents behave or interact and how
economies work.

Microeconomics examines the behavior of basic elements in the economy, including individual
agents (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, and
government, but also to such diverse subjects as crime, education, the family, law, politics, religion,
social institutions, war, and science.

Income

Income is the consumption and savings opportunity gained by an entity within a specified time
frame, 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 of
earnings received... in a given period of time."

For firms, income generally refers to net-profit: what remains of revenue after expenses have been
subtracted. In the field of public economics, it may refer to the accumulation of both monetary and
non-monetary consumption ability, the former being used as a proxy for total income. National
income, measured by statistics such as the Net National Income (NNI), measures the total income
of individuals, corporations, and government in the economy.

Politic

The term lifestyle in politics can often be used in conveying the idea that society be accepting of a
variety of different ways of life—from the perspective that differences among ways of living are
superficial, rather than existential.

Lifestyle is also sometimes used pejoratively, to mark out some ways of living as elective or
voluntary as opposed to others that are considered mainstream, unremarkable, or normative. Politic
consists of “social relations involving authority or power” and refers to the regulation of a political
unit, and to the methods an dtactics used to formulate and apply policy. From a historical
perspective, societies in need of government have moved from the primitive to the patriarchal state
and finally to the military, the real politics of modern times

Social



The term social refers to a characteristic of living organisms as applied to populations humans and
other animals. It always refers to the interaction of organisms with other organisms and to their
collective co-existence, irrespective of whether they are aware of it or not, and irrespective of
whether 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.

Demographic

Demographics are the characteristics of a human population as used in the government, marketing
or opinion research. Commonly used data are sex, race, age, income, disabilities, mobility (in terms
of 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 may
increase or decrease over time. Certain restrictions may be set in place i.e. the one child policy in
China.

Marketers typically combine several variables to define a demographic profile. A demographic
profile provides enough information about the typical member of this group to create a mental
picture of this hypothetical aggregate.

Life cycle determinants

The concept of the life cycle is widely used in social sciences - However, its meanings and
applications are diverse. Additionally, for denoting temporality in a general sense, the terms life
cycle, 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 be
characterized by the occurrence of events and the length of the resulting life cycle stages. The
development 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 incentives
of the pension system are of particular importance for the evolution of life cycles; e.g., decisions on
retirement 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 economy
influence the life cycle adjustments additively to demographic changes. The additional life time
offers opportunities to increase the length of the working life, to invest further time in education or
to enjoy more time in leisure

As governmental social transfer arrangements have partially overtaken individual financial security
functions, policy makers have to be conscious of life cycle dynamics arising from increasing life
expectancy and varying retirement ages. In economic, life-cycle decisions depend on:
• The cost-effectiveness of the banking sector;



• 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 increase
in the persistence raises expected life-time earnings of high-productivity individuals and diminishes
expected income of low-productivity individuals. The former are therefore reducing their
precautionary savings, whereas the latter are less interested in taking loans. The overall impact on
the 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 behavior

Macro determinants of tourism demand

Determinants of tourism demand include the following:
• Disposable income
• Educational levels
• Seasonality
• Household size
• Demographic variables
• The buyer decision process
• Travel buying behavior

Disposable Income

Disposable income is total personal income minus personal current taxes. In national accounts
definitions, 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 for
transfers such as payments to children in school or elderly parents’ living arrangements. The
marginal propensity to consume (MPC) is the fraction of a change in disposable income that is
consumed.

For example, if disposable income rises by $100, and $65 of that $100 is consumed, the MPC is
65%. Restated, the marginal propensity to save is 35%.

Discretionary income is money remaining after all bills are paid off. It is income after subtracting
taxes 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



standard of living. It is the amount of an individual's income available for spending after the
essentials (such as food, clothing, and shelter) have been taken care of:

Discretionary income = Gross income - taxes - necessities

Despite the definitions above, disposable income is often incorrectly used to denote discretionary
income. Commonly, disposable income is the amount of "play money" left to spend or save. The
Consumer Leverage Ratio is the expression of the ratio of Total Household Debt to Disposable
Income

Use of discretionary income in high-income loan applications

When applying for a loan (mortgage, consumer loan), lenders may take into consideration a high-
income applicant's discretionary income in order to assess the loan repayment capacity of the
applicant.

Discretionary income provides the lender with more information on the applicant's capacity to repay
than the debt-to-income ratio in the case where the applicant has a lot of debt, but also a lot of
income, such that the percent of available income may be smaller than normal standards would
allow, but the actual amount of money is still large

Educational Levels

Education in its broadest, general sense is the means through which the aims and habits of a group
of people lives on from one generation to the next. Education can be defined as any act or
experience 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, skills
and values from one generation to another – it controls decision making, lifestyle, needs, wants and
etc

A right to education has been created and recognized by some jurisdictions: Since 1952, Article 2 of
the first Protocol to the European Convention on Human Rights obliges all signatory parties to
guarantee the right to education. At the global level, the United Nations' International Covenant on
Economic, Social and Cultural Rights of 1966 guarantees this right under its Article 13.

Economics and education

It has been argued that high rates of education are essential for countries to be able to achieve high
levels of economic growth. Empirical analyses tend to support the theoretical prediction that poor
countries should grow faster than rich countries because they can adopt cutting edge technologies
already tried and tested by rich countries.

However, technology transfer requires knowledgeable managers and engineers who are able to
operate new machines or production practices borrowed from the leader in order to close the gap
through imitation. Therefore, a country's 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 of
fundamental economic institutions and the role of cognitive skills. If more education leads to faster
economic growth, then investments in education could pay for themselves in the long run, and



could also play a role in reducing poverty. Such reasoning could be crucial in bolstering political
support 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 inescapable

Mobility Levels

Is 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 population

Economic mobility

Economic mobility is often measured by movement between income quintiles. Economic mobility
may be considered a type of social mobility, which is often measured in change in income. Mobility
may 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 group's) 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 extent
do families improve their incomes over a generation?” Relative mobility is specific to individuals or
groups and occurs without relation to the economy as a whole. It answers the question, "how
closely are the economic fortunes of children tied to that of their parents?" - Relative mobility is a
zero-sum game, absolute is not.

Seasonality

In statistics, many time series exhibit cyclic variation known as seasonality, periodic variation, or
periodic fluctuations. This variation can be either regular or semi regular and very common in
economic time series. Example: retail sales tend to peak during holiday season and then decline
after the holidays

Seasonal variation is a component of a time series which is defined as the repetitive and predictable
movement around the trend line in one year or less. It is detected by measuring the quantity of
interest for small time intervals, such as days, weeks, months or quarters. Organizations affected by



seasonal variation need to identify and measure this seasonality to help with planning for temporary
increases or decreases in labor requirements, inventory, training, periodic maintenance, and so
forth.

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 seasonal
component:
• 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 Size

Households 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



Demographics are the characteristics of a human population as used in the government, marketing
or opinion research. Commonly used data are sex, race, age, income, disabilities, mobility (in terms
of 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 may
increase or decrease over time. Certain restrictions may be set in place i.e. the one child policy in
China. Marketers typically combine several variables to define a demographic profile.

A demographic profile provides enough information about the typical member of this group to
create a mental picture of this hypothetical aggregate. Increased life expectancy and consequently
the average age of population are the results of an accelerated economic growth in the modern
period. It has been proven that as a general long-term trend, when GDP per capita increases due to
better 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 on
population; thus resulting an increase in the overall productive capacity of a country and therefore
of GDP per capita

The Buyer Decision Process

Buyer decision processes are the decision making processes undertaken by consumers in regard to
a potential market transaction before, during, and after the purchase of a product or service. More
generally, decision making is the cognitive process of selecting a course of action from among
multiple 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 Behavior

Problem recognition
The buying process starts when the buyer recognizes a problem or need
Information search
An aroused consumer may or may not search for more information. How much searching a
consumer does will depend on the strength of the drive, the amount of initial information, the ease
of obtaining more information, the value placed on additional information and the satisfaction one
gets from searching.
Evaluations of alternatives
Unfortunately, there is no simple and single evaluation process used by all consumers or even by
one consumer in all buying situations. There are several evaluation processes:



Attitude of
Others
Evaluation of
Purchase Purchase
Alternatives
Intention Decision
Unexpected
Situational
Factors

Purchase decision
In the evaluation stage, the consumer ranks brands in the choice set and forms purchase intentions.
Generally, the consumer will buy the most preferred brand
Post-purchase behavior
The marketer’s job does not end when the customer buys a product. Following a purchase, the
consumer will be satisfied and dissatisfied and will engage in post-purchase actions of significant
interest to the marketer.

Travel Buying Behavior

Travel industry is undergoing massive structural reorganization – loyalty schemes, price and brand
in their buying decisions. Level of Involvement in purchase decision also increasing – importance
and intensity of interest in a product in a particular situation. Buyer’s level of involvement
determines why he/she is motivated to seek information about a certain products and brands but
virtually 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 process
involved during the purchase post-purchase decision stages.

Consumer Decision-Making Framework



Socio-
economic Cultural
influences influences

Motivation or Perception
energizers

Consumer or
Decision-maker

Personality/
attitude Learning

Reference group Family
influences influences

In 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-ventures

Market

A market is one of many varieties of systems, institutions, procedures, social relations and
infrastructures whereby parties engage in exchange. While parties may exchange goods and
services by barter, most markets rely on sellers offering their goods or services (including labor) in
exchange for money from buyers. It can be said that a market is the process in which the prices of
goods and services are established.



In mainstream economics, the concept of a market is any structure that allows buyers and sellers to
exchange any type of goods, services and information. The exchange of goods or services for
money is a transaction. Market participants consist of all the buyers and sellers of a good who
influence its price.

Markets vary in form, scale (volume and geographic reach), location, and types of participants, as
well 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 products

There are two roles in markets, buyers and sellers. The market facilitates trade and enables the
distribution and allocation of resources in a society. Markets allow any tradable item to be evaluated
and priced. A market emerges more or less spontaneously or is constructed deliberately by human
interaction 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 — or
from — small communities, towns and cities

Market structure

Market 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



conditions change. The rate of customer churn is affected by the degree of consumer or
brand loyalty and the influence of persuasive advertising and marketing

In 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 market

Monopolistic competition is a type of imperfect competition such that competing producers sell
products that are differentiated from one another as good but not perfect substitutes (such as from
branding, quality, or location).

In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the
impact 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 generate
profit. In the long run, however, other firms enter the market and the benefits of differentiation
decrease with competition; the market becomes more like a perfectly competitive one where firms
cannot 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 of
government 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



• Buyers and Sellers do not have perfect information (Imperfect Information)

Market power

MC firms have some degree of market power. Market power means that the firm has control over
the terms and conditions of exchange. An MC firm can raise it prices without losing all its
customers. The firm can also lower prices without triggering a potentially ruinous price war with
competitors.

The source of an MC firm's market power is not barriers to entry since they are low. Rather, an MC
firm has market power because it has relatively few competitors, those competitors do not engage in
strategic decision making and the firms sells differentiated product. Market power also means that
an MC firm faces a downward sloping demand curve - The demand curve is highly elastic although
not "flat"

Monopoly

A monopoly (from Greek monos μόνος (alone or single) + polein πωλεῖν (to sell) exists when a
specific person or enterprise is the only supplier of a particular commodity. Monopolies are thus
characterized by a lack of economic competition to produce the good or service and a lack of viable
substitute goods. The verb "monopolise" refers to the process by which a company gains much
greater 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 or
service ; a monopoly may also have monopsony control of a sector of a market. Likewise, a
monopoly should be distinguished from a cartel (a form of oligopoly), in which several providers
act together to coordinate services, prices or sale of goods. When not coerced legally to do
otherwise, monopolies typically maximize their profit by producing fewer goods and selling them at
higher prices than would be the case for perfect competition.

Sometimes governments decide legally that a given company is a monopoly that doesn't serve the
best interests of the market and/or consumers. Governments may force such companies to divide
into smaller independent corporations as was the case of United States v. AT&T, or alter its
behavior as was the case of United States v. Microsoft, to protect consumers. Monopolies can be
established by a government, form naturally, or form by mergers.
A monopoly is said to be coercive when the monopoly actively prohibits competitors by using
practices (such as underselling) which derive from its market or political influence. There is often
debate of whether market restrictions are in the best long-term interest of present and future
consumers.

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.



Sources of monopoly power
Monopolies derive their market power from barriers to entry – circumstances that prevent or greatly
impede a potential competitor's 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 force

Oligopoly

An oligopoly is a market form in which a market or industry is dominated by a small number of
sellers (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 to
be aware of the actions of the others. The decisions of one firm influence, and are influenced by, the
decisions of other firms.

Strategic planning by oligopolists needs to take into account the likely responses of the other market
participants. Oligopolistic competition can give rise to a wide range of different outcomes - In some
situations, the firms may employ restrictive trade practices (collusion, market sharing etc.) to raise
prices 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 example
of such a cartel is OPEC which has a profound influence on the international price of oil. Firms



often collude in an attempt to stabilize unstable markets, so as to reduce the risks inherent in these
markets for investment and product development.

There are legal restrictions on such collusion in most countries. There does not have to be a formal
agreement for collusion to take place (although for the act to be illegal there must be actual
communication between companies)–for example, in some industries there may be an
acknowledged market leader which informally sets prices to which other producers respond, known
as price leadership.

In other situations, competition between sellers in an oligopoly can be fierce, with relatively low
prices and high production. This could lead to an efficient outcome approaching perfect
competition.
The competition in an oligopoly can be greater than when there are more firms in an industry if, for
example, 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 firm's 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 firm's countermoves.

Perfect Competition

In economic theory, perfect competition describes markets such that no participants are large
enough to have the market power to set the price of a homogeneous product. Because the conditions
for perfect competition are strict, there are few if any perfectly competitive markets. Still, buyers
and sellers in some auction-type markets, say for commodities or some financial assets, may
approximate the concept.

Perfect competition serves as a benchmark against which to measure real-life and imperfectly
competitive 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.



Specific 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 not
occur where marginal cost is equal to average cost, but allocatively efficient, as output will always
occur where marginal cost is equal to marginal revenue, and therefore where marginal cost equals
average 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 its
marginal cost.

This implies that a factor's price equals the factor's marginal revenue product. This allows for
derivation of the supply curve on which the neoclassical approach is based. (This is also the reason
why "a monopoly does not have a supply curve.") The abandonment of price taking creates
considerable difficulties to the demonstration of existence of a general equilibrium except under
other, very specific conditions such as that of monopolistic competition.

Entrepreneurship

Entrepreneurship is the act of being an entrepreneur, which can be defined as "one who
undertakes innovations, finance and business acumen in an effort to transform innovations into
economic goods".

This may result in new organizations or may be part of revitalizing mature organizations in
response to a perceived opportunity. The most obvious form of entrepreneurship is that of starting
new businesses (referred as Startup Company); however, in recent years, the term has been
extended to include social and political forms of entrepreneurial activity.

When entrepreneurship is describing activities within a firm or large organization it is referred to as
intra-preneurship and may include corporate venturing, when large entities spin-off organizations .



Entrepreneurial activities are substantially different depending on the type of organization and
creativity involved. Entrepreneurship ranges in scale from solo projects (even involving the
entrepreneur only part-time) to major undertakings creating many job opportunities.

Many "high value" entrepreneurial ventures seek venture capital or angel funding (seed money) in
order 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 now
exist to support would-be entrepreneurs including specialized government agencies, business
incubators, science parks, and some NGOs.

Joint-ventures

A joint venture (JV) is a business agreement in which parties agree to develop, for a finite time, a
new entity and new assets by contributing equity. They exercise control over the enterprise and
consequently share revenues, expenses and assets. There are other types of companies such as JV
limited 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 for
the purpose of carrying out a particular project, such partnership can also be called a joint venture
where the parties are "co-venturers". The venture can be for one specific project only - when the JV
is referred to more correctly as a consortium (as the building of the Channel Tunnel) - or a
continuing business relationship. The consortium JV (also known as a cooperative agreement) is
formed where one party seeks technological expertise or technical service
arrangements, franchise and brand use agreements, management contracts, rental agreements, for
one-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 joint
venture, both parties are equally invested in the project in terms of money, time, and effort to build
on the original concept. While joint ventures are generally small projects, major corporations also
use this method in order to diversify. A joint venture can ensure the success of smaller projects for
those that are just starting in the business world or for established corporations. Since the cost of
starting new projects is generally high, a joint venture allows both parties to share the burden of the
project, 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 the
immediate returns. Ultimately, short term and long term successes are both important. In order to
achieve this success, honesty, integrity, and communication within the joint venture are necessary.

Partner selection

While the following offers some insight to the process of joining up with a committed partner to
form a JV, it is often difficult to determine whether the commitments come from a known and
distinguishable party or an intermediary. This is particularly so when the language barrier exists and
one is unfamiliar with local customs, especially in approaches to government, often the deciding
body 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


• the most appropriate structure and invitation/bid
• foreign investor buying an interest in a local company

Companies are also called JVs in cases where there are dominant partners together with
participation of the public. There may also be cases where the public shareholding is substantial but
the 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 is
sometimes 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 seeks
technological 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 incorporation

A 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



Pricing

Pricing 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 of
product. 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 on
factors 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, and
many others.

The needs of the consumer can be converted into demand only if the consumer has the willingness
and 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 product's 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 distributors

From the marketer's point of view, an efficient price is a price that is very close to the maximum
that 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.



• 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 component's 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 mistakes

Many companies make common pricing mistakes. Bernstein's 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 measures

Pricing strategies

The firm's pricing objectives must be identified in order to determine the optimal pricing. Common
objectives 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.



• 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 maximize
quantity (market share). While there is no single recipe to determine pricing, the following is a
general 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 Skimming

Skim pricing attempts to "skim the cream" off the top of the market by setting a high price and
selling to those customers who are less price sensitive. Skimming is a strategy used to pursue the
objective 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 Penetration

Penetration pricing pursues the objective of quantity maximization by means of a low price. It is
most 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.



Other Types of Pricing

Premium Pricing
Use a high price where there is a uniqueness about the product or service. This approach is used
where a a substantial competitive advantage exists. Such high prices are charge for luxuries such as
Cunard Cruises, Savoy Hotel rooms, and Concorde flights.

Economy Pricing
This 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 Pricing
This approach is used when the marketer wants the consumer to respond on an emotional, rather
than rational basis. For example 'price point perspective' 99 cents not one dollar.

Optional Product Pricing
Companies will attempt to increase the amount customer spend once they start to buy. Optional
'extras' increase the overall price of the product or service. For example airlines will charge for
optional extras such as guaranteeing a window seat or reserving a row of seats next to each other.

Captive Product Pricing
Where products have complements, companies will charge a premium price where the consumer is
captured. For example a razor manufacturer will charge a low price and recoup its margin (and
more) from the sale of the only design of blades which fit the razor.

Product Bundle Pricing
Here 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 Pricing
Pricing to promote a product is a very common application. There are many examples of
promotional pricing including approaches such as BOGOF (Buy One Get One Free).

Geographical Pricing
Geographical 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 Pricing
This approach is used where external factors such as recession or increased competition force
companies to provide 'value' products and services to retain sales e.g. value meals at McDonalds.

Pricing methods

To set the specific price level that achieves their pricing objectives, managers may make use of
several 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.



• 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 pricing
models that better meet the needs of both the firm and its customers.

Price discount

The normally quoted price to end users is known as the list price. This price usually is discounted
for 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 factors

Pricing must take into account the competitive and legal environment in which the company
operates. From a competitive standpoint, the firm must consider the implications of its pricing on
the pricing decisions of competitors. For example, setting the price too low may risk a price war
that 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 the
profits.
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 international
trade. Offering a different price for different consumers may violate laws against price
discrimination. Finally, collusion with competitors to fix prices at an agreed level is illegal in many
countries.

The demand model

In economics, demand is the desire to own anything, the ability to pay for it, and the willingness to
pay. The term demand signifies the ability or the willingness to buy a particular commodity at a
given point of time.



Elements of the Law of Demand - As Melvin and Boyes note the law of demand is defined as; the
quantity 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 buyer's willingness or ability to buy a good.
Some of the more common factors are:
• Good's 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 Curve

Economists record demand on a demand schedule and plot it on a graph as a demand curve that is
usually downward sloping. The downward slope reflects the relationship between price and quantity
demanded: as price decreases, quantity demanded increases.

In principle, each consumer has a demand curve for any product that he or she would consider
buying, and the consumer's demand curve is equal to the marginal utility (benefit) curve. When the
demand curves of all consumers are added up, the result is the market demand curve for that
product.



If 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) where
f(Q) is the inverse demand function, although the graph is referred to simply as the demand curve.

Price Elasticity of Demand

PED 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 relative
to (divided by) a given percentage change in the price. For infinitessimal changes the formula for
calculating PED is the absolute value of (∂Q/∂P)×(P/Q).

Determinants of PED

The overriding factor in determining PED is the willingness and ability of consumers after a price
changes to postpone immediate consumption decisions concerning the good and to search for
substitutes (wait and look).

The greater the incentive the consumer has to delay consumption and search for substitutes and the
more 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 one's income, it is worth one's 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 model

In economics, supply is the amount of some product producers are willing and able to sell at a
given price all other factors being held constant. Usually, supply is plotted as a supply curve
showing 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 at
specific prices under the existing circumstances. Some of the more important factors affecting



supply are the goods own price, the price of related goods, production costs, technology and
expectations of sellers.
Innumerable factors and circumstances could affect a seller's willingness or ability to produce and
sell 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 one's good's 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 Curve

The 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 variables
only; 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 term

Price Elasticity of Supply

Price elasticity of supply measures the responsiveness of quantity supplied to changes in price, as
the percentage change in quantity supplied induced by a one percent change in price.

Significant determinants include:



Reaction time: The PES coeffiecient will largely be determined by how quickly producers react to
price changes by increasing (decreasing) production and delivering (cutting deliveries of) goods to
the 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:



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
conglomerate

International regulations

International tourism relies on a high degree of communication and cooperation among nations with
respect to this complex network of laws, regulations, and policies. The regulations provides an
overview of international developments on information privacy

Reviews current trade-related regulations of discusses their effects on developing countries. For
example; International Animal Export Regulations, International Regulations for Preventing
Collisions at Sea 1972, etc.

Some government interventions which shape the environment for tourism as an international
industry cannot be avoided: the policies on visas, customs and access for airlines; transport and
communications 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



The WToO and WTTC are sectoral pressure groups, supporting tourism, collecting data, and
exchanging information. The WToO was established in 1974, with UN agency status, and financed
by the UNDP. Its scope was explained by its former name, the International Union of Official
Travel Organisations.

The WTTC is an association of private companies in the industry, established in 1990. The
individual 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 years
after goods came under the GATT.

Some services were so restricted by individual countries, both within countries and in trade, that
agreed limits on restrictions were difficult to achieve (financial services, most notably), while others
were considered of their nature so local that restrictions were regarded as unnecessary (except
through restrictions on foreign investment).

Tourism includes examples of both: transport services, both sea and air, have traditionally been
among the most regulated and protected; specific services to tourists in a country are inherently
local. Regulation of tourism is more usually indirect (or through non-trade measures) and these may
not have been seen as GATS-regulated by negotiators.

In future WTO negotiations (starting with the next Round, to begin following the ministerial
meeting of November-December 1999), the lack of completely notified schedules and the difficult
to use systems of classifications may make negotiations difficult.

Not only is there still lack of clear information about countries’ rules, but even for those services
and types which are notified, there is no agreed method of quantifying and thus comparing the
strictness 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 of
changing their own restrictions.)

The only method used in measuring the outcome of the WTO negotiations was counting: the
number of services included; the numbers of subdivisions of services or of modes of supply
The developed countries’ objective for the next round is to increase liberalisation of services, and
specifically to require all countries to include more than one service - This may mean that there is
relatively little pressure to liberalise restrictions on tourism.

Free market

A 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 market
participants.

Free markets contrast sharply with controlled markets or regulated markets, in which governments
more actively regulate prices and/or supplies, directly or indirectly. In its purest form, the
government plays a neutral role in its administration and legislation of economic activity, neither
limiting it (by regulating industries or protecting them from internal/external market pressures) nor
actively 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 perfect
information and there is perfect competition. Advocates of a free market traditionally consider the



term to imply that the means of production is under private, and not state control or co-operative
ownership.

This is the contemporary use of the term "free market" by economists and in popular culture; the
term has had other uses historically. In the marketplace, the price of a good or service helps
communicate consumer demand to producers and thus directs the allocation of resources toward
satisfaction of consumers as well as investors.

In a free market, the system of prices is the emergent result of a vast number of voluntary
transactions, rather than of political decrees as in a controlled market. The freer the market, the
more prices will reflect consumer habits and demands, and the more valuable the information in
these prices are to all players in the economy. Through free competition between vendors for the
provision 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 central
bank, 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" facilitating
reuse.

To illustrate the ambiguity: classical economists such as Adam Smith believed that an economy
should be free of monopoly rents, while proponents of laissez faire believe that people should be
free to form monopolies. In this article "free market" is largely identified with laissez faire, though
alternative senses are discussed in this section and in criticism. The identification of the "free
market" with "laissez faire" was notably used in the 1962 Capitalism and Freedom, by economist
Milton Friedman, which is credited with popularizing this usage.

Deregulation of airlines

Airline deregulation is the process of removing entry and price restrictions on airlines affecting, in
particular, the carriers permitted to serve specific routes. A new form of regulation has been
developed to some extent to deal with problems such as the allocation of the limited number of slots
available at airports.

Various solutions have been proposed, including, for the first time since 1978, federal control over
some of the prices charged and routes served by major airlines with a view of increasing price and
cost competition. Although finding solutions to some problems, airline deregulation, for the most
part, has created mixed results.

Deregulation has provided some financial benefits to the average traveler. Airline services were
historically heavily regulated, in part because of concerns about monopoly and oligopoly arising
from the fact that in most cases, only a small number of airlines provided direct flights between a
given "city pair".

In the U.S., the airline deregulation began in 1978. It was a part of a sweeping reduction in price
and entry controls in United States transportation begun with initiatives in the Nixon
Administration, carried out through the Ford and Carter Administrations, and followed up on in the
Reagan Administration.

Many other countries have since deregulated their domestic markets, and a similar process has
applied to airline markets within the European Union. Many international airline markets remain
subject to regulation



The need for deregulation

As jets were integrated into the market in the late 1950s and early 1960s, the industry experienced
dramatic growth. By the mid-1960s, they were carrying roughly 100 million passengers and by the
mid 1970s, over 200 million Americans had traveled by air. This steady increase in air travel began
placing serious strains on the ability of federal regulators to cope with the increasingly complex
nature of air travel.

At the same time, beginning in 1969, there were changes in basic economic conditions and in
aircraft technology triggered a sudden decline in the industry's performance. The onset of high
inflation, low economic growth, falling productivity, rising labor costs and higher fuel costs
devastated the airlines.

Partnerships

A partnership is an arrangement where parties agree to cooperate to advance their mutual interests.
Since humans are social beings, partnerships between individuals, businesses, interest-based
organizations, schools, governments, and varied combinations thereof, have always been and
remain commonplace.

In the most frequently associated instance of the term, a partnership is formed between one or more
businesses in which partners (owners) co-labor to achieve and share profits and losses (see business
partners). Partnerships are also common regardless of and among sectors. Non-profit, religious, and
political organizations, may partner together to increase the likelihood of each achieving their
mission and to amplify their reach.

Partnerships present the involved parties with special challenges that must be navigated unto
agreement. Overarching goals, levels of give-and-take, areas of responsibility, lines of authority and
succession, how success is evaluated and distributed, and often a variety of other factors must all be
negotiated. 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 up
Articles of Partnership. It is common for information about formally partnered entities to be made
public, such as through a press release, a newspaper ad, or public records laws.While partnerships
stand to amplify mutual interests and success, some are considered ethically problematic.

Governmentally recognized partnerships may enjoy special benefits in tax policies. Among
developed countries, for example, business partnerships are often favored over corporations in
taxation policy, since dividend taxes only occur on profits before they are distributed to the
partners.
However, depending on the partnership structure and the jurisdiction in which it operates, owners of
a partnership may be exposed to greater personal liability than they would as shareholders of a
corporation.

In such countries, partnerships are often regulated via anti-trust laws, so as to inhibit monopolistic
practices and foster free market competition. Enforcement of the laws, however, is often widely
variable. Domestic partnerships recognized by governments typically enjoy tax benefits, as well.

Mergers and acquisitions



Mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate
finance and management dealing with the buying, selling, dividing and combining of different
companies and similar entities that can help an enterprise grow rapidly in its sector or location of
origin, or a new field or new location, without creating a subsidiary, other child entity or using a
joint venture.

The distinction between a "merger" and an "acquisition" has become increasingly blurred in various
respects (particularly in terms of the ultimate economic outcome), although it has not completely
disappeared in all situations.

Acquisition

An acquisition is the purchase of one business or company by another company or other business
entity. Consolidation occurs when two companies combine together to form a new enterprise
altogether, and neither of the previous companies survives independently.

Acquisitions are divided into "private" and "public" acquisitions, depending on whether the
acquiree or merging company (also termed a target) is or is not listed on public stock markets. An
additional 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 that
50% of acquisitions were unsuccessful.

The acquisition process is very complex, with many dimensions influencing its outcome. In the case
of a friendly transaction, the companies cooperate in negotiations; in the case of a hostile deal, the
board and/or management of the target is unwilling to be bought or the target's board has no prior
knowledge of the offer.

"Acquisition" usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a
smaller firm will acquire management control of a larger and/or longer-established company and
retain the name of the latter for the post-acquisition combined entity - This is known as a reverse
takeover.

Another type of acquisition is the reverse merger, a form of transaction that enables a private
company to be publicly listed in a relatively short time frame. A reverse merger occurs when a
privately held company (often one that has strong prospects and is eager to raise financing) buys a
publicly 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, which
have 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



could arise from litigation over defective products, employee benefits or terminations, or
environmental damage.

Distinction between mergers and acquisitions

Although often used synonymously, the terms merger and acquisition mean slightly different
things.This paragraph does not make a clear distinction between the legal concept of a merger (with
the resulting corporate mechanics, statutory merger or statutory consolidation, which have nothing
to do with the resulting power grab as between the management of the target and the acquirer) and
the business point of view of a "merger", which can be achieved independently of the corporate
mechanics 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 purchase
is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer
"swallows" the business and the buyer's stock continues to be traded.

Motives behind M&A

The dominant rationale used to explain M&A activity is that acquiring firms seek improved
financial 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 broker's customers, while the broker can sign up the bank's 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 target's 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.



• 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 firm's 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' financial
performance 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.
• Manager's hubris: manager's 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.
• Manager's 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)

Conglomerates

A conglomerate is a combination of two or more corporations engaged in entirely different
businesses that fall under one corporate structure (a corporate group), usually involving a parent
company 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 a
repeating bear/bull market, which allowed the conglomerates to buy companies in leveraged
buyouts, sometimes at temporarily deflated values. As long as the target company had profits
greater than the interest on the loans, the overall return on investment (ROI) of the conglomerate
appeared to grow. Also, the conglomerate had a better ability to borrow in the money market, or
capital market, than the smaller firm at their community bank.



Advantages

• 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 Hathaway's 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 conglomerate's 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 conglomerate
discount) as evidential of these disadvantages, while other traders believe this tendency to be a
market inefficiency, which undervalues the true strength of these stocks.



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 policy

Public policy

Public policy as government action is generally the principled guide to action taken by the
administrative or executive branches of the state with regard to a class of issues in a manner
consistent with law and institutional customs.

In general, the foundation is the pertinent national and substantial constitutional law and
implementing legislation such as the US Federal code. Further substrates include both judicial
interpretations and regulations which are generally authorized by legislation.

Other scholars define it as a system of "courses of action, regulatory measures, laws, and funding
priorities 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 Actions

Shaping public policy is a complex and multifaceted process that involves the interplay of
numerous individuals and interest groups competing and collaborating to influence policymakers to
act in a particular way. These individuals and groups use a variety of tactics and tools to advance
their aims, including advocating their positions publicly, attempting to educate supporters and
opponents, 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 well
as public policy makers about the nature of problems, what legislation is needed to address
problems, and the funding required providing services or conducting research.

As An Academic Discipline

As an academic discipline, public policy brings in elements of many social science fields and
concepts, 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 its
focus on the application of theory to practice. While the majority of public policy degrees are
masters and doctoral degrees, several universities also offer undergraduate education in public
policy. Traditionally, the academic field of public policy focused on domestic policy.



However, the wave of economic globalization, which ensued in the late 20th and early 21st
centuries, created a need for a subset of public policy that focuses on global governance, especially
as it relates to issues that transcend national borders such as climate change, terrorism, nuclear
proliferation, and economic development. Consequently, many traditional public policy schools had
to tweak their curricula to adjust to this new policy landscape.

In contrast, some specialty schools that were conceived to be "international policy" schools from
the start had less of an adjustment to make. These programs typically require mastery of a second
language and take a cross-cultural approach to public policy to address national and cultural biases.

The Process

When 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 is
influential in forming a plan to address the problem in question, and the policy is the finalized
course of action decided upon by the government.

Typically the general public will make the government aware of an issue through writing letters and
emails, or making phone calls, to local government leaders; the issue is then brought forward during
government 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 players
involved in the policy-making process; also, it is believed that the government will follow through
on all decisions made by the final policy. Unfortunately, those who frame the issue to be addressed
by policy often exert an enormous amount of influence over the entire process through their
personalities, personal interests, political affiliations, and so on. The bias is extenuated by the
players involved.

The final outcome of the process, as well as its implementation, is therefore not as effective as that
which could result from a purely rational process. Overall, however, public policy continues to be a
vital tool in addressing social concerns.

Competition as public policy

Competition law, known in the United States as antitrust law, is law that promotes or maintains
market competition by regulating anti-competitive conduct by companies. The business practices of



market traders, guilds and governments have always been subject to scrutiny, and sometimes severe
sanctions.

Since the 20th century, competition law has become global. The two largest and most influential
systems of competition regulation are United States antitrust law and European Union competition
law. National and regional competition authorities across the world have formed international
support and enforcement networks.

Modern competition law has historically evolved on a country level to promote and maintain
competition in markets principally within the territorial boundaries of nation-states. National
competition law usually does not cover activity beyond territorial borders unless it has significant
effects at nation-state level. Countries may allow for extraterritorial jurisdiction in competition
cases 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 and
Trade (GATT) in 1947, limited international competition obligations were proposed within the
Charter 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, the
World Trade Organization (WTO) was created. The Agreement Establishing the WTO included a
range of limited provisions on various cross-border competition issues on a sector specific basis

Principle

Competition 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 the
interests of consumers (consumer welfare) and ensuring that entrepreneurs have an opportunity to
compete in the market economy are often treated as important objectives. Competition law is
closely connected with law on deregulation of access to markets, state aids and subsidies, the
privatization of state owned assets and the establishment of independent sector regulators, among
other market-oriented supply-side policies. In recent decades, competition law has been viewed as a
way to provide better public services.

International Expansion

By 2008 111 countries had enacted competition laws, which is more than 50 percent of countries
with a population exceeding 80,000 people. 81 of the 111 countries had adopted their competition
laws in the past 20 years, signaling the spread of competition law following the collapse of the
Soviet Union and the expansion of the European Union.



Enforcement

There is considerable controversy among WTO members, in green, whether competition law should
form part of the agreements. At a national level competition law is enforced through competition
authorities, as well as private enforcement. In the European Union, the Modernizations Regulation
1/2003 means that the European Commission is no longer the only body capable of public
enforcement of European Community competition law. This was done in order to facilitate quicker
resolution of competition-related inquiries.

In 2005 the Commission issued a Green Paper on Damages actions for the breach of the EC
antitrust 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.

Practice

Collusion and cartel

Collusion 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 to
obtain an objective forbidden by law typically by defrauding or gaining an unfair advantage. It is an
agreement among firms to divide the market, set prices, or limit production. It can involve "wage
fixing, kickbacks, or misrepresenting the independence of the relationship between the colluding
parties". 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 of
producers and manufacturers that agree to fix prices, marketing, and production. Cartels usually
occur in an oligopolistic industry, where there is a small number of sellers and usually involve
homogeneous 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 sales
agencies, and the division of profits or combination of these. The aim of such collusion (also called
the cartel agreement) is to increase individual members' profits by reducing competition.

Dominance and monopoly

When firms hold large market shares, consumers risk paying higher prices and getting lower quality
products than compared to competitive markets. However, the existence of a very high market share
does not always mean consumers are paying excessive prices since the threat of new entrants to the
market can restrain a high-market-share firm's price increases.

Competition law does not make merely having a monopoly illegal, but rather abusing the power that
a monopoly may confer, for instance through exclusionary practices. First it is necessary to
determine whether a firm is dominant, or whether it behaves “to an appreciable extent
independently of its competitors, customers and ultimately of its consumer”.



Under EU law, very large market shares raise a presumption that a firm is dominant, which may be
rebuttal. If a firm has a dominant position, then there is "a special responsibility not to allow its
conduct to impair competition on the common market".

The economist's depiction of deadweight loss to efficiency that monopolies cause:

Mergers and acquisitions

A merger or acquisition involves, from a competition law perspective, the concentration of
economic power in the hands of fewer than before. This usually means that one firm buys out the
shares of another. The reasons for oversight of economic concentrations by the state are the same as
the reasons to restrict firms who abuse a position of dominance, only that regulation of mergers and
acquisitions attempts to deal with the problem before it arises, ex ante prevention of market
dominance.

Competition law requires that firms proposing to merge gain authorization from the relevant
government authority. The theory behind mergers is that transaction costs can be reduced compared
to operating on an open market through bilateral contracts. Concentrations can increase economies
of scale and scope.

However often firms take advantage of their increase in market power, their increased market share
and 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 a
judgment.

Public sector regulation

Public sector industries, or industries which are by their nature providing a public service, are
involved in competition law in many ways similar to private companies. Under EU law, Articles
106 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 independent
sector regulators.

These government agencies are charged with ensuring that private providers carry out certain public
service duties in line of social welfare goals. For instance, an electricity company may not be
allowed to disconnect someone's 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



electricity company would have to give the person a number of warnings and offer assistance until
government welfare support kicks in.
Intellectual property, innovation and competition

Intellectual property and competition have become increasingly intertwined. On the one hand, it is
believed that promotion of innovation through enforcement of intellectual rights promotes
competitiveness, while on the other the contrary may be the consequence. The question rests on
whether 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 or
towards 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 policy

Tourism, a large, complex and fragmented industry which is still very difficult to define and
measure, is a key component of the service economy. Tourism, which has expanded dramatically
over the past 30 years, looks set to continue growing as societies become more mobile and
prosperous.

Claims of tourism’s economic significance give the industry greater respect among the business
community, public officials and the public in general. 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, government
and residents of the local community. Tourism’s economic impacts are therefore an important
consideration in state, regional and community planning and economic development. An economic
impact 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 revenue
and income in a particular area. The most direct effects occur within the primary tourism sectors –
lodging/accommodation, dining, transportations, amusement and rental trade. Through secondary
effects, tourism affects most sectors of the economy. An economic impact analysis of tourism


activity normally focuses on changes in sales, income, and employment in a region resulting from
tourism 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 destination

Tourist-generating countries

Tourism is a huge industry - It is an important pillar of many economies that generates billions of
dollars annually. Without revenues from tourism even the world's strongest and most prosperous
countries could shake. Despite the economic downturn, which has stopped many people from
traveling, the world's most popular destinations still receive enormous numbers of visitors, who
leave 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 on
year) 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 there
were 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 People's Republic of China (EXCL HK) 1,011,910 36.2
10 Australia 939,623 15.5

Measuring Flows of Visitors

The usual environment: suggested criteria



Because the measurement of flows of visitors, and of all associated variables, is highly sensitive to
the definition of the usual environment, it is recommended that countries establish observable
criteria to delineated statistically the usual environment in their national context. It is further
recommended that neighboring countries or countries belonging to common supra-national
organizations consult with each other in order to apply compatible criteria and ensure compilation
of comparable statistics. Some countries leave it to the informant to decide whether a trip taken
qualifies 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 the
concept of “usual environment”, of what qualifies as a tourism trip. There are often differences in
density of population, transportation, accessibility, cultural behaviors, vicinity to national or
administrative borders, etc., between countries or sometimes within the country.

These differences hinder the development of a unique world-wide statistical determination of the
usual environment of an individual. Nevertheless, the determination of the usual environment
should 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 stay

Forms of Tourism

In relation to an economy of reference, it is recommended that the following basic forms of tourism
be 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 trip

The three basic forms of tourism set forth can be combined in various ways to derive other forms of
tourism. 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 Visitors

International visitors



From the perspective of the country of reference, international travelers/visitors are either inbound
visitors (non-residents travelers/visitors making trips to the country of reference) or outbound
travelers/visitors (residents travelers/visitors making trips to a country other than the country of
reference.
An international traveler, that is, traveler to or within a country different from that of his/her
residence, 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 visited

Within arriving, resident and non-resident travelers observed at the border, it is possible to define
two categories; that is of visitors (returning outbound visitors in the case of residents, arriving
inbound 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 being
characterized by the reason for which they have been excluded from visitors that corresponds, either
to fact of being in an employer-employee relationship (border, seasonal, and other short-term
workers) 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 and
to those proceeding without legal permit although it has to be recognized that it is almost always
impossible to identify the latter.

Tourist expenditures patterns

How tourism spending flows into economy:

TOURISTS PAY FOR: TRAVEL COMPANIES PAY FOR:
Lodging Wages, salaries, tips and gratuities
Dining Commission and payroll taxes
Entertainment Food and beverage stocks
Clothing Music and entertainment
Gifts and souvenir Administrative expenses
Photography Professional services and insurance premium
Medicines and medical attention Advertising and publicity
Jewelry Utilities: gas, water, electricity, sewerage removal
Tobacco Purchases of goods sold
Hairdressing Materials and supplies
Cosmetics Repairs and maintenance
Internal transports Transportation, licenses, and taxes
Tours and sightseeing Capital asset repayment
Miscellaneous



Development

The act of developing or disclosing that which is unknown; a gradual unfolding process by which
anything is developed, as a plan or method, or an image upon a photographic plate; gradual
advancement or growth through a series of progressive changes; also, the result of developing, or a
developed 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 have
access to the resources needed for a decent standard of living and to be able to participate in the life
of the community.'

Achieving human development is linked to a third perspective of development which views it as
freeing 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 Country

A developed country can be defined through economic growth and security. Most commonly the
criteria for evaluating the degree of development is to look at gross domestic product (GDP), the
per capita income, level of industrialization, amount of widespread infrastructure and general
standard of living. Which criteria, and which countries are classified as being developed, are a
contentious issue.

According to the International Monetary Fund, advanced economies comprise 65.8% of global
nominal GDP and 52.1% of global GDP (PPP) in 2010. Countries not fitting such definitions are
classified as developing countries or undeveloped countries. Terms similar to developed country
include "advanced country", "industrialized country", "'more developed country" (MDC), "more
economically 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 ongoing
process that is hard to define. The term MEDC is one used by modern geographers to specifically
describe the status of the countries referred to: more economically developed.

The first industrialized country was the United Kingdom, followed by Belgium, Germany, United
States, France and other Western European countries. According to some economists such as
Jeffrey Sachs, however, the current divide between the developed and developing world is largely a
phenomenon 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) per
capita would thus be described as developed countries. Another economic criterion is
industrialization; countries in which the tertiary and quaternary sectors of industry dominate would
thus be described as developed.

More recently another measure, the Human Development Index (HDI), which combines an
economic measure, national income, with other measures, indices for life expectancy and education
has 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 whichever
measure is used.



Developing Country

A developing country, also known as a less-developed country, is a nation with a low level of
material well-being. Since no single definition of the term developing country is recognized
internationally, 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 yet
fully demonstrated the signs of a developed country, are categorized under the term newly
industrialized countries.

Kofi Annan, former Secretary General of the United Nations, defined a developed country as
follows.
"A developed country is one that allows all its citizens to enjoy a free and healthy life in a safe
environment."

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 use
of the term is convenient; it is not intended to imply that all economies in the group are
experiencing similar development or that other economies have reached a preferred or final stage of
development. Classification by income does not necessarily reflect development status."

The development of a country is measured with statistical indexes such as income per capita (per
person) (gross domestic product), life expectancy, the rate of literacy, et cetera. The UN has
developed the Human Development Index (HDI), a compound indicator of the above statistics, to
gauge the level of human development for countries where data is available.

Developing countries are in general countries which have not achieved a significant degree of
industrialization relative to their populations, and which have, in most cases a medium to low
standard 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 of
those who utilize these terms.

To moderate the euphemistic aspect of the word developing, international organizations have started
to use the term Less economically developed country (LEDCs) for the poorest nations which can in
no sense be regarded as developing. That is, LEDCs are the poorest subset of LDCs. This may
moderate 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 theoretical
systems having diverse orientations — for example, theories of decolonization, liberation theology,
Marxism, anti-imperialism, and political economy.

Criticism of the term 'developing country



There is criticism of the use of the term ‘developing country’. The term implies inferiority of a
'developing country' or 'undeveloped country' compared to a 'developed country', which many
countries dislike. It assumes a desire to ‘develop’ along the traditional 'Western' model of economic
development 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 in
decline or static in some countries, particularly in southern African states worst affected by
HIV/AIDS. In such cases, the term developing country may be considered a euphemism. The term
implies homogeneity between such countries, which vary widely.

Developing Countries As International Tourism Destinations

While the majority of international tourism occurs within a relatively small number of developed
countries, developing countries have increased their market share considerably since the early
1970s . However, international tourist arrivals are spread very unequally among developing
countries.

The main reasons for this are the varying degrees of safety, accessibility and availability, standard
of tourism infrastructure, tour operator links and connections, and historical and political links to
the main generating areas.

While tourism to developing countries is growing more rapidly than global tourism, there are large
differences between regions and countries2 (Table 1).

Table 2 provides a more detailed breakdown of arrivals by country. A number of key features
characterise 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.



• 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 holiday
destinations (e.g. Central and Eastern Europe3). Here a high percentage of arrivals are independent
travellers, business travellers and those visiting friends or relations (VFR).

This situation is not static, however. Table 3 highlights the developing countries that have grown
rapidly in terms of international arrivals in the last decade – many of which are low-income
countries.

The highest growth rates are shown by South East Asia, although in many cases these can be
explained by the very low starting point. Cambodia, Lao PDR and Myanmar, in particular, received
few tourists in 1990 and although numbers are still not high in 2000 the rate of growth appears
spectacular.

This table also highlights strong tourism growth in African countries. These figures are rather more
significant than those for South-East Asia given a higher starting point – particularly for South
Africa.



Underdeveloped Country

Underdevelopment is a term often used to refer to economic underdevelopment, symptoms of
which include lack of access to job opportunities, health care, drinkable water, food, education and
housing.

At the 1948 Conference of FAO the term was already current. Underdevelopment takes place when
resources are not used to their full socio-economic potential, with the result that local or regional
development is slower in most cases than it should be. Furthermore, it results from the complex
interplay of internal and external factors that allow less developed countries only a lop-sided
development progression.

Underdeveloped nations are characterized by a wide disparity between their rich and poor
populations, and an unhealthy balance of trade. The economic and social development of many
developing countries has not been even. They have an unequal trade balance which results from
their 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 can
production be expanded as this rapidly depresses prices. Consequently, the primary commodities
upon which most of the developing countries depend are subject to considerable short-term price
fluctuation, rendering the foreign exchange receipts of the developing nations unstable and
vulnerable. Development thus remains elusive.

The world consists of a group of rich nations and a large number of poor nations. It is usually held
that economic development takes place in a series of capitalist stages and that today’s
underdeveloped countries are still in a stage of history through which the now developed countries



passed long ago. The countries that are now fully developed have never been underdeveloped in the
first 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 businesses

Local job creation

Globalisation has become a key force of change in all OECD countries. It is making our economies
more open, bringing new opportunities, new markets and new wealth - But it also demands more
rapid adjustment to change. The accomplishment of strategic restructuring is often required, so that
workers are not displaced or excluded from the labour market and so that no localities are left to lag
behind or decline.

Local development and job creation initiatives first emerged in the early 1980s as a direct response
to a new phenomenon of high, persistent and concentrated unemployment, which national policies
appeared unable to defeat on their own. Since then local initiatives have continued to spread and
evolve - They represent an important mechanism for responding to a number of broad forces
affecting our economies and societies today.

These forces include the globalisation of markets, new technologies, the transfer of policy powers
from central to local governments and partners, the rise of civil society and the renewed interest in
equitable and sustainable development. If implemented properly, local development initiatives can
bolster national efforts to create employment, tackle poverty and improve governance.

While the content of local development efforts varies, from the promotion of entrepreneurship to
the battle against exclusion in distressed areas, they share a characteristic working method.



They mobilise local people and agencies in the design and implementation of initiatives that are
more tailored to local needs. Their intiatives may be funded by individual regions or cities, but
equally they may be part of national government programmes that are executed in partnership with
local agencies.

Although local development and job creation policies are not as old as many other areas of
government intervention, there is nevertheless a large stock of knowledge that can already be drawn
on from across the regions of the OECD. And there is undeniably a strong demand on the ground
for an exchange of knowledge on best practices and on the lessons from these experiences, both to
help 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 to
reduce welfare dependency and to increase entrepreneurial activity more generally. Self-
employment programmes help community development and discourage informal economic
activities. They are not a panacea for unemployment, as typically only a small fraction of the
unemployed – usually less than 5% – will participate in such schemes.

However, these programmes can provide a cost-effective alternative to income support, even when
one considers their inherent deadweight costs (where self-employment would have happened
anyway without the programme). Furthermore, the programmes clearly add to the long-term
employability of those who participate, even if their businesses fail.

Trade and wealth

Redistribution of wealth

Redistribution of wealth is the transfer of income, wealth or property from some individuals to
others 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 also
refer to regressive redistribution, from the poor to the rich. The desirability and effects of
redistribution are actively debated on ethical and economic grounds. Some countries, such as the
United States, have a particular history of it. All demographic groups—even those not usually
associated with wealth redistribution such as Republicans and the wealthy—desired a more equal
distribution of wealth than the status quo."

Types of redistribution

Today, income redistribution occurs in some form in most democratic countries. Progressive
income 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 earner
will pay a higher tax rate than a low income earner. A steeper progressive income tax results in
more equal distribution of income and wealth across the board.

Property redistribution is a term applied to various policies involving taxation or nationalization of
property, or of regulations ordering owners to make their property available to others. Public
programs and policy measures involving redistribution of property include eminent domain, land
reform and inheritance tax. Two popular types of governmental redistribution of wealth are
Subsidies and Vouchers (such as food stamps).



While the persons receiving redistributions from such programs may prefer to be directly given
cash, these programs may be more palatable to society, as it gives society some measure of control
over how the funds are spent. The objectives of income redistribution are varied and almost always
include the funding of public services. Supporters of redistributive policies argue that less stratified
economies are more socially just.

One basis for redistribution is the concept of distributive justice and wealth. One premise of
redistribution is that money should be distributed to benefit the poorer members of society, and that
the 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 in
some way through the utilities of its individuals.

Stabilization of the economy

Economic stability refers to an absence of excessive fluctuations in the macro-economy. An
economy with fairly constant output growth and low and stable inflation would be considered
economically stable.
An economy with frequent large recessions, a pronounced business cycle, very high or variable
inflation, or frequent financial crises would be considered economically unstable - The United
States or Greece is an example of an unstable economy. Perhaps most importantly, the federal
government 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 controlling
the use of credit (monetary policy), it can slow down or speed up the economy's rate of growth - in
the process, affecting the level of prices and employment.

Fiscal Policy and Economic Stabilization

In economics and political science, fiscal policy is the use of government expenditure and revenue
collection (taxation) to influence the economy. Fiscal policy can be contrasted with the other main
type of macroeconomic policy, monetary policy, which attempts to stabilize the economy by
controlling interest rates and spending.

The two main instruments of fiscal policy are government expenditure and taxation. Changes in the
level and composition of taxation and government spending can impact the following variables in
the 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: economic
activity.

Stances of fiscal policy

The three possible stances of fiscal policy are neutral, expansionary and contractionary. The
simplest definitions of these stances are as follows:



• 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 tax
laws at all, cyclical fluctuations of the economy cause cyclical fluctuations of tax revenues and of
some types of government spending, altering the deficit situation; these are not considered to be
policy changes.

Monetary Policy

Monetary policy is the process by which the monetary authority of a country controls the supply of
money, often targeting a rate of interest for the purpose of promoting economic growth and
stability.
The official goals usually include relatively stable prices and low unemployment. Monetary theory
provides insight into how to craft optimal monetary policy - It is referred to as either being
expansionary or contractionary, where an expansionary policy increases the total supply of money
in the economy more rapidly than usual, and contractionary policy expands the money supply more
slowly 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, and
associated borrowing.

Types of monetary policy

In practice, to implement any type of monetary policy the main tool used is modifying the amount
of 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 liquid
forms of money are bought or sold). The multiplier effect of fractional reserve banking amplifies
the effects of these actions. Constant market transactions by the monetary authority modify the
supply of currency and this impacts other market variables such as short term interest rates and the
exchange rate.

The distinction between the various types of monetary policy lies primarily with the set of
instruments 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 CPI

Price Level Targeting Interest rate on overnight debt A specific CPI number



Monetary Aggregates The growth in money supply A given rate of change in the CPI

Fixed Exchange Rate The spot price of the currency The spot price of the currency

Gold Standard The spot price of gold Low inflation as measured by the gold price

Mixed Policy Usually interest rates Usually unemployment + CPI change

The different types of policy are also called monetary regimes, in parallel to exchange rate
regimes.
A fixed exchange rate is also an exchange rate regime; The Gold standard results in a relatively
fixed regime towards the currency of other countries on the gold standard and a floating regime
towards those that are not.

Targeting inflation, the price level or other monetary aggregates implies floating exchange rate
unless the management of the relevant foreign currencies is tracking exactly the same variables
(such as a harmonized consumer price index).

Local income and businesses

Businesses and public organizations are increasingly interested in the economic impacts of tourism
at national, state, and local levels. One regularly hears claims that tourism supports X jobs in an
area or that a festival or special event generated Y million dollars in sales or income in a
community.

“Multiplier effects” are often cited to capture secondary effects of tourism spending and show the
wide range of sectors in a community that may benefit from tourism. Tourism’s economic benefits
are touted by the industry for a variety of reasons. Claims of tourism’s economic significance give
the industry greater respect among the business community, public officials, and the public in
general. 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, government
and residents of the local community. Economic benefits and costs of tourism reach virtually
everyone in the region in one way or another. Economic impact analyses provide tangible estimates
of these economic interdependencies and a better understanding of the role and importance of
tourism in a region’s economy.

Tourism activity also involves economic costs, including the direct costs incurred by tourism
businesses, government costs for infrastructure to better serve tourists, as well as congestion and
related costs borne by individuals in the community. Community decisions over tourism often
involve debates between industry proponents touting tourism’s economic impacts (benefits) and
detractors emphasizing tourism’s costs.

Sound decisions rest on a balanced and objective assessment of both benefits and costs and an
understanding of who benefits from tourism and who pays for it. Tourism’s economic impacts are
therefore an important consideration in state, regional and community planning and economic
development. Economic impacts are also important factors in marketing and management decisions.



Communities 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 economic
impact 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 Effects

A standard economic impact analysis traces flows of money from tourism spending, first to
businesses 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 households

Formally, regional economists distinguish direct, indirect, and induced economic effects. Indirect
and induced effects are sometimes collectively called secondary effects. Any of these impacts may
be measured as gross output or sales, income, employment, or value added.



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 technology

Public ownership

State ownership, also called public ownership, government ownership or state property, are
property interests that are vested in the state, rather than an individual or communities. State
ownership 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. The
process 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 like
joint-stock corporations with the government owning a controlling stake of the shares - This model
is 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 use
profitable entities they own to support the general budget.



SOE's may or may not be expected to operate in a broadly commercial manner and may or may not
have 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 rights

When ownership of a resource is vested in the state, or any branch of the state such as a local
authority, individual use "rights" are based on the state's management policies, though these rights
are 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 a
tenancy of the apartment, which may be lifelong or inheritable, but the management and control
rights are held by various government departments

Public property

There is a distinction to be made between state ownership and public property. The former may
refer to assets operated by a specific organization of the state used exclusively by their operators or
that organization, such as a research laboratory, while public property refers to assets and resources
that are available to the entire public for use, such as a public park

Private ownership

Is the tangible and intangible things owned by individuals or firms over which their owners have
exclusive and absolute legal rights, and can only be transferred with the owner’s consent. Private
property is the right of persons and firms to obtain, own, control, employ, dispose of, and bequeath
land, 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 emerged
as the dominant form of property in the means of production and land during the Industrial
Revolution in the early 18th century, displacing feudal property, guilds, cottage industry and craft
production, which were based on ownership of the tools for production by individual laborers or
guilds of craftspeople.

Private property can take the form of real estate, homes, factories, automobiles, capital, patents and
copyrights. 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 socialized
production 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, whereas
possession is a physical phenomenon.

Personal property versus the means of production

In political and economic theory, the distinction between private property in personal goods and
private property in the means of production is important. In general, personal property is part of
your person and includes property from which you have the right to exclude others.



From the socialist perspective, private property refers to capital or means of production that is
owned by a business or few individuals and operated for their profit. Personal property refers to
tangible items and possessions individuals own, such as consumer goods.

From the Marxist perspective, private property is a social relationship, not a relationship between
person and thing - In capitalism there is little distinction between personal and private property.

Privatization

Privatization 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 private
sector (businesses that operate for a private profit) or to private non-profit organizations. The term
is 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
company's 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 organisations
that 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. SIPs
are more likely to be used when capital markets are less developed and there is lower income
inequality. 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 be
difficult 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, for
example Euronext, and the London, New York and Hong Kong stock exchanges. As a result of
higher political and currency risk deterring foreign investors, asset sales occur more commonly in
developing countries.

Voucher privatization has mainly occurred in the transition economies of Central and Eastern
Europe, such as Russia, Poland, the Czech Republic, and Slovakia. Additionally, Privatization from
below 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 activity
undertaken by organizations that are for non-profit and non-governmental. This sector is also called



the third sector, in reference to the public sector and the private sector. Civic sector is another
term for the sector, emphasizing the sector's 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 (NPO's) and non-governmental
organizations (NGO's) 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 economy

The presence of a large non-profit sector is sometimes seen as an indicator of a healthy economy in
local and national financial measurements. With a growing number of non-profit organizations
focused 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 third
sector 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 definitions

There are considerable problems with terminology, however. Although the voluntary, community
and not-for-personal profit sectors are frequently taken to comprise the "Third Sector" each of these
sectors or sub-sectors have quite different characteristics.

The community sector is assumed to comprise volunteers (unpaid) whilst the voluntary sector are
considered (confusingly) to employ staff working for a social or community purpose. In addition
however, the not-for-personal-profit sector is also considered to include social firms (such as
cooperatives and mutuals) and more recently governmental institutions (such as Housing
Associations) that have been spun off from government, although still operating fundamentally as
public service delivery organisations.

These other types of institutions may be considered to be quasi-private or quasi-public sector rather
than stemming from direct community benefit motivations.

Concerns



There have been long-ranging arguments regarding the financial accountability of the nonprofit
sector throughout Western society. There is also ongoing concern whether the nonprofit sector will
unequally 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 and
further globalization of that process through neo-liberal strategies of the Washington consensus.

Commercial sectors

In economics, the private sector is that part of the economy, sometimes referred to as the citizen
sector, which is run by private individuals or groups, usually as a means of enterprise for profit, and
is not controlled by the state. By contrast, enterprises that are part of the state are part of the public
sector; 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 governments

A variety of legal structures exist for private sector business organizations, depending on the
jurisdiction in which they have their legal domicile. Individuals can conduct business without
necessarily 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 decisions

In countries where the private sector is regulated or even forbidden, some types of private business
continue to operate within them.

Pricing policy

Can be defined as the policy by which a company determines the wholesale and retail prices for its
products 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. One
strategy does not fit all, so adopting a pricing strategy is a learning curve when studying the needs
and behaviors of customers and clients.

The factors that businesses must consider in determining pricing policy can be summarised in four
categories:

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



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 prices

4. 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 market

Pricing Factors to Consider

• Determine primary and secondary market segments . This helps you better understand the
offering's value to consumers. Segments are important for positioning and merchandising
the offering to ensure maximized sales at the established price point.
• Assess the product's availability and near substitutes . Underpricing hurts your product as
much as overpricing does. If the price is too low, potential customers will think it can't 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.



Visitor management

Visitor management refers to tracking the usage of a public building or site. By gathering
increasing amounts of information, a visitor management system can record the usage of the
facilities by specific visitors and provide documentation of visitor’s whereabouts.

Because a visitor management system provides a record of building use, these systems are
frequently used to complement building security systems and access control systems. As
electronic visitor management systems become more common and more powerful, these systems
are taking over many of the functions of building security and access control.
Many different vendors provide visitor management software and systems.

Controversy

The amount of data recorded by a modern visitor management system is formidable, and issues of
information privacy have created controversy regarding the use of these visitor management
systems. However, terrorist activities, school violence and child protection issues have acted as
rallying 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 security
system is a critical concern for privacy advocates. They argue that as the level of information
accessed, gathered and retained increases, additional security measures to protect the information
itself should be put in place.

Also at issue is the level of security given to the access cards themselves. Some privacy advocates
point to experiments done by researchers that crack the security of RFID cards, sometimes used as
part 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 as
one substantial benefit. As more parents demand action from the schools that will protect children
from sexual predators, some school districts are turning to modern visitor management systems that
not only track a visitor’s stay, but also check the visitor’s information against national and local
criminal databases.

According to the supporters of enhanced visitor management systems, the same database search
capabilities could be used to protect sensitive areas potential threats such as terrorists of criminal
activity.

Visitor Management Technologies

Pen and paper visitor management system

A pen and paper visitor management system records basic information about visitors to a public
building 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. Training
to use the system is minimal, and the equipment required to implement this visitor management
system is cheap and readily available. Some systems use a simple book format where visitors
simply enter their details on marked rows.



Computer visitor management systems

Basic computer or electronic visitor management systems use a computer network to monitor and
record visitor information. As computer processing power, digital video and information gathering
technology 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 and
paper system. Visitor ID can be checked against national and local databases, as well as in-house
databases for potential security problems.

Many visitor management systems feature searchable visitor information databases; Photo ID cards
can be custom printed for one-time only or continuing use; Swipe cards speed the security screening
process.

Visitor management software

Several desktop-based visitor management software applications are currently available. These
applications 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 a
visitor's driver license, passport or other government issued identification document.

Visitor management software as a service

Another alternative to visitor management software is an on-line, web based visitor management
system offered as a service.

The advantage of using a software as a service vs. a desktop-based application is immediate
deployment and full access through the internet from any computer. This solution is perfect for
multi tenant buildings with tenants on individual networks, as well as Enterprise corporations with
global locations. Because there's no on-site software to install, the system is highly scalable and
rapidly deployed.



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 earnings

Tourism multiplier effects

Tourism multiplier effect can be defined as the expansion of a country's money supply that results
from banks being able to lend. The size of the multiplier effect depends on the percentage
of 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 bank
deposits by the reserve requirement. Tourism not only creates jobs in the tertiary sector, it also
encourages 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 by
a tourist circulates through a country's economy.



The generator’s of economic impact:

Multiplier
Visitors
Effect

Their
Expenditures

The tourist multiplier effect:



Money spent in a hotel helps to create jobs directly in the hotel, but it also creates jobs indirectly
elsewhere in the economy. The hotel, for example, has to buy food from local farmers, who may
spend some of this money on fertiliser or clothes. The demand for local products increases as
tourists often buy souvenirs, which increases secondary employment.

The multiplier effect continues until the money eventually 'leaks' from the economy through
imports - the purchase of goods from other countries.

Direct and indirect economic effect

Direct effect

Direct effect is the easiest to understand because they result from the visitor spending money in
tourist enterprises and providing a living for the owners and managers and creating job for
employees. The direct economic effects are those that occur at front-line tourism-related
establishments.



Therefore, when tourists spend their money in hotels, restaurants, transportation and communication
services and retail outlets, for example, this will create direct income, output, government revenue
and employment effects, as well as requiring some direct imports of goods and services. The direct
effects are generally less than the volume of tourism receipts because of the expenditures that
immediately leak out of the economy under study

Indirect effect

The 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 the
money 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 are
classified as indirect effects, as are those economic effects created as the suppliers to these other
industries find the demands for their services increasing.

It is often the case that these subsequent demands for goods and services within the local economy
result in further demands upon the front-line tourism-related establishments, such as when an
intermediate 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 the
amount of money circulating getting smaller at each successive round of activity as money leaks out
of the economy in the form of savings and imports, until the amount of money circulating in the
economy as a result of the initial tourism spending becomes negligible.

Induced effect

The induced effects occur because at the direct and indirect levels of economic impact, income will
accrue to residents of the local economy. Some of this money will be saved and leak out of the
system, but some of it will be spent on goods and services within the local economy and this will
generate further rounds of economic activity. This additional activity and its subsequent effects
reflect the induced effects of the initial change in tourist spending.

This ratio reflects direct, indirect and induced impacts

A distinction may be drawn between partial and complete multiplier effects. The former refers to
the multiplier effect associated with a single productive sector (industry) of the economy, so that if



the demand for that specific industry's output changes then the total impact, taking account of the
secondary 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 and
distribution of tourism spending across all sectors of the local economy. They are, in effect, a
weighted average of the partial multipliers where the weights are determined by the distribution of
spending. It should also be noted that changes in tourism spending also create predictable changes
in 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 and
planning of tourism development. Multiplier values will provide information relating to human
resource requirements, government revenue, imports and income level changes that are essential if
tourism is going to be developed and maintained in an optimal fashion.

Sizes of Multipliers

The size of the multipliers depends on four basic factors:

(1) The overall size and economic diversity of the region's economy. Regions with large, diversified
economies producing many higher order goods and services will have high multipliers as
households 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 large
geographic extent will have higher multipliers, all other things equal, than small areas as
transportation costs will tend to inhibit imports. Regions that serve as central places for the
surrounding area will also have higher multipliers than more isolated areas.

(3) The nature of the economic sectors under consideration. Multipliers vary across different sectors
of the economy based on the mix of labor and other inputs and the propensity of each sector to buy
goods 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 economic
structure as well as price changes. When using regional economic models or multipliers, spending
changes are usually price adjusted to the model year. Employment multipliers and ratios are more
likely to change over time than sales or income multipliers, as they are more sensitive to general
price inflation.

Types of Multipliers

Change may be measured in several ways. Some community leaders may be primarily concerned
with employment or income while others may want to estimate the total value added to the local
economy. Since multipliers are simple ratios of total to initial change, numerous economic
multipliers are easy to calculate.

Four multipliers are commonly used to assess impacts of an initial increase in production resulting
from an increase in sales, usually called final demand in multiplier analysis

The four (4) are:
• Output



• Employment
• Income
• Value added multipliers

Output multipliers

The output multiplier estimates the total change in local sales, including the initial $1 of sales
outside 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 an
estimate of the total increase in sales for the study area, including the $1 export sales. The output
multiplier is used to assess the interdependence of sectors in the local economy.

Employment multipliers

Communities often wish to know the number of jobs that will be created as a result of a new
economic activity. The employment multiplier measures the total change in employment resulting
from an initial change in employment of an exporting industry. The additional employment in the
new activity multiplied by the employment multiplier for the industry provides an estimate of the
total 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 employment
multiplier for sawmills is 2.1. In this scenario, an additional 330 jobs (630 - 300) would be created
as a result of the 300 new jobs in Lumberland.

Income multipliers

The 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 change
in income by the income multiplier for the industry provides an estimate of the increase in income
for 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 income
multiplier 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 total
payroll of the study area.

Value added multipliers

The value added multiplier provides an estimate of the additional value added to the product as a
result of this economic activity. Value added includes employee compensation, indirect business
taxes, proprietary and other property income.

Consider again the situation of Lumberland which is to produce $1 million worth of lumber
products to be exported to Japan. The total value added that is generated from the production of the
lumber products can be calculated by multiplying the value added to the lumber products times the
multiplier. If the value added to the $1 million of lumber products is $360,000 and the value added
multiplier is 2.2, then $432,000 ($360,000 x 1.2) of “value” is added to products in other industries
affected by the increase in lumber sales.

Employment



Employment is a contract between two parties, one being the employer and the other being the
employee.

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 material
details of how the work is to be performed.” - Black's Law Dictionary page 471 (5th ed. 1979).

Employee

An employee contributes labor and expertise to an endeavor of an employer and is usually hired to
perform 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, which
differs from those of customer or client.

Other types of employment are arrangements such as indenturing which is now highly unusual in
developed nations but still happens elsewhere.

Types of Employment

Full-time Employees:

Full-time employees work on a regular weekly basis and are expected to work a full week. Workers
considered full-time employees usually work 40 hours per week. Full-time employees most often
receive employee benefits that may include vacation time, retirement fund contributions, health
benefits, sick leave, and other benefits provided by the employer. An employee is obliged to work
only for one organization. Underlining principle is, he/she can not have any other avocation.

Example: all regular employees

Part-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 in
proportion to the amount of time worked. Part-time employees usually work on a regular ongoing
basis - 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 working

Temporary Employees:

Temporary workers, often called "temp" employees, are workers employed by a temporary service
business. Employees usually work for a short period of time at different companies to which they
are assigned. The temporary service pays workers' wages and withholds taxes, Social Security,
unemployment insurance, and workers‘ compensation from paychecks like other employers do -



Some temporary businesses, but very few, offer benefit programs - health insurance, retirement
plans, paid vacation, and sick leave.

The types of workers most commonly hired by temporary services include office and clerical
support staff, technical workers, and professionals - doctors, lawyers, and corporate executives.
Temporary work arrangements often attract workers who desire work schedule flexibility, an
opportunity to check out potential employers, and a means of acquiring work experience and
contacts 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 as
agreed (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 specific
project, or to replace an employee on sick leave or parental leave. You should provide the employee
with an agreement in writing that sets out the length of the employment contract. Fixed term
employees are entitled to the same annual, personal and other leave entitlements as full-time
employees, 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 a
temporary 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 the
work is performed.

Job Share Employees:

In a job share arrangement, two or more employees share one full-time job. For example, two
employees might agree to work 20 hours each per week. Benefits provided by the employer are
prorated by share. Many employers are now offering job share options to help retain employees and
increase worker satisfaction.

Apprenticeships and traineeships:

Apprentices are generally training to be trades people, while trainees are generally learning the
skills 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 agreement
Both apprenticeships and traineeships lead to a nationally recognized qualification.



Probationary period:

You can use a probationary period to make sure a new employee is suitable for the job. To comply
with the law when using a probationary period, or dismissing a probationary employee

Piecework 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 receipts

The basic source of information regarding receipts gained by a country from tourists’ arrival and
expenditures is seen in its balance of payments accounts. This information is contained in the travel
account part of the balance of payments statement which shows the overall position of inflows and
outflows and the final outcome arising from financial transactions of a country with the rest of the
world.

Export of goods and services are comparable to exports from foreign tourism (or receipts there
from) on account of foreign tourists visiting the host country and money spent by them during their
stay, 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 Earnings

Definition: Proceeds from the export of goods and services of a country, and the returns from its
foreign investments, denominated in convertible currencies. Foreign exchange – currency-literally
foreign money – used in settlement of international trade between countries

The foreign exchange market (forex, FX, or currency market) is a global, worldwide-
decentralized financial market for trading currencies. Financial centers around the world function as
anchors 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 of
different currencies.



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 businesses

Negative economic impacts of tourism

There are many hidden costs to tourism, which can have unfavourable economic effects on the host
community. Often rich countries are better able to profit from tourism than poor ones. Whereas the
least developed countries have the most urgent need for income, employment and general rise of the
standard of living by means of tourism, they are least able to realize these benefits. Among the
reasons for this are large-scale transfer of tourism revenues out of the host country and exclusion
of local businesses and products.

Dependence on tourism

Diversification in an economy is a sign of health. If a country, or region within a country, becomes
dependent for its economic survival on one industry and that industry fails then the social
consequences can be devastating. Overdependence on one or two industries is also often
accompanied 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 the
generating or host countries. Countries with a high percentage are more at risk to any decline in
tourism and travel. Others are less vulnerable to the ill effects of a decline in tourism, because their
economies are more diversified - Japan is a good example.

The table below shows international tourism receipts as a per cent of export earnings for selected
countries around the world.

International Tourism Receipts:
% of Export Earnings (1998)
Argentina 17.2
Australia 10.2
Canada 03.8
China 06.1
Czech Republic 11.0
Egypt 19.0
France 07.7
Germany 02.6
Greece 25.4
Israel 08.3



Whether it is a town or a country, is in an economically vulnerable situation or position when it is
dependent on the health and vigor of just one industry. Tourism revenues may fluctuates, for more
than just seasonal reasons, beyond a destination or an attraction’s ability to predict and manage such
a situation

Many countries, especially developing countries with little ability to explore other resources, have
embraced tourism as a way to boost the economy. In The Gambia, for instance, 30% of the
workforce depends directly or indirectly on tourism. In small island developing states, percentages
can 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, the
impacts of natural disasters such as tropical storms and changing tourism patterns can all have a
devastating effect.

Interdependence

Is a dynamic of being mutually and physically responsible to, and sharing a common set of
principles with others - Two states that cooperate with each other are said to be interdependent. It
can 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 also
been studied. Especially, possible negative impacts of tourism/tourists reflecting directly on
national 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 natural
environment including green crime must not be overlooked. Therefore, some managing and
governance guidelines in tourism in correlation with environmental safety and national security are
suggested.

Leakages



The 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 subtracted
amounts are called leakage.

In most all-inclusive package tours, about 80% of travellers' expenditures go to the airlines, hotels
and other international companies, and not to local businesses or workers. In addition, significant
amounts 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 up
leaving Thailand. Estimates for other Third World countries range from 80% in the Caribbean to
40% in India.

There are two main ways that leakage occurs:

Import leakage

This commonly occurs when tourists demand standards of equipment, food, and other products that
the host country cannot supply. Especially in LEDC’s, food and drinks must often be imported,
since local products are not up to the hotel's (i.e. tourist's) standards or the country simply doesn't
have 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 and
diversified economies.

Export leakage

TNC's have a substantial share in the export leakage. Often, especially in poor developing
destinations, they are the only ones that possess the necessary capital to invest in the construction of
tourism infrastructure and facilities. As a consequence of this, an export leakage arises when
overseas investors who finance the resorts and hotels take their profits back to their country of
origin.

Displacements

Displacement can happen when a tourism development occurs at the expense of another industry, or
when a new tourism project takes customers away from an existing attraction or facility – rather
than adding sufficient numbers of new visitors to the local tourist destination to justify the
investment. This type of situation, where tourism development simply substitutes one form of
expenditure and economic activity for another, is known as the displacement effect.

Similar situation with the enclave tourism where by the business aim in maximising economic
benefits and limiting social and environment impacts by concentrating investments and visitors to a
small geographical area or enclave. Local businesses often see their chances to earn income from
tourists 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 provides
everything they need and where they will make all their expenditures, not much opportunity is left
for local people to profit from tourism. All-inclusive hotels generate the largest amount of revenue
but their impact on the economy is smaller per dollar of revenue than other accommodation types.



The cruise ship industry provides another example of economic enclave tourism. - Non-river
cruises carried some 8.7 million international passengers in 1999. On many ships, especially in the
Caribbean, guests are encouraged to spend most of their time and money on board, and
opportunities to spend in some ports are closely managed and restricted.

Infrastructure cost

Tourism 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, and
possibly to provide tax breaks and other financial advantages, which are costly activities for the
government. Public resources spent on subsidized infrastructure or tax breaks may reduce
government investment in other critical areas such as education and health.

Increase in prices

Increasing demand for basic services and goods from tourists will often cause price hikes that
negatively affect local residents whose income does not increase proportionately. Tourism
development and the related rise in real estate demand may dramatically increase building costs and
land values. This makes it more difficult for local people to meet their basic daily needs.

Loss of local businesses

Foreigners will tend to explore/exploit a developing tourism industry of a country. An increased
foreign direct investment will take place in a country. Consequencely, it will affect the
local/domestic businesses related to tourism industry


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