THC 3: MACRO PERSPECTIVE OF TOURISM

AND HOSPITALITY

Name:_____________________________
Course and Year:____________________
 HOSPITALITY MANAGEMENT DEPARTMENT
THC 3: MACRO PERSPECTIVE OF TOURISM AND HOSPITALITY

Module No: 4 “THE ECONOMICS OF TOURISM AND HOSPITALITY”

NAME: _______________________________ COURSE&YEAR: __________

Date submitted: ______________ Rating: _______

Intended Learning Outcomes:

At the end of this chapter, you should be able to:

1. explain the role of tourism and hospitality in economic development

2. analyze the economic impact of tourisms and hospitality on a destination area;
3. differentiate the direct effects from the secondary effects of tourist expenditures on the
economy of the host area
4. elucidate the meaning of tourism multiplier and its effect on the economy of the host country
5. describe the undesirable effects of the economic aspects of tourism and
6. identify the strategies which can maximize the economic effects of tourism and hospitality

LESSON PROPER

The Role of Tourism and Hospitality in Economic Development

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

The Organization for economic Cooperation and Development (OECD) has concluded that tourism
and hospitality provide a major opportunity for growth to countries that are at the intermediate stage
of economic development and require more foreign exchange earnings.

Tourism and hospitality is an invisible export which differs from international trade in many ways.

 In tourism and hospitality, the consumer collects the product from the exporting country,
thereby eliminating the freight costs for the exporter, except in cases in which the airline used
are those of the tourist-receiving country.
 The demand for pleasure travel is largely dependent on non-economic factors, such as local
disturbances, political unrest, and changes in the fashion ability of resorts/countries created
mostly by media coverage. At the same time, international tourism and hospitality is both price
elastic and income elastic. This means that changes in price and income will also change the
demand for pleasure travel.
 By using specific fiscal measures, the exporting or tourist-receiving country can manipulate
exchange rates so that those for tourists are higher or lower (normally the latter is implemented
in order to attract large numbers of tourists) than those in other foreign trade markets. Also,
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 tourists are allowed to buy in domestic markets at the same prices as the local residents (the
exceptions are the duty-free tourist shops operated in many Caribbean islands and
elsewhere).

 Tourism and hospitality is a multifaceted industry that directly affects several sectors in the
economy, such as hotels, shops, restaurants, local transport firms, entertainment
establishments, handicraft producers, and indirectly affects many others, such as equipment
manufacturers and utilities.

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

economic Impact

When travelers outside the destination area spend on goods and services within the destination,
tourism and hospitality acts as an export industry by bringing in revenues from outside sources.
Tourist expenditures also increase the level of economic activity in the host area directly. Many
countries have utilized tourism and hospitality as a means to increase foreign exchange earnings to
produce investment necessary to finance economic growth.

The tourism and hospitality industry's economic impact on a destination area can be immense since it
provides a source of income, employment, and foreign exchange.

Direct and Secondary Effects

In order to measure the economic impact of tourism and hospitality on the destination area, it is
important to know the direct and secondary effects of visitor expenditures on the economy of the
area. Tourist expenditures received as income by businesses such as hotels, restaurants, car rentals,
tour operators, and retail shops serving tourists have a direct effect on the economy of the host area.
The term "direct means that the income is received directly. Indirect or secondary effects mean that
the money paid by tourists to businesses are, in' turn, used to pay for supplies, wages of workers, and
other items used in producing the products or direct services bought by tourists.

Tourism Multiplier
The term. "multiplier" is used to describe the total effect, both direct and secondary, of an external
source of income introduced into the economy. The tourism multiplier or multiplier effect is used to
estimate the direct and secondary effects of tourist expenditures on the economy of a country. The
multiplier effect is illustrated in Figure 2.

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A tourist makes an initial expenditure into the destination. This expenditure is received as income by
local tour operators, handicrafts store owners, hoteliers, and taxi drivers. In the first round of
transactions, a hotelier may use some of the money received to buy some supplies, pay some wages,
and retain some profits. The income in the second round may be spent or saved, while the employee
who has received payment for services rendered may spend some of it on rent and some on food,
and may put some into savings. The money spent on supplies in the third round of spending goes for
such things as seed, fertilizers, and imported raw materials. Any income spent on imports has leaked
out of the local economy. This process continues until the additional income generated by a new
round of spending essentially becomes zero. Leakage is the value of goods and services that must
be imported to service the needs of tourism and hospitality. To estimate the total economic impact on
an area, imports must be subtracted from the income generated by visitors.

Where:
K = the multiplier
Y= the change in income generated by E
E= the change in expenditure (the initial sum of money spent by the tourist)

The size of the multiplier depends on the extent to which the various sectors of the economy are
linked to one another. When the tourism and hospitality sectors buy heavily from other local economic
sectors for goods and services, there will be a smaller tendency to import and the multiplier will be
greater than if the reverse were true.

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Where:

K = the multiplier
L= the direct first-round leakages
C= the tendency to consume
CJ= the proportion of that propensity spent abroad
Tic= the indirect tax
Td= the value of direct deductions (income tax, national insurance and so on)
B= the level of government benefits
M= the value of imports.

Most developing economies have an income multiplier range between 0.6 and 1.2 while developed
economies have a range between 1.7 and 2.0

Cost-Benefits Ratio
Those concerned with developing the tourism and hospitality industry, whether a government or a
private individual, would to know the extent of potential benefits and their cost. Benefits divided by
cost equal the cost-benefit ratio. To arrive at this ratio, the following procedures are used:

1. Determine where the tourist dollar is spent

2. Determine what percentage of each expenditure leaves the local
3. Derive a “multiplier effect”, a ratio applied to income that reflects multiple spending within an
economy
4. Apply the multiplier effect to the tourist expenditures to arrive at the total benefits pf tourist
expenditures in dollar
5. Derive a cost-benefit ratio expressed as a dollars received/dollars spent: and
6. Apply the cost-benefit ratios to tourist expenditures to provide estimates of income and cost of
tourist businesses to a community for both the private and public sectors.

Undesirable Economic Aspects of Tourism

Some undesirable economic aspects of tourism and hospitality are higher prices and economic
instability. Because of additional demand and/or increased imports, tourist purchases may result in
higher prices in a destination area. This would mean that local residents would also have to pay more
for products and services.

Since pleasure travel is a discretionary item, it is subject to changes in prices and income. These
fluctuations may result in economic instability.

How to Maximize the Economic Effect of Tourism and Hospitality

Growth Theories
Some economic growth theories have been proposed to maximize the economic effect of tourism and
hospitality within a destination area. These are the theory of balanced growth and the theory of
unbalanced growth.

Proponents of the theory of balanced growth suggest that tourism and hospitality should be viewed as
an important part of a broad-based economy. This theory states that tourism and hospitality needs
the support of other industries. Its objective is to integrate tourism and hospitality with other economic
activities. To obtain maximum economic benefit, tourism and hospitality goods and services should
be locally produced.

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Supporters of the theory of unbalanced growth see tourism and hospitality as the spark to economic
growth. While the proponents of the theory of balanced growth stress the development of supply,
supporters of the theory of unbalanced growth emphasize the need to expand demand. As demand is
increased through the vigorous development of tourism and hospitality, other industries will move to
provide products and services locally.
Economic Strategies
The key to maximizing the economic effects of tourism and hospitality is to maximize the amount of
revenue and jobs developed within the region. To attain this objective, some economic strategies
have been adapted, such as import substitution, incentives, and foreign exchange.

Import Substitution It imposes quotas or tariffs on the importation of goods which can be developed
locally. It also grants subsidies, grants, or loans to local industries to encourage the use of local
materials. Its objective is to minimize the leakage of money.

Incentives
The wise use of incentives can encourage the influx of capital, both local and foreign, necessary to
develop tourism and hospitality supply. The most common forms of incentives are:

1. tax exemptions/reductions on imported machinery, materials, and the like;

2. reduction in company taxation by means of favorable depreciation allowances on investment,
or special treatment in relation to excise taxes, sales taxes, income taxes, turnover taxes, profit
taxes, or property taxes;
3. tax holidays (limited period);
4. guarantee of stabilization of tax conditions (for up to 20 years)
5. grants (for up to 30% of total capital costs);
6. subsidies (guaranteeing minimum level of profit, occupancy, etc.);
7. loans at low rates of interest;
8. provision of land freehold at nominal or little cost or at low rents;
9. free and unrestricted repatriation of all or part of invested capital profits, dividends, and interest
subject to tax provisions; and
10. guarantees against nationalization or appropriation.

Before implementing an incentive strategy, a destination should:

1. examine the performance of the schemes of other countries in light of their resources and
development of objectives;
2. research the actual needs of investors;
3. design codes of investment concessions related to specific development objectives with
precise requirements of investors; and
4. establish targets of achievements and periodically monitor and assess the level of realization
of such targets.
Foreign Exchange
Many countries have placed restrictions on spending in order to maximize foreign exchange earnings.
They have limited the amount of their own currency that tourists can bring in and take out of the
destination to ensure that foreign currency is used to pay bills in the host region. Tourists may be
required to pay hotel bills in foreign currency. Visitors may be required to show that they have enough
money for their stay before they are permitted to enter the country or they may even be required to
enter with a specified amount of foreign currency for the duration of their visit.

DISCUSSTON QUESTIONS
1. Differentiate tourism and hospitality from international trade.

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 2. Explain the meaning of tourism multiplier.

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3. In what way does the tourism multiplier affect the economy of the host country?

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4. Describe the direct and secondary effects of tourist expenditures

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CHAPTER QUIZ
I. Identify the following.

__________________1. It imposes taxes on imported goods which can be produced

locally.
_________________2. It describes the direct and indirect effect of an external
source of income introduced into the economy.
__________________3. A ratio obtained by dividing the benefits with the costs.
__________________4. The value of goods and services that must be imported to
service the needs of tourism and hospitality.
__________________5. An economic theory which emphasizes the development
of supply.
Il. Enumerate the following. (Write your answer at the back of this paper)
11-12. The undesirable economic aspects of tourism and hospitality
13-17. How to maximize the economic effects of tourism and hospitality
18-20. Forms of incentives

References:

Zenaida Lansangan-Cruz, PhD (2018) Macro Perspective of Tourism and Hospitality. CHAPTER: 3 Page: 19-55

Prepared by:
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Pamela Jean M. Onting
College Instructor

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