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Economic aspect on tourism (group 2)

    Introduction

    This wiki will explain the economical aspects of tourism, through explaining and giving examples of the subjects mentioned. If looked upon tourism through the economical aspect it will become clear that tourism creates new jobs and in some cases is a big contributor to the GDP of a country. While tourism in considered as a key element by the governments to enhance the economic in micro and macro level of the countries, the world witnesses a big contribution in economic through tourism which the income support the employment and current currency which are considered as a positive impact. On the other hand the nature and socio-economy may not have the same influence.

    Microeconomics and tourism

    To define the Microeconomics in tourism, it is the collection of consumer's behaviours, companies and the determination of market prices which is all affected by the demand side and the supply side of tourism as well. The consumer behaviour in usually influenced by many factors to determine the destination of travel, and the expenditure that the tourist will spend in the destination. Hence, these factors are related fundamentally with the disposable income, free time, advertisements, quality and access to travel, besides the price. The price is become an essential effect of traveling for the demand side of tourism and that what stimulate the supply side of tourism such as the ’budget’ airlines companies to compete on low prices services. Consequently that increased the demand for mass tourism which is based on ’high demand and low price’ strategy. For that the relation between the demand and the price is strongly influenced the market, the companies consider that when they based on the ’price elasticity’ theory which create the flexibility in the prices which are based on the quality of services and the quantities of tourists as well. In the microeconomic sectors the balance between the demand and supply side is important to avoid inflation or downturns in the market. For example when an oversupply on a specific destination occurred, then the demand for it was below the indications, in this case the supply side will have downturns which reflect directly to the micro-macro-economics in negative way.

    Market failure

    There are several of factors may be occur to collapse the market, even if it has benefits on the economic for example (mass tourism). On the other hand it could notably affect the environment such as pollution, or the host community, and that could cause a market failure by creating tensions between the tourists and the local’s community. Monopoly and oligopoly are significantly risky to the market. It is “the ability of a single person or a small group of people to unduly influence market prices” as (Ellwood, 2001, cited in Holden, 2006) claims. The market failure in this case occurs when one company or alienation of groups control the market and crush the other small companies. Hence, that leads to ban the competition in the market and affect the prices.

    Macroeconomics and tourism

    The concept of Macroeconomics considers the demand, investments and supply in the entire economy rather than individual markets (microeconomics). It includes the economic growth through full employment and by applying the price stability to reach to the balance of payment equilibrium (Burningham, Bennet, Cave, Herbert & Higham, 1984, cited in Holden, 2006). It is the power of tourism to contribute in the nation government and attract more investments. The positive contributions occur when the tourism import foreign currency and make a positive effect to the balance of payment ,beside developing the infrastructure and contributing to the gross domestic product (GDB) in normal levels to protect the destination from over-dependence on tourism (Holden, 2006).

    Contribution of GDP

    The Gross Domestic Product (GDP) is what measures the economy in a country or a region. The GDP measures everything that is being produced in the region during a specific period of time, for example a year. The GDP does indicate factors such as trade, services and goods and industrial production. Normally GDP is used to measure the economic activity of a region or country, it can also be used for estimate the grant from a specific industrial sector. Though the GDP can be measured in different ways, there is another way to define the contribution of the GDP. The Gross National Product (GNP) is instead used for measuring the profit made out of foreign spending in the certain region or country. This type of profit can rely upon for example tourism spending or investments by foreign enterprises within the region. (Koba, 2011).

    Indirect and direct effects of Tourism Expenditure

    Direct effects indicates the expenditure process in the tourism sector, it is based upon tourism products that are consumed upon the destination, and which often are likely to be produced locally. The indirect effects do instead explain the intermediate consumption for products within the tourism sector. These kind of products are purchased by companies within the tourist sector. The indirect effects form a supply chain for the tourism products that are being produced, from the local suppliers and industries, to the companies working within the tourism sector. The indirect effects can be important especially for the production of local products. Many companies adapt to the market by producing what is being consumed by visitors or by tourist suppliers, in that way they adapt to the demand. For example. If a supplier of tourist accommodation starts buying local products for his enterprise, the tourist will then be the one creating a demand for local produced goods and services in the host communities. Because of this effect, it is important that the tourism sector purchase goods and services that are locally produced so that the region itself will be able benefit from the economic impact that tourism brings (Vellas, 2011).

    Balance of Payments

    The balance of payments is a way of measure and classify the economic situation within a country according to how the country is financial governed. The country in question will be compared to other countries that are on the same level, financially. International tourism has a huge impact upon the balance of payments in a direct way (Çelik, Özcan, Topcuoğlu & Yildirim). Having a positive payment balance is important for underdeveloped countries this goes as well for developed countries. Many countries rely on international tourism in a way of earning foreign currency, which in itself benefits the balance payment a lot. From a tourism aspect, the struggle is to keep the balance sustainable between visitors that are visiting and the countries own residents that are travelling. Having I higher percentage of international visitors is what every government are working for, but some of them are struggling a lot with just that. If this structure is not balanced, the outcome could be that a country gets too dependent upon tourism. A negative payment balance can then lead to a few negative scenarios such as for example that the government has to borrow foreign currency or is not able to repay their foreign loans. (Holden, 2006).

    Tourism multipliers

    When determining the economic impact on tourism spending the so called multiplier concept can come to use. Here some indirect effects of a change in demand are highlighted (Cooper et al., 1998 cited in Holden, 2006). The basis of the multiplier process is that a circulation of money in the economy is created when an investment in the tourism industry takes place, which at each stage in the circulation is able generate extra demand (Holden, 2006). The economy wherein an expenditure is made will be impacted by changes in the pattern or in the level of the expenditure of tourism (Fletcher, cited in Jafari, 2000). One can therefore say that a section which produces the final service or product is not the only one affected by a change in demand, but the economic sectors that supply these services and products are also affected. The income distribution required by tourism enterprises to these suppliers is referred to as the ’indirect income’. Local firms and households take part of the money, with their increasing incomes, at each stage of this circulation. The round of economic activity which is generated by the increased spending of money (through increased incomes) in the economy is known as the ’induced effect’ (Cooper, Fletcher, Gilbert, Wanhill & Shepherd, 1998 cited in Holden, 2006).

    Tourism employment

    Employment is an effect that often comes with tourism, and the tourism sector itself contributes in a large scale to global employment. According to (WTTC, 2004) in 2004 tourism was accountable for 8,1 percent of the total global employment, both directly and indirectly generated by the industry (Holden, 2006). The tourism industry consists of a range of different sectors, which in varying degrees receive revenues from tourists and the jobs within these sectors may only be partially supported or dependent on revenues. The employment measurement is difficult to undertake in tourism since no standard classification of the tourist industry exists and due to the big variety of sectors involved (Westlake, cited in Jafari, 2000).

    The development of tourism and the employment that comes with it can also create complications. One aspect of tourism employment that can be problematic is an over-dependency on the industry as an employment source. This can occur through limited resources in other economic sectors, something which is usual on smaller islands, but also simply by tourism providing high salaries and financial rewards in comparison to other economic sectors. The result of the industry’s development can be a shift of workforce between the sectors with an increase in tourism employment. Increased development of tourism often takes with it increased reliances upon imported goods. Hereby the opportunities for employment generation reduce drastically and the workforces’ skills levels and opportunities for education within tourism become vital when determining opportunities for local employment within the industry (Holden, 2006).

    Problems with measurement

    To be able to make an accurate economic assessment of the impact of tourism it is crucial to have reliable and well covering data. With this data governments will be able to decide on whether to allocate resources to tourism or not (Holden, 2006).

    There are difficulties with collecting economic data about tourism. Tourism is disparate and within tourism there are many different actors involved. With tourism being so spread out it becomes difficult to gather accurate data.

    Liberalisation, tourism and trade

    Liberalisation can have a big impact on a countries economy. Due to the removal of measures that would protect the country’s industry. Besides the previously mentioned effects liberalisation also means that removing any restrictions on the foreign establishment, ownership, employment of personal, and remittances. This will lead to other countries being able to freely trade without any restrictions. This helps to create the so called “Free trade” (Holden, 2006).

    The General Agreement on Trade in Services (GATS) encourages countries to liberalise their economies, which will enable the free flow of capital and will encourage foreign investments. With this a country has to start focussing on exporting services, and finding out what the countries strengths are. This will further-on lead to specialisation and maximize the used resources available (Holden, 2006).

    Lesser-developed countries are often forced to accept liberalise in their economies. For the lesser-developed countries a free trade economy is not always favourable. Due to large multinationals coming with new and large scale investments. Most of the revenue will then return back to the multinational companies and not the local economy (Holden, 2006).

    Reference List

    Literature references:

    ·         Holden, A. (2006) Tourism Studies and the Social Sciences. New York: Routledge

    ·         Jafari, J. (2000). Encyclopedia of Tourism, London: Routledge

    ·         Cooper, C. (2012). Essentials of Tourism, Harlow: Pearson

    Internet references:

    •        Çelik, A., K., Özcan, S., Topcuoğlu, A. & Yildirim K., E. (2013). Effects of the tourism industry on the balance of payments deficit. (ISSN: 1303-2917), P. 2-3 http://www.tandfonline.com/doi/abs/10.1080/13032917.2013.772529 22/10/2014

    •         Kobal, M. (2011). Gross Domestic Product: CNBC Explains. http://www.cnbc.com/id/44505017 22/10/2014

    •         Vellas, F. (2011) THE INDIRECT IMPACT OF TOURISM: AN ECONOMIC ANALYSIS. http://t20.unwto.org/sites/all/files/pdf/111020-rapport_vellas_en.pdf

     

    By group 2;

    Salah Nashawati, Yoni Dob, Aton Yoseph and Maurice Koopmans

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