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Economics and Tourism - Group 6

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    Cécile Guermann, Fanny Tschofen, Farzaneh Tavajohi Hassan Kiadeh & Hanah Zavahir


    Tourism is one of the world's largest industries. It employs 235 million people (8,1% of total job employment) and generates billions of dollars for countries around the world. It is a substantial economic sector which needs to be analysed in order to plan, invest and target a market. Moreover, the World Travel and Tourism Council has stated, that for the next ten years, the tourism industry will increase by 4.5 percent per year (Holden, 2005). The study of economics assists to distinguish the choices which members of the public make in order to meet their demand.

    From an economic point of view, tourism is seen as a form of trade. Thus one of the main areas of research in tourism is how the money and jobs created by it circulate around the economy of a destination to generate further income and employment. Economic consequences of tourism are measurable compared to social impacts.


    Tourism can be defined in two ways:

    Firstly there are the demand-side definitions. Demand-side definitions can be viewed by a ‘conceptual’ rationale (Cooper, 2012). In this case, tourism is: ‘The activities of the people who travel to and stay in places outside their usual environment for not more than one consecutive year for leisure, business and other purposes’ (WTO and UNSTAT, 1994, cited in Cooper, 2012). This states that tourism is generated by movement between places and a stay at the destination, and explains that tourism cannot occur in one’s regular place of residence. Despite this, there are still factors that remain vague within this definition, whereas if it is viewed from a ‘technical’ point. In order to define tourism from ‘technical’ point definitions have been created, although there are certain ‘criterias’ that it has to pass in order to be considered as ‘tourism’ rather than another form of travel, such as day trip - to qualify, the trip has to span over at least one night or else it is just an excursion. (Cooper, 2012).

    The second way to define tourism is through the supply-side. This therefore is in relation to the product itself. The tourism product is made up from both tangible and intangible items, making it challenging to define. The supply-side definition from a ‘conceptual’ view includes the product, but also incorporates the firms, organisations and facilities that are used to deliver the product to the tourists (Leiper, 1979, cited in Cooper, 2005).


    The microeconomic analysis is a part of economics which focuses on the behaviour of clients and companies, and calculation and computation of the market price (Holden, 2005). In this level each of the consumers of services and providers and managers are an economic unit supplied with resources such as income, workforce, social capital and time with a set of purposes such as, profit, savings, quality and controlling (Freyens, 2008). Microeconomics evaluates and analyses the in which agencies and services set their prices and the way that consumers control the quality, Moreover, the way that value is created for consumers (Freyens, 2008). In this level the behavior of each unit is being analysed (Freyens, 2008).  There are several factors that affect the consumer's behaviour such as price, income, quality and advertising (Tribe, 1999, cited in Holden, 2005).


    The Meso-level analysis focuses on the characteristics and dynamics of sections such as healthcare, employment, social welfare, education. All of these are markets with their own policies and policy makers, providers, stakeholders, delivery frameworks and supply characteristics (Freyens, 2008). Governments and different units tend to increase and boost the combined energies of different sections such as increasing teaming between education and labour market programs. Mesoeconomic analysis presents beneficial means in order to evaluate the obstacles and the efficiency of each industry. This produces a wide provision for public about their services and encourages the managers to have an emphasis on social welfare (Freyens, 2008).


    Macroeconomic emphasises upon the balance and stability of the whole demand and supply (Holden, 2005). It then evaluates the demand side investment and supply side as a whole in the economy, instead of evaluating each unit separately (Holden, 2005). The concerns of this analysis is economic growth, full employment, price stability and the balance of payment  (Burningham, Bennett, Cave, Herbert, Higham, 1984 cited in Holden, 2005) and that the tourism industry has the ability to meet all these demands (Holden, 2005).


    Another factor that relates to the economic discipline is the social market failure. The common and accepted economics principles argue the failure of some markets in working according to the plans or in social efficiency is called market failure (Freyens, 2008). In social service industries wrong predictions by markets, poor price signals, unbalanced supply, limited effective demand, or restrictions to competitive outcomes are the causes of market failure (Freyens, 2008). For instance, quality issues occur when a wide range of problems appear due to the wrong or incomplete information and lack of experience prevents informed evaluation on the quality of the service (Freyens, 2008). In the case of tourism, despite the fact that most governments have been attracted to this industry because of the benefits that it brings for the destinations, they found that market failure can also appear in this industry, negative impacts upon different sections of destinations and locals and also the nature, for instance, different types of pollution, the growth of crime rates are the result of the tourism industry in some destinations. (Holden, 2005).


    Economic benefits from tourism can be resumed in three points: income, employment and regional development.

    Firstly, income: It is the spending generated by tourists at a destination.

    Tourism stimulates economies around the world, especially in the small and less-developed countries. Tourism is a catalyst for the expansion of other activities such as, agriculture and fisheries.

    Gross Domestic Product (GDP): tourism contributes to strengthen the economy of a country. To calculate it, a country needs to count the total value of all goods and services produced in ( It is a small contribution compared to other developed countries like Australia, where it contributes to around 12 percent, but it can be explained by the high level of economic development and by a large diversification of its activities. But in some other destinations like, islands, tourism contributes to more than half of the GDP. (Maldives, 74 percent; British Virgin Isles, 95 percent). Small scale destinations rely on tourism to increase their GDP because they have limited economic alternatives. (Holden, 2005 )


    Balance of payments (international tourism):

    • tourism play an important part in less-developed countries, because they rely on traditional primary industries which are decreasing.

    • The balance of payment shows the level of economic development of a country, the disposable income of its population, the cultural attitudes toward travel, the natural and cultural resources for tourism, the geographical proximity and the travelling time for the main tourism-generating countries, the level of development of the tourism infrastructures and finally clears that whether the country is attractive for people from other cultures or not.

    • tourism counts as “invisible” item because it cannot be seen and recorded. So their values are determined by company returns, government accounts, foreign currency purchases and sales data from banks.


    Secondly, employment: Governments need tourism to generate and create new jobs. Tourism is a sector with a lot of potential and always in expansion. Worldwide, tourism represents more than 8 percent of the total workforce. As the GDP, an over-dependence upon tourism can occur in small scale destinations, especially if the locals are not trained. Hence the need for training schools to allow locals to have the knowledge and skills to work. Moreover, tourism is a wide industry, so perspectives of employment are significant.


    Finally, regional development: It is one of the main points of the economics of tourism, particularly in areas where other types of activities are impossible, because tourism attracts investments to develop the local area. For example, creations of new infrastructures and facilities which can also be used by locals. The regional development is particularly important in the developing countries because of their low income and high unemployment. In this case, tourism is a tool to develop and support the economy. Regional development is also valuable in remote destinations, such as in islands.

    However tourism has a lot a positive aspects, it has also negative ones. At some destinations, mostly on small islands, the tourism industry can generate an overdependence of tourism. It means that this sector is much more developed in comparison to other sectors. If tourism is the only source of income, it can be dangerous if the destination loses its attractiveness for any reasons. (Cooper, 2012). Also there is a lack of diversity, tourism is over-used and the other sectors are not promoted the same. A loss of culture and tradition can be observed too. Other leakages are observed, for example, the loss of potential economic benefits. In most cases, facilities at the destination are controlled by foreign investors, so benefits are rarely re-invested at the destination. In order to make advantages for local communities, the companies related to tourism should employ local people, but in reality, it is mostly people who come from poor countries and can be paid very low who are employed. It is the same for the goods, most of them are not coming from the destination or produced by locals, but are imported. The popularity of a destination leads to increasing of living costs. (Cooper, 2012) The life expenses increase and sometimes locals can not afford it and they have to leave and move to other places to live in. Indeed, tourism is a cause of inflation. It causes all products to generally increase in price, as a result there is a decrease in purchasing power. Tourism can be highly seasonal, it means that there is a boom of activity at the destination for few months and then it stops until the next season. It creates unstable and low paid jobs. There is also a big difference between areas that are developed due to the tourism industry and undeveloped areas. Indeed, most of the time, tourism is very concentrated so there is a lot of facilities at the destination but as soon as you walk away, you can see the undevelopment of the land (poverty, ‘real’ local people, etc).


    According to the theory of Keynesian economics is a multiplier concept (Holden, 2005). An example would be when money is invested to build a hotel, the investment does not only profit the goods and service companies, but also other firms in other sectors. The money circulates within different industries because there is a lot of interconnections related with business. Therefore the money within the economy increases. Another multiplier effect is that tourists spend more money at their vacation destination than they would normally spend (Holden, 2005). There are three different impacts that result from this process:

       -direct effects: tourism commodities generate jobs.

      -indirect effects: tourists bring money not only to people they interact with, but also for other linked businesses. Indeed, they spend money to sleep in clean beds in the hotel, thus hotels have to pay the laundry companies to clean the bed linen. So, it creates jobs and increases income.

       -Induced effects : tourist participates to the general economy;income, employment and government revenue. (Holden, 2005)


    Resources play an important role in the  discipline of economics. Economic is not just about the money, as it is usually perceived to be; it is about managing resources while the public meet their desires (Mankiw, 2001). It is critical to recognise the importance of resources as they are a limited means. This is crucial to focus on tourism as it is a rapidly-expanding sector and utilises a range of different resources. This discipline focuses on what goods and services to provide, how to do this and determining the market in which the goods and services are to be produced for (McLeish, 1993, cited in Holden, 2005). Resources related to destinations could include primary resources: natural resources such as the climate, the landscape, the ecosystems; and cultural resources such as urban heritage, arts, traditions. Tourist destinations may also include secondary resources, too, and these can be in relation to the accommodation sector, the catering sector, and the transport sector. (

    It is suggested by Lundberg et al. (1995)  that the concept of scarcity is simply a phenomenon that has been formed as a result of the necessary and luxury items that are demanded by humans. Therefore it means that the decisions that people make are highly influential upon the world’s resources: poor decisions can result in a deficit of resources which could lead to more economic struggles due to the fact that there will be less resources to produce goods to fulfil consumer demand. For example, if the public continue to visit a place like the Arctic without thinking about the environment (the resource, in this case), the high emissions of cO2 from factors such as transport are going to cause land to deteriorate further, thus ruining the destination, means that it would lose its attractiveness for public and this will result in an economic dilemma for the contributing nations. This certainly would not be an example of using resources efficiently and maximising the uses.

    Scarcity in resources also means that one cannot get everything that wants. This means that a choice has to be made and this results in an opportunity cost, An opportunity cost is essentially having to sacrifice one thing in order to get another as it is not possible to have everything. For example, because money is a limited resource, an individual may have to sacrifice buying a new TV in order to fund their desired overseas travel. This does not only happen on the household level, but also happens on national levels and in governments. This is simply due to the limited budgets, therefore they have to decide which elements are most important before investing large amounts of money into them (Tribe, 1990, cited in Holden, 2005). An example of this could be a government having to decide whether to spend a large sum of money on  promoting tourism in their country or on local factors to benefit the public sector, such as improving healthcare or education (Holden, 2005).






    Burningham, D., Bennett, P., Cave, M., Herbert, D., Higham, D. (1984). Teach Yourself Economics, Hodder and Stoughton, Sevenoaks

    Cooper, C. (2012). Essentials of Tourism. Oxford Brookes University

    Freyens, B. (2008). Macro-, Meso- and Microeconomic considerations in the delivery of social services. International Journal of Social Economics, 35, 823-845.

    Holden, A. (2005). Tourism Studies and the Social Sciences. Taylor & Francis.

    Lundberg, D. E., Krishnamoorthy, M., Stavenga, M. H. (1995). Tourism Economics .New York: John Willey and sons

    Mankiw, N.G. (2001). Principles of Economics. South-Western

    Tourism resources (2005) at, Accessed 22.10.05

    Tribe, J. (1999). The Economics of Leisure and Tourism. Oxford: Butterworth Heinemann

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