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Economics and Tourism - Group 8

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    Group 8: Sunna Guðmundsdóttir, Xinyu Xu, Collins Clinton


    Economy and Tourism

    With the growth of tourism demand, its meaning for the global economy has become more significant. World Travel and Tourism Council (WTTC) published a report stating that the direct contribution of travel and tourism industry on the world gross domestic product (GDP) was 2,4 trillion dollars in 2014, or 3,3% of the world gross domestic product and the industry also creates 105 million jobs worldwide (Holden, 2005). Sufficient to say, the tourism industry contributes significantly to the global economy and has a relationship on both governmental and the individual level. This wiki article scratches the surface of the relationship between tourism and economy with a social science perspective.



    The term economy is derived from Greek and means “household budget” and from the early 18th century the term economy was usually referred to as a household or family budget, however when the industrial revolution began around 1800 the mass production of goods, commodities and services resulted in a bigger market and increased division of labout, the term economy evolved to explain the economic system as a whole. The economy was seen as an “external sphere”; a metaphor for the economy to be its own machine or organism; the economy as an independent creature capable of being healthy or weak, and some concluded that it was the responsibility of the government to keep the creature fat and healthy, by analyzing and managing the economic process within their territory (Coe, Kelly, Yeung, 2007).

    According to Begg et al (as cited in Holden, 2006), the “study of economy is the study of how society manages its scarce resources.” Furthermore Lundberg et al (as cited in Holden, 2006) suggest that “economy is a social science that seeks to understand the choices people make in using their resources to meet their wants”. So the economy tries to understand what goods, commodities and services should be produced (the supply) and for whom in the society (the demand) (Holden 2005). The economy is a consequence of human needs, therefore economy as a social science tries to explain and understand how and why people make the economic choices they do, how they exploit their own resources to meet their needs and wants (Holden 2005). The benefit that is sacrificed by choosing one action rather than the next best alternative is called opportunity cost (Holden 2005), on a micro level an example for this is deciding to invest additional money in travelling instead of buying a flat-screen television or on a macro level the example of this is the government allocating resources to promote the tourism industry within their country or to improve the educational system.

    Supply and demand are the most fundamental concepts of economics. Demand refers to the quantity of product or service that is desired by the costumers for a given price. The basic law of demand is that if all factors remain equal, the higher the price, the lower the quantity demanded. Supply refers to how much the market can offer. The quantity supplied refers to the amount of a certain products the producers are willing to supply when they receive a certain price for their product. The law of the supply is the higher the price the higher the quantity supplied (Holden 2005).


    Microeconomics and Tourism

    Microeconomics is the branch of economics that studies the consumers and firms choices and the determination of market prices, it applies to the market where goods and services are bought and sold as oppose to macroeconomics, which is the branch of economics that studies the performance, structure, behavior and decision-making of the economy as a whole, on national, regional and global level (, 2015). Microeconomists analyze the system that settle the prices of goods and services as well as they analyze the market failure and describe the competition within the market. Mixture of factors influence the demand for tourism, such as; income, price, comparative quality, fashion, advertising, vacation time from work and proximity. A key concept in microeconomics is the price elasticity, it is the measure of change in quantity in relation to change in price of a particular good or service. The formula to calculate the price elasticity of demand is:

    Price elasticity of demand = % Change in quantity of demanded / % Change in Price

    If a small change in price of a product is followed by a large quanity demanded, the product is considered to be elastic. Visa versa product is considered to be inelastic if a large change in price is followed by a small amount of change in quanitity demanded (Investopedia 2003).


    Macroeconomics and Tourism

    Opposed to microeconomics, macroeconomics concerns the macro or the aggregate of supply and demand. Keynesian economics are various macroeconomic theories about large scale aggregate economic causes and effects, they were first presented in the 1930s and its appearance is not accidental, they were established during the Great Depression as a theory trying to explain recession, inflation and other macroeconomic elements concerning aggregate supply and demand.

    John Maynard Keynes economist criticized the employment theory of the classical economics. The fundamental principle of Keynesian economics is that government spending should be inversely proportional to private trade. That means when the private trade reach a flourishing period, the government should reduce participation in the economy. On the other hand, when the economy recesses, the government should increase its participation in the economy (Stokes, 2003).

    The economic benefit of tourism is apparent, the direct economic benefits of tourism are somewhat measurable, but the multiplier effect is harder to measure, it is apparent that the tourism industry will promote other related industries, and bring indirect economic benefits.

    Tourism as a fast growing and developing industry, has a huge potential. There are many countries that have there eyes on the tourism industry as a major economic source, especially developing countries (Holden, 2005).


    Tourism Economy

    A report by the World Tourism Organization shows that in recent years, the tourism industry has expanded incredibly and has also become very diversified, it should be safe to say that it is one of the fastest growing industries in the world. As a worldwide export category, tourism industry total export was ranked forth in a UNTWO report in 2013, next to fuel, chemicals and food, and higher than the automotive industry. In 2014, the international tourism took 30% of global trade, generating 1.5trillion$ in exports (international tourism revenue and transport). One third of developing countries have tourism as their most exporting industry. The sector is expected to account for 10% of global GDP. Furthermore, there is one in every ten people engaged in tourism. Tourism is expected to continue to expand (, 2015).


    Tourism as a Form of Trade

    Free trade is an economic policy promoting free flow of goods to increase economic development and market equilibrium. The Free trade policy bans tariffs on imports and contributions to exports, this is done for the benefits of the industries of the countries.

    In 1947 at a conference in Geneva the policy for prohibition of imports was first established: The General Agreement on Tariffs and Trade (GATT). In 1990 the policies towards the trade of goods was disoriented, some supporting free trade others supporting trade protection measures. In 1993 the members of GATT decided to establish the World Trade Organization (WTO). In addition to tariffs is the use of export subsidies, which allowed fairer access of the poorer countries to the markets of rich countries (Wright, 2015).

    WTO was established as an organization that handles negotiations for nations and is also the host to new negotiations and regulations. Countries have faced trade barriers and wanted them lowered. The aim of WTO includes to help open the market and to regulate trades between nations.

    International trade in tourism is regulated through The General Agreement on Trade in Services (GATS). GATS is now under the umbrella of WTO. The agreement encourages countries to be open to foreign investments and the free flow of capital (Holden 2006). Capital flow is the movement of money for the purpose of trade or business production.

    Some benefits of the free trade policy for the countries is the security of international specializations. International specializations is the concept that every country should specialize in numerous economics activities, using their natural and human resources to their (reasonably) fullest. (Holden 2006).

    David Ricardo discovered the law of comperatative advantages in 1816. The law explains how every country on earth has a particular economic advantage they should specialize in. Ricardo discussed the arguments of free trade,similar to the division of labour, on a macro level (Holden 2006).

    The resources being traded in the tourism industry are the natural and cultural resources of the country. Countries that are rich in cultural resources are often not as much developed as other countries and should be a great potential for tourism growth. Tourism can be a factor of long-term economic growth, however it depends on the host nation to decide how to split the profit-cake. (Holden 2006)

    Fair trade tourism (FTT) is a non-profit organization which emphasizes the development of sustainable and responsible tourism, the organization raises awareness of sustainability and the obligations of the consumers. FFT assists tourist businesses to operate more sustainably and ensure that people who contribute their work, land and knowledge benefit from it. The FFT certifications include fair wages and working conditions (Fairtrade.Travel, 2016).



    Coe, N., Kelly, P., & Yeung, H. (2007). Economic geography. Malden, MA: Blackwell Pub.,. (2015). Fair Trade Tourism. Retrieved 27 January 2016, from

    Holden, A. (2005). Tourism studies and the social sciences. London: Routledge.Print

    Investopedia,. (2003). Price Elsticity of Demand Definition, Investopedia. Retrieved 22. December 2015,,. (2015). Economics Glossary. Retrieved 22 December 2015, from

    Stokes, P,. (2003). Philosophy, 100 essential thinkers. New York: Enchanted Lion.

    Wright, E. (2015). A dictionary of world history (3nd ed.). Oxford: Oxford University Press.,. (2016). World Tourism Organization UNWTO, a Specialized Agency of the United Nations. Retrieved 27 January 2016, from

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