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Economics in Tourism - Group 10
According to Lundberg, Stavenca and Krishmanmoorty, the term economics is defined as “a social science that seeks to understand the choices people make in using their resources to meet their wants” (as cited in Holden, 2005, p. 84). Therefore, it generally deals with the management and appropriate usage of resources whereas economists make decisions on which product to manufacture, the way of production and the target group for whom the good is fabricated (Holden, 2005). Further, the discipline economics is generally separated into microeconomics and macroeconomics.
Microeconomics is the study of distinctive markets rather than analyzing the holistic economy. Aside from looking at the demand and supply of a product, the overall labor market is also a part of microeconomics as well as the determination of prices for goods and services (Holden, 2005). All these aspects have high influence on the consumer behavior which is particularly examined when it comes to the theories of demand and supply. While the demand is determined by aspects such as the customers’ income, consumer preferences, number of buyers and the price of related goods, supply is defined by the production costs, technology, number of sellers and the expectation of future prices. These two players of supply and demand are responsible for the theory of “price elasticity” which determines if prices are elastic or inelastic. If a product price shifts while the consumer demand stays stable, the demand is inelastic. In contrast to that, demand is elastic when customers directly respond to changes in price (Mankiw, 2003).
Macroeconomics on the other hand, analyzes the whole economy which includes the demand and supply of the overall economy. In addition to that, the overall national economy and its reaction to inflation, decline or growth are consistently taken into account as the effects of one market upon another are being observed. At this point, the government may also step in since the economist Keynes argued that government’s intervention is needed in order to experience a proper economy with full employment and stable prices (Holden, 2005).
Regarding the tourism industry, economics is an essential discipline that is affecting the tourism in various areas as well as vice versa. According to the World Tourism Organization, the UNWTO (2015), from the 1950’s on the tourism has witnessed constant expansion while becoming one of the leading economic sectors in the world. Despite of rare affects of global or national crises, the industry has experienced tremendous growth rates on the global scale. From 278 million tourist arrivals a year in 1950, the tourism industry broke the border towards over 1 billion tourist arrivals in 2014 spending US$ 1245 billion in total. Taken these numbers into account, the tourism industry is not only responsible for steady employment in many countries; it also contributes to national economies since high taxes revenues are received by the governments. Considering further research from the UNWTO (2015), further numbers can be pointed out:
· The tourism industry contributes 9% to the global GDP.
· 1 out of 11 jobs is direct, indirect or induced connected to tourism.
· Tourism exports $US 1,5 trillion.
· Tourism makes up 30% of global service exports.
Regarding these numbers, the wiki will further concentrate on the tourism industries contribution to the economies by outlining the import and export of tourism, the contribution to the GDP, the multiplier effect as well as possible leakages.
Import and Export
As it is stated in Holden’s (2005) course book, regarding the dominant world export industries, such as oil, automotive products and chemicals, tourism is considered to be the following branch of export, which has a great potential. Several state governments have admitted that tourism industry potential is clearly visible when it comes to earning foreign currencies and stabilizing accounts deficit. Tourism has been playing an important part in export for a long time because it has quite of influence to the balance of payments: ‘a statement of a country’s trade and financial transactions with the rest of the world over a particular period usually one year’ (Holden, 2005).
It is a crucial measure of states exports of goods and services which correlates with its imports of goods and services and is normally parted into two main groups of ‘visible’ or ‘invisible’ items. Visibles are tangible products because they have physical presence, such as foods, raw materials or oil etc., so it is easy for customs to follow their movement in and out of a state. Invisibles are without physical presence, for example various services: banking, transportation, tourism etc. (Holden, 2005).
However, a balance of payments in tourism has a specific meaning: ‘The “tourism balance” of a particular state will consist of all receipts from its overseas visitors less payments made by its own residents on travel abroad.’ (as cited in Holden, 2005, p. 91).
What is also needed to know about the balance of payments is that the method of calculating it is: to subtract the ‘International Tourism Expenditure’ from the ‘International Tourism Receipts’. Firstly, ‘international tourism receipts’ are defined by WTO as: ‘the receipts earned by a destination country from inbound tourism including all tourism receipts resulting from expenditure made by visitor from abroad, examples as such would be: accommodation, food products, beverages, means of transportation in the country etc.’ Also the other definition is of ‘international tourism expenditure’: ‘the expenditure on tourism outside the country of residents by visitors (one day visitors and tourists from a given country of origin)’(Holden, 2005).
Balance of payments in 2013
Additionally bellow is given the most recent statistics of the balance of payments in the world by UNWTO (2015):
Regarding the growth of regions, Asia and the Pacific region have proven themselves as the fastest growing ones while Europe takes the biggest share. Europe, which accounts for 42% of all international tourism receipts, saw the biggest growth in 2013: up US$ 35 billion to US$ 489 billion (euro 368 billion). Destinations in Asia and the Pacific (accounting for 31% of all tourism receipts) increased earnings by US$ 30 billion to US$ 359 billion (euro 270 bn). In the Americas (20% share), receipts increased by US$ 16 billion to a total of US$ 229 billion (euro 173 bn). In the Middle East (4% share) total tourism receipts are estimated at US$ 47 billion (euro 36 bn) and in Africa (3% share) at US$ 34 billion (euro 26 bn).In relative terms, Asia and the Pacific (+8%) recorded the largest increase in receipts, followed by the Americas (+6%) and Europe (+4%).
On the other hand, China, Russia and Brazil account for half the world’s increase in tourism expenditure. The emerging economies of China, Russia and Brazil have been dynamic drivers of outbound tourism in recent years. In 2013, these three source markets accounted for some US$ 40 billion of the total US$ 81 billion increase in international tourism expenditure.
Tourism contribution to GDP
Gross Domestic Product (GDP) is defined as a monetary value of all the goods and services produced in a country during a certain period of time. One of the contributors to the country‘s GDP is tourism. Tourism expenditure is known to be a particular percentage of the Gross National Product (GNP), further it is a purification of the measure of GDP (Holden, 2005).
Regarding the tourism contribution to GDP in 2013, this year it has reached even 9% together with other related services (UNWTO, 2015). GDP calculations refer to the direct and indirect effects of tourism expenditure (Holden, 2005).
International tourist arrivals reached the growth of 5% in 2013, and it means, it has reached a record with 1087 millions arrivals worldwide. It grew a lot in comparison with 1035 million in 2012. It is a significant achievement because it is the first time when the 1 billion mark was exceeded.The economies which profited from expanded revenues from hosting international travelers included the US, UK, Thailand, Hong Kong, Turkey, Japan, Greece, Russia and Indonesia (WTTC, 2013). Anyhow, the tourism industry contributes to the destinations economies in a direct, an in indirect and an induced way.
Multiplier Effect and Leakages
According to Cooper (2012) the multiplier effect is known as the “tourist expenditure at the destination increases the income of the destination by an amount greater than that which was originally spent.” This states that the term “multiplier” can be defined as a cycle in which money is transmitted through a destination and increases in the process. The multiplier effect is a great tool for a destinations economy as it can be one of the easier ways to generate a higher amount of income from the tourists. Travelling is more flexible as people are earning through employment, therefore tourists will earn a substantial amount of income which will be further spent in the visiting country. This leads to the aspect of the destination they are visiting to have a higher economic standard due to tourism. There are three types of context to consider for the multiplier effect:
1) Direct income: the money that is directly invested into the economy to be used for resources such as creating a new development for a hotel.
2) Indirect income: the income that is directly sent to suppliers of the goods and services needed to carry out tourism activity. For example: a hotel recruiting another firm to do the laundry. This will create jobs for the laundry service which is not within the tourism industry but another industry.
3) Induced effect: the contribution that tourism brings to a destination as it creates employment, income and revenue for the government (Holden, 2005, p.94).
This is how the introduction of leakages can be a problem with the economy as not all the income can be kept within the tourism industry. This shows that income needs to be spent in other industries to meet the needs of the tourists. The “indirect income” shows the leakages as tourism sectors pay other industries to carry out jobs which therefore is known as “leaking” from the economy. Leakages can also be considered due to the government as industries have to pay taxes, wages and the profits from the businesses. There are two main ways that the leakage occurs, the first is import leakage which is known for providing the good and services for the tourists. The goods and services need to be imported from other destinations to meet the needs which will further lead to satisfaction for the guest. The second is export leakages known as multinational companies and large foreign businesses having a considerable amount of shares causing leakage. This means that the money is spent to help out infrastructure and facilities to complete the demand of tourism (United Nations Environment Programme, 2015).
Referring to Holden (2005) package holidays generally have the highest leakage due to tourists providing the income to other businesses such as airlines and hotels which may be international and therefore not providing income for locals in the destination. Another concept that is largely to do with leakage is tourists’ not spending extra cash in the destination which is also known as an all inclusive holiday. This suggests that tourist operators would suggest people to go this route of vacation as the income will stay in their destination and not leave to the other. This means that within the all inclusive holiday, everything is prepaid in the country that they will depart and spending extra money for food and beverage is unnecessary. Furthermore, income can also leak out of the economy through inflation as products may cost a higher rate in the host destination and therefore importing goods will be a less expensive decision.
Furthermore, the destinations should try and reduce the amount of leakages in a destination and this can be completed through encouraging tourists to taste the local products instead of the imported goods. This suggests that the tourists will experience the local services and goods which will lead to more satisfied hosts and also begin to reduce the amount of leakage in destinations.
In the following link, it provides a diagram explaining how the multiplier effect works and also includes the aspect of “leakages” within a destination: http://geographyfieldwork.com/TouristMultiplier.htm
Holden, A. (2005). Tourism Studies and the Social Sciences. Abingdon, Oxon: Routledge.
Mankiw, N.G. (2003). Principles of Economics. Massachusetts: Thomson Learning.
Word Travel and Tourism Council WTTC. (2013). WTTC Economic Impact Report, 2013, p. 3.Retrieved October 22, 2015,from http://www.wttc.org/-/media/files/re.../world2014.pdf
World Tourism Organization UNWTO. (2013). International tourism generates US$ 1.4 trillion inexport earnings[Press release PR No.: PR14034]. Retrieved October 22, 2015, from http://media.unwto.org/press-release...xport-earnings
World Tourism Organization UNWTO. (2015). Tourism Highlights. Madrid: UNWTO.
World Tourism Organization UNWTO. (2015). UNWTO Tourism Highlights, 2015 Edition, p. 2-3. Retrieved from http://mkt.unwto.org/publication/unwto-tourism-highlights-2015-edition
United Nations Environment Programme. (2015). Negative Economic Impacts of Tourism. Retrieved October 22, 2015, from http://www.unep.org/resourceefficiency/Business/SectoralActivities/Tourism/FactsandFiguresaboutTourism/ImpactsofTourism/EconomicImpactsofTourism/NegativeEconomicImpactsofTourism/tabid/78784/Default.aspx
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