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Economics in Tourism - Group 4
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Tina, Heissy, Claudia and Henrietta
Tourism is cultural, social and economic phenomenon with many definitions. To simplify, it could be divided into two different kinds of definitions, the supply-side definitions and the demand-side definitions (Cooper, 2012). According to UNTWO in the year 1994 (cited in Cooper, 2012) demand-side tourism is “The activities of a person’s travelling and staying in a place outside their usual environment for not more than one consecutive year for leisure, business or other purpose”. A supply-side definition, however, is, according to Leiper in 1979 (cited in Cooper, 2012): “Thetourist industry consists of all those firms, organizations and facilities which are intended to serve the specific needs and wants of tourists”.
There are several ways to define economics. For example, Lundberg et al (1995) says that “economics is a social science that seeks to understand the choices people make in using their resources to meet their wants”. In economic terms tourism is seen as a form of trade and focuses on how society and individuals distribute their resources. This means that the main concern for economists when it comes to tourism is to find the best system for society to allocate resources to maximize efficiency (Holden, 2005).
Tourism has been increasing rapidly for over 50 years (Song, Dwyer, Li & Cao, 2012). This makes “mass-tourism” a relatively new concept despite the fact that tourism itself is much older (Cooper, 2012). Therefore, the research of tourism from an economic perspective is also relatively new, since it began with these increases (Song et al, 2012). Still, it is an highly important study, since tourism itself today stands for 9,8% of the GDP (gross domestic product) of the countries of the world (wttc.org, 2015).
Since tourism is a changing industry and/or activity, researchers within the economic discipline of tourism always has and always will need to be up to date and provide new approaches for better comprehension within the field (Song et al, 2012). That is why Eadington and Redmain in 1991 made the first overview of the up to then progresses within tourism economics and also why seven years later, in 1998, Sinclair did a similar thing focusing on the past 20 years (Song et al, 2012). In 2003, Sinclair, Blake and Sugiarto noticed that the analysis of the demand side of tourism economics has consistently been in focus, something that is still evident todays research, since it is more advanced (Song et al, 2012).
This means that, historically, the demand side research within the economic discipline of tourism is the eldest (Li, Song & Witt, 2005 cited in Song et al, 2012).
Tourism in economics faces a dilemma, particularly finding the best system for allocating the resources in a society, which is maximizing the destination’s “efficiency”.
“Efficiency” in economic terms, refers to that a society is getting the most of what it can from its insufficient resources. For example, should governments allocate the use of land to build infrastructures for tourism purposes or should it be designated for school buildings or improvement of agricultural use?
There are two main systems on how to allocate resources:
Command economy – this is a system where the government determines what goods should be produced, how much should be produced and the price at which the goods will be offered for sale. This system is a key character of any communist countries, such as Cuba, China, North Korea and the former Soviet Union.
The market system – this is a system where individual firms and household make the decision on allocating the resources. Firms decide what to produce in response for the household demands. This system can also be called as the “free market” where the decision regarding the supply and demand is based with little or no government involvement. The basis of this interaction is buyers and sellers can transact freely based on a mutual agreement on price without imposing government taxes and state regulations. (www.investopedia.com; 2015)
Nowadays, the use of market system is the best tool for allocating the resources and this can be based by the work of Adam Smith (1723-1790). Smith’s research was based upon the changes in the economy and society during the 18th century, just before the Industrial Revolution began. His observations include expansion of domestic and international trade and commerce, agricultural improvements, growth of the population, and the establishment of institutions such as banks and the crediting system. According to Smith, the interaction between household and firms in the market is being guided by the “invisible hand”.
Invisible Hand Theory
This theory was presented in the book “The Wealth of Nations” by Adam Smith, the basis of this theory is that by enriching one’s own interest, one unintentionally serves the interests of society as a whole. Furthermore, he explained that the government should leave people alone to buy and trade freely amongst themselves. If people work in a “free market” scenario where individuals work for their own interest, then the economy will function well. For instance, if a seller charges a product for a high price, then the customers will go to his/her competitors who offer a lower price for the same product. In this way, producers supply products that are demanded by the consumers at a reasonable price, and it guarantees that the management of resources to keep production are at low cost. (Holden, A. (2005). Tourism studies and the social sciences (illustratition;1; ed.). London: Routledge).
Another major concern in tourism is the economic leakages. Economic leakage is when the revenue generated from the tourism activity in a destination is lost to other countries’ economy, by for example importing products. This phenomenon has a big impact on the original destination’s economy. The leakage of expenditure develops for a range of reasons, such as imports for the tourism industry, for example, equipment and materials for hotels, food and beverages, the employment of foreign workers, repaying foreign loans for the development of tourism and the paying of taxes to the government. This problem is commonly experienced by less developed countries who relies on multi-international corporations and foreign investors for the improvement of tourism facilities, accommodations and infrastructures.
(Holden, A. (2005). Tourism studies and the social sciences (illustratition;1; ed.). London: Routledge).
Microeconomics in Tourism
Microeconomics is a branch of the economic discipline which can be defined as the study of the behavior of individuals, consumers, firms and markets (Hall and Papell, 2005). Furthermore, it is focus on the way they cooperate and interact on the various markets. In addition, its main concern is how and what issues affects the individual, groups and companies.
According to Andrew Holden (2005) microeconomic has numerous of effects because a lot of businesses are forced to raise prices in other to increase the cost of materials. On the other hand, employees are paid more which explains for the higher cost of living. It is also clear that with the demand, several of goods and services provided in tourism market, price and income seem to be an important factor.
Demand and Supply Theories in Tourism
Supply in general is the relationship between a price of goods and the quantity supplied, but supply in tourism is all assets, services and goods to be enjoyed or bought by visitors and occasioned by the journeys of visitors according to Cooper (1993).
Demand is the amount of goods and services buyers are willing to purchase at various price, but in tourism Cooper (1993) refers demand in tourism as the total of number of a person who travel or wish to travel and use tourist facilities and services at places away from their places of work or residence, so price is therefore a reflection of supply and demand in tourism.
Microeconomic focuses more on the supply and demand theories. It explains how the individual, groups and companies take decisions and decide on how much of something to produce and the cost of it. In reality supply and demand are mostly used in analyzing economics.
The tourism supply
Tourism supply components can, according to Page & Connel (2006) be classified into four parts and these consist of:
1. Natural resources and Environment (water bodies, beaches, lands. air and climate and etc.)
2. Built environment: which consist of the Infrastructure and the superstructure. Infrastructure: electricity, water supply and telecommunications. Superstructure: stores, hotels. restaurants. airport and etc.)
3. Operating sector consist of transportation, accommodation and attraction.
4. Hospitality and cultural resources. These include the cultural wealth which consist of the language, religion and customs.
Macroeconomics in tourism.
Tourism is one of the activities in the world that is growing from year to year and in some countries tourism contributes highly to the economy. Therefore, the theory of macroeconomics plays a role in tourism. Macroeconomics explains why the economy grows and fluctuates (Hall & Papell 2005:4). Macroeconomics considers demand, supply, and investment in the whole economy, rather than individual markets. The macroeconomic theory includes full employment, price stability and the balance of payment.
Full employment is when the labor demand equals supply and unemployment is natural (Hall et al, 2005: A3). Tourism satisfies the macroeconomic theory when jobs are created, and this leads to a balance in the whole economy. The rise and fall in employments follows the rise and falls in the Gross Domestic Product (GDP), so therefore tourism creating job opportunities affect the fluctuations in the whole economy’s GDP. The multiplier effect can also be applied to employment in tourism because, tourism creates both direct and indirect jobs. However, even though employment contributes to the economy, there are negative impacts that comes from employment that might affect the economy. Cultural conflicts and quality of employment are some of them. When jobs are given to expatriates instead of local residents this may affect the employment rate and raise the issue of racism. For example, in places like the Caribbean and Africa where hotel management jobs are given to expatriates. Also the quality of employment where people are low skilled and some jobs are seasonal, therefore people will not be able to hold on to their jobs when people who are better skilled are hired or the season ends. (Holden 2005:99).
The balance of payment
The balance of payment is an economy’s transaction with the rest of the world for a specific period of time. This includes all transactions between a country’s residents and its non-residents involving goods, services and income (Investopedia: 2003). Tourism plays a role in the country’s export which in turn affects the Balance of payment.
As Youell explained the “tourism balance” of a country will consist of all receipts from its overseas visitors, and less payments from its own residents from travel abroad (Holden 2005:91). Receipts from abroad are the expenditure made by the visitors and receipts from tourism expenditure are expenditure made by residents abroad. So therefore when calculating the balance of payment in tourism the international tourism expenditure is subtracted from the international tourism receipts.
The benefits of macroeconomics that can be gained from tourism includes earning foreign currency and making contribution to balance payment, developing service sector and contributing to gross domestic product (GDP), attracting inward investment and income multiplier and finally employment creation. (Holden 2005:90).
World Travel & Tourism Council’s Economic Research (https://www.wttc.org/research/economic-research/)
Video: Tourism benefits everyone, everyday, everywhere – video by TourismAlliance (https://www.youtube.com/watch?v=NyVI2tiRBeE)
Illustration: How Money Travels by WTTC (https://www.wttc.org/-/media/images/reports/policy-research/travel-pays.png)
Cooper, C. (2012). Essentials of tourism. Harlow, England: Pearson Financial Times/Prentice Hall.
Hall, R., & Papell, D. (2005). Macroeconomics: Economic growth, fluctuations, and policy. (6th ed.). New York: W.W. Norton.
Holden, A. (2005). Tourism studies and the social sciences. London: Routledge.
Page, S., & Connell, J. (2006). Tourism: A modern synthesis (2nd ed.). London: Thomson Learning.
Song, H., Dwyer, L., Li, G., Cao, Z. (2012). Tourism economics research: A review and assessment, Annals of Tourism Research, 3 (39), 1653-1682.
Microeconomics: Introduction | Investopedia. (2009, June 14). Retrieved October 22, 2015, from http://www.investopedia.com/university/microeconomics/
Balance Of Payments (BOP) Definition | Investopedia. (2003, November 25). Retrieved October 22, 2015, from http://www.investopedia.com/terms/b/bop.asp
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