Measurement of Economic Impact

The Flow of Money - The Phenomenon of Tourism Multiplier

The concept of the multiplier is based upon the recognition that the various sectors which make up the economy are interdependent, that is, in addition to purchasing primary inputs such as labour, imports, etc., each sector will purchase intermediate goods and services produced by other establishments within the local economy. Therefore, any autonomous change in the level of final demand will not only affect the industry which produces that final good or service, but also that industry’s suppliers’ suppliers, etc. (Fletcher and Archer, 1991:28)

In order to gain insight into the net economic benefits, we will trace the flow of money from tourists through the economy of a destination area. Three steps are distinguished in this flow scheme; each of them will be discussed below.

- First order effects

The initial spending of tourists is at the start of the economic chain. Tourists can buy tourism products or services either directly or indirectly. In turn, these products and services can be provided either inside or outside the destination country. From these observations, the following table emerges:

Final recipient

Inside destination Outside destination Direct purchase (a) accommodation, food (c) tax free shopping Indirect purchase (b) accommodation via tour

operator

(d) air-fare via tour operator

Table 7.2 - A Classification of Tourist Expenditure with Some Examples

The inflow of money from tourism into the destination country (the gross effect on the balance of payments) depends on (a) and on the percentage of (b) the tour operator spends in the destination country. Clearly, if (b) is important compared to (a), the destination country is sensitive to changes in tour operators’ spending patterns. Moreover, if (b) is large, tour operators can often negotiate a significant price discount, resulting in a smaller inflow of money.

- Second order effects

Having received the initial spending by tourists and tour operators, the tourism industry in its turn

- Third order effects

Returning to the flow of money, we see that buying inputs means extra consumption and sometimes also taxation in the form of value added taxes (Holloway, 1989). The owners of the production factors spend their income on consumption, savings or taxation. Savings and taxation can be seen as leakages from the spending cycle. However, these leakages are usually only temporary. Savings are simply postponed consumption, while part of tax revenues flow back into the economy in the form of government expenditure.

The extra consumption expenditures from buying inputs and from spending production factor income can be directed towards imported products or locally produced products. A large percentage spent on imports means a large import leakage, influencing the balance of payments.

It is good to remember that the net contribution of tourism on the balance of payments depends not only on initial spending, but also on the magnitudes of the import leakage and the repatriation of money.

- Closing the cycle

Now, the amount of money spent on locally produced goods enters the spending cycle again.

This amount is, of course, smaller than the initial expenditure due to the various leakages.

After having gone through the spending cycle for the second time, less money remains still and so on, until the effects of the initial expenditure have vanished. The cumulative effect of the initial tourist expenditure going through various spending cycles is called the tourism income multiplier (TIM).

Figure 7.2 and 7.3 illustrated how tourism expenditure can contribute to the economy of a destination.

Tourist Expenditure

Tour operators Investors

Expenditure in destination (First order)

Inputs Wages, Interest, Profits (Second order)

Savings (Third order) Tax (Third order)

Expenditure Repatriation (Third order)

Imports

Recovery Leakages Figure 7.2 - Economic Impacts of Tourism

$1,000

LOCAL ITEMS INCOME

TAX

SAVING SPEND ING

IMPORTS

1st circulation 2nd circulation 3rd circulation, etc.

Tourists spend

$1,000

$200

$100

$50

$100

$50

$25

$500

$250

$125

$350$700

$175

$200 $100 $50

$500

$250

$125

Figure 7.3 - The Tourism Income Multiplier at Work Source: Extracted and modified from Holloway, 1992:175

Very often, only tourism-related sectors such as accommodation like hotels, transport like airlines, or tour operators and travel agents, are considered as the ones who are benefited from tourism development. However, tourism is virtually a multi-faceted industry, the revenue generated benefits various sectors of the economy. For example, manufacturers of electrical appliances and suppliers of foodstuff who provide their products and services to hotels are also benefited. In this sense, there is always a linkage amongst different sectors and industries that jointly support the running of the tourism business and in return, they are all benefited from tourism.

The initial spending of tourists triggers the economy boom of the host society. There are a number of multipliers working in the economic system including transactions multiplier, output multiplier, income multiplier, employment multiplier and government multiplier.

Transactions (or sales) multiplier

It measures the amount of additional business revenue created in an economy as a result of an increase in tourist expenditure.

Output multiplier

It measures the amount of additional output generated in an economy as a result of an increase in tourist expenditure. The principal distinction between transactions and output multipliers is that output multipliers are concerned with changes in the actual levels of production and not the volume and value of sales. Not all sales will be related to current production (some sales may have been made from inventories and some productive output may not be sold within the time frame of the model and, therefore, result in an increase in inventories). Therefore, the value of an output multiplier may well be larger or smaller than the value of the corresponding transactions multiplier.

economy as a result of an increase in tourist expenditure.

Employment multiplier

It is a measurement of either the total amount of employment generated by an additional unit of tourist expenditure or the ratio of the total employment generated by this same expenditure to the direct employment alone.

Government revenue multiplier

It measures the impact on government revenue, from all sources, associated with an increase of tourist expenditure. This multiplier may be expressed in gross terms, that is the gross increase in government revenue as a result of an increase in tourist spending, or in net terms when the increase in government revenue is reduced by the increase in government expenditures associated with the increase in tourist activity.

Source：Cooper, Fletcher, Gilbert, Shepherd & Wanhill, 1998:134

This multiplier effect is explained as follows:

Tourists visit Hong Kong and spend money on their meals in restaurants. This provides income for the restaurant owners. They then pay tax, save some money and spend the rest. Some of what they spend goes to the purchase of goods and services from other suppliers and producers in Hong Kong. Some is spent as wages and salaries of staff and some is used to pay interest to banks and rents to landlords.

The people who receive money from the restaurant owners will pay tax, save some money and spend the rest for goods and services. Thus, the money spent by tourists is used again and again by other people. It is spread throughout the whole economy. As a result, the additional income created is far greater than the initial spending of the tourists.

Not all money circulates in the economy. Some has gone to pay tax; some has been saved or used for imported goods and services. Money which stays out of the circulation system will reduce the multiplier effect. The multiplier effect is great when there are strong linkages among various economic sectors. Linkages are strong and the income multiplier effect are high if all the goods and services are locally supplied.