CHAPTER 3 The Economics of Tourism and Hospitality

The Role of Tourism and Hospitality in Economic Development

Reasons of developing countries used tourism and hospitality development as an alternative to help
economic growth:
1. There is a continuous demand for international travel in developed countries;
2. Income in developed countries increases because the demand for tourism and hospitality
increases;
3. Developing countries need foreign exchange to aid their economic development

Organization for Economic Cooperation and Development (OECD) concluded that tourism and
hospitality provide a major opportunity for growth to countries

Tourism and hospitality are an invisible export which differs from international trade in many ways:
1. Consumer collects the product from the exporting country which means freight cost is
eliminated except when airline used are of the tourist receiving country.
2. Changes in price and income will also affect demand for pleasure travel
3. Exporting or tourist-receiving country can manipulate exchange rates
a) Normally lower exchange rates attract more tourists
b) Tourists are allowed to buy domestic markets at same price as locals
4. Tourism and hospitality are multifaceted industry directly affecting several sectors such as
hotels, shops, restaurants, local transport firms, entertainment, establishments, handicraft
producers
5. Brings more non-monetary benefits and costs such as social, cultural and environmental
benefits and costs.

Economic Impact: Travelers spend on goods and services within the destination; tourism and hospitality
acts as an export industry by bringing in revenues from outside sources. This is a means to increase
foreign exchange earnings to produce investment necessary to finance economic growth. It provides a
source of income, employment and foreign exchange.

Direct and Secondary Effects: Tourist expenditures received by hotels, restaurants, car rentals, tour
operators and retail shops serving tourists have a direct effect on the economy of the host area. “Direct”
means income is received directly.

Indirect or secondary effects: Mean that money paid by tourists are used to pay supplies, wages of
workers and other items used in producing products or direct services bought by tourists.

Tourism Multiplier
“Multiplier” is used to describe the total effect, both direct and secondary, of an external source of
income introduced into the economy. Multiplier effect is used to estimate the direct and secondary
effects of tourist expenditures on the economy of a country.
 FIGURE 2. MULTIPLIER EFFECT

The size of the multiplier will depend on the various sectors of the economy linked to one another. 
When more sectors are linked, the tendency to import would be smaller and the multiplier will be
greater.

Cost-Benefit Ratio
Benefits divide costs equal the cost-benefit ratio. This can be derived by using the following procedures:
1. Determine where tourist dollar is spent;
2. Determine percentage of each expenditure leaves the local economy;
3. Derive a “multiplier effect,” a ratio applied to income that reflects multiple spending within an
economy; 
4. Apply the multiplier effect to the tourist expenditures to arrive at the total benefits of tourist
expenditures in dollars;
5. Derive a cost-benefit ratio expressed as dollars received/dollars spent;
6. Apply the cost-benefit ratios to tourist expenditures to provide estimates of income and costs of
tourist business to a community, for both the private and public sectors.

Undesirable Economic Aspects of Tourism

 Higher prices – additional demand and/or increased imports, tourist purchases may result in
higher prices in a destination area
  Economic instability – pleasure travel is a discretionary item and is subject to changes in prices
and income. Fluctuations may result in economic instability

How to Maximize the Economic Effect of Tourism and Hospitality

Growth Theories
 Balanced Growth 
o Important part of a broad-based economy
o Tourism and hospitality need the support of other industries
o Integrate tourism and hospitality with other economic activities
o Obtain maximum economic benefit
o Tourism and hospitality goods and services should be locally produced
 Unbalanced growth
o See tourism and hospitality as the spark to economic growth
o Proponents stress the development of supply; supporters of unbalanced growth
emphasize the need to expand demand
o As demand is increased through development of tourism and hospitality, other
industries will move to provide products and services locally.

Economic Strategies
 Maximize the amount of revenue and jobs developed within the region
 Economic strategy: import substitution, incentives and foreign exchange

Import Substitution
 Imposes quotas or tariffs on the importation of goods developed locally
 Grants subsidies, grants or loans to local industries to encourage use of local materials
 Objective is minimizing the leakage of money

Incentives
Wise use of incentives can encourage influx of capital, both local and foreign necessary to develop
tourism and hospitality supply. Most common forms of incentives:
1. Tax exemptions/reductions on imported machinery, materials
2. Reduction to company taxation by means of favorable depreciation, allowances on investment
3. Tax holidays (limited period);
4. Guarantee of stabilization of tax conditions
5. Grants (capital costs)
6. Subsidies
7. Loans at low rates of interests
8. Land freehold at normal or little cost 0or at low rents
9. Free and unrestricted repatriation on all or partly of invested capital profits
10. Guarantees against rationalization or appropriation

Before implementation of incentive:

1. Examine the performance of the scheme of other countries in light of their resources and
development objectives;
2. Research the actual needs of investors;
3. Design codes of investment concessions related to specific development
4. Establish targets of achievements and periodically monitor and assess level of realization of
targets

Foreign Exchange

 Restrictions on spending in order to maximize foreign exchange earnings

 Limited amount of own currency that tourists can bring in and take out to ensure foreign
currency is used to pay bills in host region
 Tourists may be required to pay hotel bills in foreign currency
 Visitors may be required to show that they have enough money for the stay before permitted to
enter a country or a specified amount of foreign currency for duration of visit or stay.