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5 Key Economic Variables Directly Affected by the Growth of Tourism Industry

January 30, 2019 0 Comment

In India, tourism has created direct employment for 7 million people. In UK, total tourism-related employment is about 7 per cent of total employment in that country.

Tourism as a source of employment is particularly important for areas with limited alternative sources of employment, i.e., non- industrial areas deficient in natural resources.

According to one estimate an investment of one million rupees creates 89 jobs in the hotel and restaurant sector, a key component of the tourism industry, as against 44.7 jobs in agriculture and 12.6 in manufacturing industries.

This ratio obviously increases if one takes into account ancillary services associated with hotels and restaurants.

Who benefits from tourism? The simple answer is the tourist industry that part of the economy which caters for the tourist, those firms and establishments which have a common function supplying tourist needs.

Some of them, such as holiday camps, many restaurants and many souvenirs are mainly dependent on tourism for their business.

In addition to being a source of income and employment, tourism is frequently a source of amenities for the resident population of the tourist destination. Because of visitor traffic, residents may enjoy a higher standard of public transport, shopping and entertainment facilities than they would be able to support otherwise.

The provision of incomes, jobs and amenities for the resident population may therefore be regarded as the three beneficial effects of tourism to tourist’s destination.

In some locations tourism may provide an infrastructure which in turn forms the base and the stimulus for the diversification of the economy and for the development of other industries. Thus tourism expenditure may be said to stimulate an economy beyond the sector concerned with tourism.

In both developed and developing countries, government authorities have identified tourism as a means of generating employment and income. Third World countries such as Gambia in West Africa have placed tourism as a major component of their economic policy.

The economic significance of tourism varies from country to country. In a developing country, the economic significance of tourism may be measured in terms of its ability to generate an inflow of foreign exchange. On the other hand, in a developed country, its significance may be measured in terms of its ability to assist diversification and combat regional unbalances.

Economic impact of tourism can be measured in terms of the multiplier process. The concept of multiplier was developed by Kahn and Keynes.

Keynes argued that economic growth was determined by two groups of flows of activity leakages from the economic systems and injections into that system.

The injections comprise investment, exports and government expenditure. Investment is important because it creates jobs and income. Exports means the selling of goods overseas and thus earning money from overseas residents.

Government expenditure is a means of financing investment. Exports and Government expenditure are injections that add to economic growth. From the standpoint of tourism, the building of the tourist attraction is investment; it helps to attract overseas visitors and thus it is a form of export.

The leakages in the system are savings, taxation and imports. The act of saving withdraws money from the economy and diminishes the level of demand for goods and hence employment.

By raising taxation, the government withdraws money from the economic system and so diminishes the level of demand. Imports are a leakage in the sense that jobs associated with the production of these goods are also to be found overseas.

When both the injections and leakages are in equilibrium, then the economy is also in equilibrium. Economic growth is generated by the injections being greater than the leakages.

There is important economic flow consumer expenditure and this is placed in both sides of the equation. Consumer spending is an injection in that it is the spending that simulates the demand for goods and services and thus creates employment and income.

On the other hand, if the recipient of the consumer expenditure does nothing with the revenue, the money flows out of the economic system.

The economic impact of tourism has a disproportionate effect on the host community because of the multiplier effect which spreads the benefits for beyond the resort. The economic impact can be divided into three stages.

First, there is a direct expenditure by tourists on goods and services provided by hotels and restaurants. Second is the indirect expenditure due to the resultant business transactions arising from the first stage? Finally, there is the induced expenditure due to the responding of income by local nationals employed in or benefiting from the tourism expenditure in their regions.

Tourism Has Economic Effects By:

1. Creating employment and income,

2. Contributing to the balance of payments.

The term tourist multiplier refers to the ratio of two changes the changes in one of the key economic variables such as output (income, employment of government revenue) to the change in tourist expenditure.

There are different types of multiplier as follows:

(a) Sales Multiplier:

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

(b) Output Multiplier:

These measures the amount of additional output generated in an economy as a result of an increase in tourist expenditure.

(c) Income Multiplier:

This measure the additional income (wages, rent, interest and profits) created in the economy as a result of increase in tourist expenditure.

(d) Employment Multiplier:

This is a measurement of the total amount of employment generated beyond additional unit of tourist expenditure. Employment multipliers provide a useful source of information about the secondary effects of tourism.

(e) Government Revenue Multiplier:

This measure the impact on Government revenue from all sources associated with an increase of tourist expenditure.

The basic formulation of Tourism Multiplier is thus,

Where A = proportion of tourist expenditure remaining in the area after first round leakages,

B = proportion of income that local people spend on local goods and services propensity to spend locally,

C = proportion of expenditure of local people which accrues as local income.

Tourism multipliers have been found to be weak for the following reasons:

1. Comparatively low levels of pay,

2. Costs as well as income are generated,

3. Nature of the tourist regions.

Tourism multipliers measure the present economic performance of the tourism industry and the short-run economic effects of a change in the level or pattern of tourism expenditure.

They are particularly suitable for studying the impact of tourist expenditure on business turnover, incomes, employment, government revenue and the balance of payments.

One of the means of assessing the impact of tourist expenditure on other areas of the economic system is the use of input-output analysis. This technique attempts to show the flow of economic transactions through the economy within a given time span, usually a year.

It is a refinement of the basic multiplier process in that it seeks to show the inter-relationship between different sectors of the economic system.

Last but not the least, the impact of tourism on the balance of payments may be significant. In the case of developing countries one reason for tourism is that it is a means of earning foreign currencies.