CAVITE STATE UNIVERSITY

HOME ECONOMICS, VOCATIONAL AND

TECHNICAL EDUCATION DEPARTMENT

TOUR50- MACRO PERSPECTIVE IN

TOURISM AND HOSPITALITY INDUSTRY

Module 4: The Economics of Tourism
And Hospitality

Compiled by:
MAIZIE ANNE S.MODESTO
Instructor
 Table of Contents

Learning Objectives ………………………………………………………………………1

Instructions to the learner ………………………………………………………….……1

Pre-Test ……………………………………………………………………………………..2

Learning Topics: The Economics of Tourism and Hospitality

A. The Role of Tourism and Hospitality in Economic Development …………..3

B. Economic Impacts ……………………….……………………………………..4

1. Positive Economic Impacts …………………………………………….4

2. Negative Economic Impacts ……………………………………………6

C. Direct and Secondary Effects ……………………….…………………………7

D. Tourism Multiplier .……………………………………………………………….7

E. Maximizing the Economic Effects of Tourism and Hospitality ………………8

Post-Test …………………………………………………………………………………..10

Key to Correction ………………………………………………………………………..11

References ………………………………………………………………………………..11
After the completion of this module, the student will be able to:

1. explain the role of tourism in economic development;

2. analyze the positive and negative economic impacts of tourism on the
destination area;
3. differentiate between the direct effects from secondary effects of tourist
expenditure on the economy of the host area;
4. elaborate the meaning of tourism multiplier and its effect on the economy of
the host community; and
5. propose strategies to maximize the economic benefits brought about by the
tourism and hospitality industry.

INSTRUCTIONS TO THE LEARNER

• Make sure to read the lecture notes thoroughly and jot down unfamiliar terms and
take time to research its definitions by any means possible.

• Several learning activities and supplementary readings are required for some
topics which will further enhance your comprehension and understanding about the
subject matter so make sure to accomplish them.

• You may also be asked to watch video clips related to certain topics so please be
mindful of footnotes regarding the links to such learning materials.

• Do not forget to answer the post-test after completing this module since it is one of
the tools in assessing what you have learned from the included topics.

• Should there be any clarification or queries, feel free to communicate your

concerns with your instructor through any means possible and within the specified
consultation hour/period.
 THE ECONOMICS OF TOURISM AND HOSPITALITY

“Economics is everywhere, and understanding economics can help you make better
decisions and lead a happier life.”

- Tyler Cowen

A. THE ROLE OF TOURISM AND HOSPITALITY IN ECONOMIC DEVELOPMENT

Several developing countries have used tourism development as an

alternative to help economic growth. The reason for this are; (1) there is a demand
for international travel in developed countries; (2) the income from developed
countries increased with the demand for tourism also increases at a faster rate.; (3)
developing countries need foreign exchange to aid their economic development.

The Organization for the Economic Corporation and Development (OECD)

has concluded that tourism has a major opportunity for growth for countries that are
at the intermediate stage of economic development and require more foreign
exchange earnings.

Tourism is an invisible export which differs from international trade in many ways.

1. In tourism, the consumer collects the product from the exporting country there
by eliminating the freight cost for export, except in cases in which the airline
used are those of the tourist receiving countries.

2. The demand for pleasure travels purely dependent on non-economic factors

such as local disturbances, political unrest and changes the fashion ability of
resort/countries created mostly by media coverage. At the same time
international tourism is bot price elastic and income elastic. This means that
changes in price and income will also change the demand for pleasure
travels.

3. By using specific fiscal measure, the exporting or tourist receiving country can
manipulate exchange rates so that those for tourists are higher or lower
(normally the latter is implemented in order to attract large number of tourist)
than those foreign trade markets. Also, tourist is allowed to buy in domestic
markets at the same price as the same as the local residents.
 4. Tourism is a multifaceted industry that directly affects several sector in the
economy such as hotels, shops, restaurants, local transport firm,
entertainment establishments, handicraft producers and indirectly many
others such as equipment manufacturers and utilities.

5. Tourism brings many more non-monetary benefits and costs than other export
industries such as social, cultural and environmental benefits and costs.

B. ECONOMIC IMPACTS

When travelers outside the destination spend on goods and services within
the destination, tourism acts as an export industry by bringing in revenues from
outside sources. Tourist expenditures also increase the level of economic activity in
the host area directly. Many countries have utilized tourism as a means to increase
foreign exchange earnings to produce investment necessary to finance economic
growth.

Tourism’s economic impact on a destination area can be immense since it

provides a source of income, employment and foreign exchange.

Positive Economic Impacts

1. Foreign exchange earnings - One of the biggest benefits of tourism is the

ability to make money through foreign exchange earnings. Tourism
expenditures generate income to the host economy. The money that the
country makes from tourism can then be reinvested in the economy. How a
destination manages their finances differs around the world; some
destinations may spend this money on growing their tourism industry further,
some may spend this money on public services such as education or
healthcare.

2. Contribution to government revenues - Tourism can help to raise money

that it then invested elsewhere by the government. There are two main ways
that this money is accumulated. Direct contributions are generated by taxes
on incomes from tourism employment and tourism businesses and things
such as departure taxes.
3. Employment generation - The rapid expansion of international tourism has
led to significant employment creation. From hotel managers to theme park
operatives to cleaners, tourism creates many employment
opportunities. Tourism supports some 7% of the world’s workers.There are
two types of employment in the tourism industry: direct and indirect.

• Direct employment includes jobs that are immediately associated with the
tourism industry. This might include hotel staff, restaurant staff or taxi drivers, to
name a few.

• Indirect employment includes jobs which are not technically based in the tourism
industry, but are related to the tourism industry

4. Contribution to local economies - All of the money raised, whether through

formal or informal means, has the potential to contribute to the local economy.
If sustainable tourism is demonstrated, money will be directed to areas that
will benefit the local community most. There may be pro-poor tourism
initiatives (tourism which is intended to help the poor) or volunteer
tourism projects. The government may reinvest money towards public
services and money earned by tourism employees will be spent in the local
community. This is known as the multiplier effect.

5. Development of the Private Sector - The private sector has continuously

developed within the tourism industry and owning a business within the
private sector can be extremely profitable; making this a positive economic
impact of tourism. Every destination is different with regards to how they
manage the development of the private sector in tourism. Some destinations
do not allow multinational organizations for fear that they will steal business
and thus profits away from local people. This has been the case in Italy
wherein one cannot find a collectible Starbucks mug since it does not allow
the company to open up any branch in their country because they are very
proud of their individually-owned , local coffee shops.
 Negative Economic Impacts

1. Leakage - Economic leakage in tourism is when money spent does not remain in
the country but ends up elsewhere; therefore, limiting the economic benefits of
tourism to the host destination. The biggest culprits of economic leakage are
multinational and internationally-owned corporations, all-inclusive holidays and
enclave tourism.

2. Infrastructure cost - Tourism development can cost the local government and
local taxpayers a great deal of money. Money spent in these areas may reduce
government money needed in other critical areas such as education and health.

3. Increase in prices/ Inflation - One of the most obvious economic impacts of

tourism is that the very presence of tourism increases prices in the local area.
Increasing demand for basic services and goods from tourists will often cause
price hikes that negatively impact local residents whose income does not increase
proportionately.

4. Economic dependence of the local community on tourism - Many countries

run the risk of becoming too dependent on tourism Whilst this can work out well, it
is also risky business. If for some reason tourism begins to lack in a destination,
then it is important that the destination has alternative methods of making
money. If they don’t, then they run the risk of being in severe financial difficulty if
there is a decline in their tourism industry

5. Foreign Ownership and Management - As enterprise in the developed world

becomes increasingly expensive, many businesses choose to go abroad. Whilst
this may save business money, it is usually not so beneficial for the economy of
the host destination. Foreign companies often bring with them their own staff, thus
limiting the economic impact of increased employment. They will usually also
export a large proportion of their income to the country where they are based.
C. DIRECT AND SECONDARY EFFECTS

In order to measure the economic impact of tourism on the destination are, it

is important to know the direst and secondary effects of the visitor expenditures on
the economy of the area.

Tourist expenditures received as income by businesses such as hotels,

restaurants, transportation sector, tour operators and retail shops serving tourist
have a direct effect on the economy of the host area. The term direct means that the
income is received directly. Indirect or secondary effects means that the money paid
by tourist to business are in turn used to pay for supplies, wages of workers and
other items used in producing the products or direct services bought by tourist.

D. TOURISM MULTIPLIER

The term multiplier is used to describe the total effects of an external source
of income introduced into the economy. Tourism multiplier or multiplier effect is used
to estimate the direct and secondary effects of tourism to estimate the tourist
expenditures on the economy of the country.

A tourist makes an initial expenditure into destination. This expenditure is

received as income by local tour operators handicrafts store owners, hoteliers and
taxi drivers. In the first round of transactions, a hotelier my use some of the money
received to buy some supplies pay more wages and retain some profit. The income
in the second round may be spent or saved, while the employee who has received
payment for services rendered my spend some of it on rent an on some food, and
third round of sending goes for such things as seed, fertilizers and important raw
materials.
E. MAXIMIZING THE ECONOMIC EFFECTS OF TOURISM AND HOSPITALITY

Some economic growth theories have been proposed to maximize the

economic effect of tourism and hospitality within a destination area. These are the
theory of balanced growth and the theory of unbalanced growth.

Theory of Balanced Growth

• Proponents of the theory of balanced growth suggest that tourism and hospitality
should be viewed as an important part of a broad-based economy.
• This theory states that tourism and hospitality needs the support of other
industries.
• Its objective is to integrate tourism and hospitality with other economic activities.
• To obtain maximum economic benefit, tourism and hospitality goods and
services should be locally produced.

Theory of Unbalanced Growth

• Supporters of the theory of unbalanced growth see tourism and hospitality as the
spark to economic growth. They emphasize the need to expand demand.
• As demand is increased through the vigorous development of tourism and
hospitality, other industries will move to provide products and services locally.

The key to maximizing the economic effects of tourism and hospitality is to

maximize the amount of revenue and jobs developed within the region. To attain this
objective, some economic strategies have been adapted, such as import
substitution, incentives, and foreign exchange.
Import Substitution
• It imposes quotas or tariffs on the importation of goods which can be developed
locally.
• Also grants subsidies, grants, or loans to local industries to encourage the use of
local materials.
• Its objective is to minimize the leakage of money.

REFERENCES

• Cooper C., Fletcher, J., Gilbert D.,

Fyall, A. And Wanhill, S. (2008). Tourism: Principles and Practices. 4th Edition
England: Pearson Education Limited.

• Lansangan-Cruz, Z., (2018). Macro Perspective of Tourism and Hospitality.

Manila: Rex Book Store Inc.

• Santos, B., and Manzano, R., (2009). Principles of Tourism 1. Quezon City: C and
E Publishing, Inc.

• Vibal, V., (2010). Principles of Tourism 1. Anvil Publishing.

• Walker, J., (2011). It’s tourism concepts and practices. USA: Pearson Education
Inc.