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Tourism and the Economy The Multiplier Effect How are Tourism and the Economy Related? The Multiplier Effect • In its simplest form, the multiplier effect is how many times money spent by a tourist is circulated in a country’s economy • 3 important concepts: – Direct Impact: The tourist’s initial spending which creates direct revenue – Indirect Impact: The initial process of respending i.e., employees’ salary – Induced Impact: The secondary process of respending, i.e., employees’ purchases The Multiplier Effect • A multiplier is the total effects (direct, indirect and/or induced) divided by the direct effects of tourism. This concept is based on the recirculation of income: recipients use some of their income for consumption spending, which then results in further income and employment. (Frechtling, 1994). New hotels set up Create jobs directly in the hotels Local businesses supply services Other companies are attracted to the area Workers spend their income in the local area; tax revenues increase The area becomes a popular tourist destination, increasing profitability and revenue for re-investment Money lost through leakage More jobs are indirectly created Taxes spent on improving infrastructure, image and tourist services Calculating the Multiplier Effect • The following equation is used to calculate the multiplier effect: (direct expenditure + indirect expenditure + induced expenditure)/initial direct expenditure = multiplier effect Multiplier Effect Exercise Create a detailed, illustrated flow chart showing how a tourist’s initial spending amount (say, $1000) to a hotel filters through the economy. Leakages in the Multiplier Effect • Foreign ownership in a destination country means that not all money a tourist spends ends up in the local economy Leakages in the Multiplier Effect • Ways that money can leak out of the economy from foreign owned hotels: – Profit goes back to the country that the initial investment came from – Some wages paid to foreign workers – Interest payments on loans made for investment in the hotel may go back to foreign banks – Commissions may be paid to foreign travel agencies Leakages in the Multiplier Effect – Advertising in foreign countries must be paid for – Goods and services must be imported – Money may be spent on training foreign rather than local staff Developed vs Developing • Developed nations such as Canada tend to enjoy less leakage than developing nations • The Caribbean Tourism Research and Development Centre (CTRC) has estimated that 42 % of all tourism spending remains in the local economy; 58% leaves the islands. • Because many products and services in the Caribbean must be imported, leakage remains high