Course Title: Tourism &Hotel Economics Course Code: (THM 241)

1. Course Title: Tourism &Hotel EconomicsCourse Code: (THM 241) Week Number:6 Lecture: 6 Lecture Title: The Multiplier Effect

2. Multiplier effect Objective: Explore the impact of the multiplier effect on a local economy.

3. Tourist Spending: The Multiplier Effect

4. What is the Multiplier Effect? Definition: The number of times money spent by a tourist circulates through a country's economy • The ME continues until the $ eventually 'leaks' from the economy through the purchase of items from other countries

5. Direct Spending Definition: Money spent by the tourist in return for goods or services.

6. Indirect Spending Definition: Money spent by the people/businesses who received direct spending from the tourist.

7. Multiplier Effect A new resort hotel is set up in Hope more workers needed to keep up with business Laundromat Grocery Store Caterer Florist Creates jobs indirectly in the hotels Businesses supply services to the resort Other companies are attracted to the area Malls, Restaurants, Car Rental Workers spend their earned $ in the local area, increasing tax revenue. Food Entertainment More jobs are indirectly created Area becomes a more popular tourist destination, increasing profit & revenue for reinvestment Taxes spent on improving infrastructure for residents & tourist services Parks Hospitals Schools Roads Money lost through leakage Going to the USA to shop for the weekend, buying a Japanese car

8. Direct, Indirect and Induced Multiplier Effects • The cascading effect of tourists’ money being spent throughout the host economy, begins at front-line tourist establishments, eg hotels, restaurants and taxis. The effect of this spending then permeates throughout the economy (Mathieson & Wall, 1982), creating impacts at three different levels: ie at the direct, indirect, and induced levels.. This is the multiplier effect.

9. The direct multiplier effect • The direct level of impact (also called the direct multiplier) is the value of tourist spending less the value of imports necessary to supply the front- line service-providers, such as hotels, etc. The direct impact-and the size of this multiplier-is likely to be less than an individual tourist’s actual expenditure because of leakage, except in the rare cases where the local economy can supply all that particular tourist’s needs (Cooper et al, 1993).

10. The indirect multiplier effect • The travel industry businesses which directly receive the tourists’ money also need to purchase goods and services from other organizations within the local economy. The economic activity generated by these subsequent rounds of expenditure is called the indirect multiplier effect. The indirect effect will not involve all that money which was originally spent by tourists, as some of this money is also likely to leak out of circulation through imports, savings, and taxes.

11. The induced multiplier • during the direct and indirect rounds of expenditure, money will be paid to local residents in the form of wages, salaries, rent, interest, and dividends; and also to local businesses for routine services. • Some of this expenditure (called the induced multiplier) generates yet more rounds of economic activity- by being spent on local goods and services. • It is only when all three levels of impact (ie direct + indirect + induced) are assessed that the full nature of this particular effect of tourism can be identified.

12. continued • Finally in the multiplier process, • direct multipliers flow from what visitors actually spend, • indirect multipliers are created by tourist industry expenditure. • Induced multipliers come from the routine spending, by their non-tourism industry suppliers, of both their direct tourist and indirect tourist industry receipts.

13. The Multiplier Effect in Action • Fig 1, a tourist’s $100 expenditure creates at least another $160 worth of transactions, though $40 is lost as leakage ($20 to imports, $20 to savings). • The left-hand column of Fig 2 shows the kinds of activities which tourists pay for, creating direct multiplier effects, while the right-hand column identifies those businesses from which travel companies make purchases, using tourist-generated money, and so creating indirect multipliers. • Fig 3 below shows those non-travel industry businesses, who may receive tourist-generated money, and who then create induced multipliers by spending this revenue.

14. Fig 1: The Multiplier Effect

15. [Source: WTO (ie the World Tourism Organization)] Fig 2: How Tourism Spending Flows into the Economy

16. Fig 3: Ultimate Beneficiaries of Travel Industry Spending • accountants, advertising agencies, appliance stores, architects, arts & crafts producers, bakers, banks, butchers, carpenters, charities, chemists, clothing suppliers, confectioners, cultural organizations, dairies, dentists, department stores, doctors, electricians, engineering companies, farmers, fishermen, freight forwarders, garages, gardeners, giftware producers, government: education - health - utilities etc, grocers, furniture & office equipment suppliers, insurance agents, laundries, lawyers, newsagents, painters, plumbers, printers, publishers, sporting venues, supermarkets, vehicle manufacturers & repairers, wholesalers, etc • [Source: WTO]

17. Different Types of Multiplier • There are five types of multiplier. Firstly, the income multiplier is the number of times which an individual amount of tourist expenditure should be multiplied to identify the total effect on the visited place’s economy. • The second and third types are the Sales or transaction multiplier which measures changes in business turnover created by tourism expenditures; and the output multiplier. The latter is similar to the sales multiplier but includes changes in inventory or stock levels in addition to sales. • The final two types are the employment multiplier which measures changes in economic activity caused by increases or decreases in tourism employment, and the government revenue multiplier. The latter measures the effect on government revenue of changes in tourism expenditure

18. Calculating multiplier The Type I sales multiplier = direct sales + indirect sales direct sales.

19. Types of multipliers The Type II sales multiplier1 = direct sales + indirect sales + induced sales direct sales. • The multipliers defined above are called ratio type multipliers as they measure the ratio of a total impact measure to the corresponding direct impact.

20. Types of multipliers • Comparable income and employment ratio type multipliers may be defined by replacing sales with measures of income or employment in the last equations. income ratio multiplier direct income + indirect income + induced income direct income. Employment ratio multiplier direct employment + indirect employment + induced employment direct employment.

21. Types of multipliers • Another wayof calculating a multiplier (generally the preferred approach among economists) is as a ratio of income or employment to sales. This kind of multiplier is sometimes called a Keynesian multiplier or response coefficient. Type III Income multiplier = Total direct, indirect, and induced income direct sales

22. Types of multipliers Type III Employment multiplier= Total direct employment + indirect employment + induced employment direct sales • This income (employment) multiplier produces total income (employment) impacts when multiplied by the direct sales.

23. Ratio multipliers should be used with caution. • Ratio multipliers should be used with caution. In most casesthe factory that produces the good bought by a tourist lies outside of the local region, creating an immediate “leakage” in the first round of spending and therefore no local impact from production of the good.

24. continued • Before applying a multiplier to tourist spending, one must first deduct the producer prices of all imported goods that tourists buy (i.e. only include the local retail margins and possibly wholesale and transportation margins if these firms lie within the region). • Generally, only 60 to 70% of tourist spending appears as final demand in a local region.

25. continued • The ratio of local final demand to tourist spending is called the capture rate. Capture rate = local final demand / tourism spending in local area • While all tourist purchases of services will accrue to the local region as final demand , only the margins on goods purchased at retail stores should be counted as local final demand.

26. questions • Q1: define the following • Multiplier effect • Direct spending • Indirect spending • Q2: Complete the following: • Direct multipliers flow from……………………………. • Indirect multipliers are created by…………………….. • Induced multipliers come from…………………………. • Q3: Discuss the different type of multiplier? • Q4: show haw to calculate the different types of multiplier?