12 Income,
employment and
prices
© John Tribe
© John Tribe
Learning outcomes
• By studying this section students will be able to:
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distinguish between microeconomics and macroeconomics
measure the total level of economic activity in an economy
distinguish between changes in real and money GNP
measure the contribution to GNP
understand the contribution to employment
understand the contribution to tax revenue
utilize simple economic models of the macroeconomy
understand and apply the multiplier principle
measure inflation in the recreation, leisure and tourism sector
interpret government policy in this area
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Macroeconomics
• Cf microeconomics
• Macroeconomic issues affect the whole
economy
• Aggregates
– Eg. adds together the spending of individuals
to calculate consumers’ expenditure, or
aggregate demand
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A simple macroeconomic model
• The economy is
divided into two
sectors, households
and firms
• Real and Money
Flows
• Circular Flow
• National Income = A
• National Output = B
• National
Expenditure = C
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Gross, net, real and money
• Real national income or national income at
constant prices has had the effects of
inflation removed.
– Money national income has not
• Some investment is merely replacing worn
out machinery, so:
– Gross national product – Capital consumption
= Net national product (national income)
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Impacts:
Expenditure
• In the UK 18.2 per
cent of average
expenditure in 2000
to 2001 was on
leisure items
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Impacts:
Employment 1
In Australia, there were
about 551,000 persons in
tourism generated
employment in 2000-01,
the number of tourism
employed persons grew
by 7.4% between 199798 and 2000-01 and the
tourism share of total
employed persons in
2001 was 6.0%.
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Impacts: Employment 2
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Impacts: Taxation
– The tourism industry’s
indirect tax
contribution has been
estimated at 10.6% of
total tax revenues
worldwide.
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Economic Impacts: Meribel, France
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De-industrialisation in the
developed world
• Employment in the services sector has grown in
importance, manufacturing employment has shown a
long-term decline. This is known as deindustrialization.
This is caused by three factors.
– First, technological progress enables productivity increases in
manufacturing and thus the ratio of labour input to output
declines.
– Second, manufacturing has been subject to intense competition
from low labour cost countries such as China and Vietnam, so
many manufactured goods are now imported.
– Third, as incomes increase expenditure on services increases by
a greater proportion (services demonstrate high income elasticity
of demand).
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De-industrialisation
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Wages
• Demand and
supply
• Trade Unions
• Minimum
Wage
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Multipliers
• Example:
– Investment of £100 000 on a new leisure complex.
– Firms will hire factors of production to the value of £100000 and
therefore national income, measured at point A, will rise by
£100000.
– However, the effects of the investment do not stop there.
– The workers who earned money from building the complex will
spend their money in shops and bars, etc. Thus the incomes of
shop and bar owners will rise. They in turn will spend their
incomes. In other words, a circular flow of income and
expenditure will take place.
– The investment expenditure sets in motion a dynamic process,
and the total extra income passing point A will exceed the initial
£100 000.
– This is known as the multiplier effect. .
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Multipliers
• The Keynesian multiplier (k) shows the
amount by which a change in expenditure
(∆ EXP) in an economy leads to a change
in national income (∆Y)
• ∆EXP x k = ∆Y
• Thus if an increase in investment on a
leisure complex of £100 000 led to a final
increase in national income of £400 000,
then the multiplier would have a value of 4.
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Multipliers
• The key factors
affecting the size of
the multiplier are:
– The size of the initial
injection into the
economy
– “Leakages” from the
economy:
• Savings
• Taxation
• Imports
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Multipliers
• Formula for calculating the multiplier:
• k = 1/MPL
• where MPL = the marginal propensity to leak (the proportion of extra
income that leaks out of the economy).
• MPL = MPS + MPM + MPT
• where MPS = marginal propensity to save (the proportion of extra
income saved), MPM = marginal propensity to spend on imports (the
proportion of extra income spent on imports) and MPT = marginal
propensity to be taxed (the proportion of extra income taken in
taxes.
• For example if MPS = 0.1Y, MPM = 0.05Y and MPT = 0.1Y, where Y
= income, then:
• k = 1/(0.1 + 0.05 + 0.1)
• k = 1/0.25
• k = 4.
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Multiplier Rounds
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Multiplier Impacts
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Tourism Destination Price Index
• Prices in destinations can have an
important effect on tourism demand
• A tourism destination price index can offer
a guide to relative prices of key tourismrelated activities (e.g. hotel costs, meal
prices, car hire etc)
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Destination Price Index
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Tourism Destination Price Index
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Government policy
• Government policies to promote employment
may include the following:
– Demand management
– Export-led policies
– Project assistance
• Governments of countries with comparatively
high rates of inflation may utilize counterinflationary policy.
– Demand pull inflation
– Cost push inflation
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Review of key terms
• Macroeconomics =
– the study of the national economy.
• National income =
– a measure of the total level of economic activity which takes
place in an economy over a year.
• GNP =
– gross national product.
• NNP =
– net national product (national income).
• Money national income =
– national income calculated at current prices.
• Real national income =
– national income calculated at constant prices (inflationary
element removed).
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Review of key terms
• Tourism income multiplier (TIM) =
– exaggerated effect of a change in tourism expenditure on an
area’s income.
• TDPI =
– tourism destination price index.
• Basket of goods =
– typical items bought by a defined group.
• Cost-push inflation =
– inflation caused by changes in input prices.
• Demand-pull inflation =
– inflation caused by excess of aggregate demand over aggregate
supply.
• Demand management =
– government policy to influence total demand in an economy.
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12 Income,
employment and
prices:
The End
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