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