Unit 3

The Economics of
Tourism and Hospitality

Prepared by: Berna E. Mercolisia

THC 101-Instructor
Topics:

• The Role of Tourism and

Hospitality in Economic
Development
• Economic Impact
• Direct and Secondary Effects
• Tourism Multiplier
Topics:
• Undesirable Economic Aspects
of Tourism
• How to Maximize the
Economic Effect of Tourism
and Hospitality
• Economic Strategies
Learning Outcomes
• At the end of this chapter, you
should be able to:
Explain the role of tourism and
hospitality in economic
development;
Learning Outcomes
 analyze the economic impact of
tourism and hospitality on a
destination area;
differentiate the direct effects from
the secondary effects of tourist
expenditures on the economy of
the host area;
Learning Outcomes
elucidate the meaning of tourism
multiplier and its effect on the
economy of the host country;
describe the undesirable effects of
the economic aspects of tourism
and hospitality; and
Learning Outcomes
 identify the strategies which can
maximize the economic effects of
tourism and hospitality
 The Role of Tourism and Hospitality
in Economic Development
1. Continuous demand for international
travel in developed countries.
2. Income in developed countries increases,
the demand for tourism and hospitality
also increases at a faster rate;
3. Developing countries need foreign
exchange to aid the economic
development.
 Economic Impact
Tourism and hospitality 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.
 Economic Impact
Utilize tourism and hospitality as
a means to increase foreign
exchange earnings to produce
investment necessary to finance
economic growth.
 Direct and Secondary Effects
Direct effects mean the income is
received directly.
Indirect or secondary effects mean that
the money paid by tourist to businesses
are, in turn used to pay for supplies,
wages of workers, and other items
used in producing the products.
 Tourism Multiplier
Multiplier is used to describe the total
effect, both direct and secondary, of an
external source of income introduced
into the economy. This is used to
estimate the direct and secondary
effects of tourist expenditures on the
economy of a country.
 Undesirable Economic
Aspects of Tourism
 Higher Prices – because of additional
demand and/or increased imports

 Economic Instability
 How to Maximize the Economic
Effect of Tourism and Hospitality
 Balanced Growth – viewed as an
important part of a broad-based
economy. This means that T&H needs
the support of other industries. Its
objective is to integrate T&H with
other economic activities. To obtain
benefit, T&H goods and services
should be locally produced.
 How to Maximize the Economic
Effect of Tourism and Hospitality
 Unbalanced Growth – see tourism
and hospitality as the spark to
economic growth. Emphasized that
there is the need to expand demand.
As demand is increased through the
vigorous development of T&H, other
industries will move to provide
products and services locally.
 Economic Strategies
1. Import Substitution – It imposes
quotas or tariffs on the importation of
goods which can be developed locally.
It 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.
 Economic Strategies

2. Incentives – the use of incentives

can encourage the influx of capital,
both local and foreign, necessary to
develop T&H supply.
 Economic Strategies
The most common forms of incentives
are:
 Tax exemptions/reductions on
imported machinery, materials, and
the like;
 Economic Strategies
 Reduction in company taxation by
means of favorable depreciation
allowances on investment, or special
treatment in relation to taxes;
 Tax holidays (limited period);
 Guarantee of stabilization of tax
conditions (for up to 20 years);
 Economic Strategies
 Grants (for up to 30% of total capital
costs);
 Subsidies (guaranteeing minimum
level of profit, occupancy, etc.);
 Loans at low rates of interest;
 Provision of land freehold at nominal
or little cost or at low rents;
 Economic Strategies
 Free and unrestricted repatriation of
all part of invested capital profits,
dividends, and interest subject to tax
provisions; and
 Guarantee against nationalization or
appropriation.
 Economic Strategies
2. Foreign Exchange – Tourist may
be required to pay hotel bills in foreign
currency. Visitors may be required to
show that they have enough money for
their stay before they are permitted to
enter the country.
End of Unit 3