Multiplier Effect

Q) Define multiplier effect. Discuss its role in local economy?
Q) What are the direct and indirect economic benefits of tourism? Explain with illustrations?

In tourism, multiplier effect is the way in which total spending done by the tourist filters through the economy and stimulates other sectors as well. Multiplier effect includes the direct and secondary effects of tourist expenditures on the economy. Multiplier effect refers to the number of rounds of spending with the local economy, thus indicating the impact on local income, employment and other economic sectors, graphically.

Multiplier effect is divided into 3 categories

a) Sales and Output Multipliers

It measures total sales on output stimulated by an initial expenditure as a ratio. The greater the multiplier, the greater is the benefit to the local economy. 

Eg: A tourist spends Rs.100 at a hotel. Out of the Rs.100, Rs.50 is spend by the waiter for buying his dress in the second round. The shop owner spends Rs.25 on weekly groceries in the third round. Then the total spending is Rs.175 against the Rs.100 originally spent by the tourist. Thus the multiplier effect is 1.75.

b) Income Multiplier

It measures the relation between tourist spending and subsequent changes in income in the following way

K = A x 1/ (1-BC)

A- % of tourist spending after leakage

B- % of income spent by residents on local goods and services

C- % expenditure of resident accessing a local income after leakages

c) Employment Multiplier

The ratio of direct and secondary employment generated by additional tourism expenditure to direct employment alone. 

Suppose 100 new jobs in tourist industry gave rise to 20 more jobs, then the multiplier would be 120/100 = 1.2

The comprehensive formula to calculate multiplier effect is TIM = 1-TPI / (MPS + MPI)

TIM - Tourism Income Multiplier
1 - Tourist expenditure
TPI - Tourist's propensity to import
MPS - Marginal propensity to save
MPI - Marginal propensity to import

The size of multiplier in tourism depends on how well developed the supplying sectors are and how closely linked they are to tourism. Tourism's primary activities involve purchase of goods and services mostly from the local economy, the multiplier will be higher than it would be, if many imported goods and services are used. 

Multiplier is higher for tourism than manufacturing. As tourism largely involves small businesses, tourist spending filters rapidly and more widely through the society. Multiplier for small island economies is less than 1. It is greater than 2 for highly integrated economies.

1. Positive Economic Benefits

Direct economic benefits include employment, income, foreign exchange which improved the living standards of the local community and overall national and regional economic development. In economically depressed areas, the employment and income provided by tourism may stop out migration. 

Increased government revenue from various taxation on tourism can be used for general economic benefit like infrastructural development. Indirect economic benefit is that it acts as a catalyst for development in other economic sectors such as agriculture, fisheries, construction, manufacture of handicrafts etc.

Another indirect benefit is the improvement in transportation and other infrastructural facilities and services for tourism which also serve as general national, regional and community needs. Tourism will impart training and managerial skills for its population and encourage people to adopt regular employment habits. Tourism also contributes in upliftment of women through training and employment. 

2. Negative Economic Impacts

Investments in tourism is large and locals have little participation. Economic distortion can take place geographically if tourism is concentrated in only one area of a country or region without corresponding development in other places. Inflation is another problem. Foreigners buy goods at high costs regularly and the prices get stabilized resulting in inflation. Productivity index of tourism industry is reduced during the off season, particularly to the investors and in general to the national economy. Eg: If there is no occupant in a hotel room for a day, it perishes.

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