Tourism Multiplier Effect

TOURISM MULTIPLIER EFFECT The income generated from tourism flows to a country, region or location and is an injection of new resources for the economy. The direct economic effects of tourism are experienced by providers of tourism services and products, creating income for various economic agents and directly increasing Gross Domestic Product (GDP). Business owners get profits, workers get wages, and the government gets indirect taxes from the goods and services sold. The economic impact does not stop here. Because the economy is a dynamic system, new circles or cycles of transactions have emerged as more resources have been accumulated at the beginning. There are two main types of effects that can be recognized, namely indirect effects and induced effects. 1. (Indirect effects) or indirect effects arising from intermediate/medium consumption originating from suppliers of tourist goods and services. For example, to market a pizza. restaurants must prepare flour, tomatoes, toppings and wood for the oven. Just like airline companies need planes and fuel. Sales of intermediate consumption of these goods and services, in turn will provide income to suppliers, and income for the economic actors involved. These suppliers will also consume their own inputs, creating a new cycle of effects that indirectly parallel the production chain. 2. (Induced effects), namely the income of workers and business owners that comes from tourism income into capital that can be spent on different types of goods and services. For example, hotel employees who use part of their salary for their children's school fees, will generate economic income by engaging in educational activities. The same condition occurs among employees and company owners who do not sell anything directly to tourists, but economic activities are indirectly influenced by tourism income. Indirect and induced effects in the first cycle will influence the second cycle, and so on. However, in each cycle, there will be another weakening effect, namely the leakage variable. There are 3 types of variable leaks: 1. Taxes, namely resources collected by the government directly (paid individually) and indirect taxes will come out of the cycle, reducing the purchasing power of individuals and companies. 2. Savings budget, namely the part of workers' and company income that may be saved and not used to purchase goods or services. 3. Imports, namely the expenditure of companies and individuals allocated to purchase imported goods and services, the money will not circulate in a national cycle, but will instead leak and provide new income or cycles for other countries. The final result of resource injection is that tourism can lead to an increase in GDB through various transaction cycles. The total net income created may be large, it may also be smaller than the initial tourism income based on the presence of existing leakage variables. If the leak is large, then every dollar that goes into the economy at the end will be small. If the leak is small. So the final result may be greater than the initial tourism income. Therefore, the economic impact of tourism can be dual based on indirect effects and induced effects. In other words, the tourism multiplier effect is a multiplication of economic effects that occurs due to many rounds of transactions, driven by the injection of tourism revenues into the economy. Various policies can be implemented to increase the multiplier effect of tourism, in general these policies consist of ways to reduce leakages in the economy. The main strategy to achieve this goal is to encourage the development of local production and overcome the need for imports. In numerical terms, the tourism multiplier effect can be defined as the ratio of the total economic effect to tourism revenues. 2. Another method for calculating more complex and informative effects is through an input-output matrix. This matrix provides detailed information about income and expenses from economic activities and agents. For example, the matrix will indicate the expenditure structure of the hotel business including the amounts allocated to intermediate consumption, profits, wages and indirect taxes. In addition, the input-output matrix shows the structure of individual and government expenditure. The process of calculating the tourism multiplier effect through input and output matrices has important limitations including: - This matrix considers the pattern of each activity and economic agent to be constant. - The effect of tourism income on a price is ignored. - Does not consider the operation of all markets that make up the economy. The operations of labor, capital, monetary and exchange markets are ignored in whole or in part. - Does not consider government finances, implicitly assuming that public income and expenditure have no relationship with each other. 3. As a solution to the shortcomings of the input-output model. A new economic analysis model has been created based on equations and parameters that display the operation of the economy as a whole. This instrument is called the Computable General Equilibrium Model and is widely used today. Estimation of these parameters compares several equations of a general model, thus requiring large amounts of statistical information and substantial computing power. As a result these equilibrium models can provide very sophisticated estimates of the multiplier effects of tourism. Operationalizing the Tourism Multiplier Effect 1. Operational 1 Singh (2010) estimates the multiplier effect of tourism in 17 countries in Latin America based on the Keynesian method. This study only looks for values based on leakages represented by savings and imports, but eliminates leaks related to taxes. Based on estimates, Argentina has the highest tourism multiplier effect among the countries studied. In this country, dollars from tourist income rose rapidly by $2.08 US in GDP. On the other hand, countries such as Salvador, Guatemala, Mexico and Venezuela have a multiplier effect below 1, this is due to the high level of goods and services imported for the country. For example, Singh did calculations for Brazil. 2. Operational 2 Dwyer et al (2003) used the Computable General Equilibrium Model to analyze the economic effects of tourism in Australia. This research examines the short term of an increase in international tourism revenues of AUS$1 million which in turn results in an increase of AUS$1,289 million to the country's GDP. Based on these results, the estimated income multiplier is 1,289.