multiplier effect tourism meaning

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Multiplier Effect in Tourism

• Emily Ma 3  
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Estimating the economic impact of tourism is an important research direction. As an industry involving multiple sectors in the economy, tourism not only creates jobs and brings in income to the industry itself (Campos Soria et al. 2019 ), but it also facilitates growth in the primary and secondary circles. This is known as the multiplier effect. In simple terms, the tourism multiplier effect refers to how many times money spent by a tourist circulates through a country’s economy (Archer 1982 ).

There are three types of multiplier effects: direct, indirect, and induced impacts. Direct effects refer to the first-round effect of spending by tourists (Vanhove 2005 ), including the initial injection of money providing revenues and jobs for director stakeholders such as hotels, airlines, travel agencies, restaurants, and attractions (Turgarini et al. 2018 ). Tourism can further cause indirect and induced effects (Vanhove 2005 ). Indirect effects include the ripple effect of recirculating the...

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Archer, B.H. 1982. The value of multipliers and their policy implications. Tourism Management 3 (4): 236–241.

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Campos Soria, J.A., and L. Robles Teigeiro. 2019. The employment multiplier in the European hospitality industry: A gender approach. International Journal of Contemporary Hospitality Management 31 (1): 105–122.

Laterra, P., L. Nahuelhual, M. Gluch, X. Sirimarco, G. Bravo, and A. Monjeau. 2019. How are jobs and ecosystem services linked at the local scale? Ecosystem Services 35: 207–218.

Turgarini, D., B. Muhammad, and E. Harmayani. 2018. The multiplier effect of buying local gastronomy: The case of Sundanesse Restaurant. E-Journal of Tourism 5 (1): 54–61.

Vanhove, N. 2005. The economics of tourism destinations . Amsterdam/Boston: Elsevier.

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Peter U. C. Dieke PhD

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Ma, E. (2023). Multiplier Effect in Tourism. In: Jafari, J., Xiao, H. (eds) Encyclopedia of Tourism. Springer, Cham. https://doi.org/10.1007/978-3-319-01669-6_454-2

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Tourism multiplier effect- made SIMPLE

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Do you want to know what the tourism multiplier effect is and how it works? If you have come through to this page then the answer is probably yes! And you are probably aware that when you Google the term ‘multiplier effect’, the results presented to you include an array of complicated economic jargon that can be hard to understand. Well the good news is that if you are studying travel and tourism , especially at undergraduate level or below, the chances are that you don’t need to understand the complex economic terms and formulas! Yippee!

So what do you need to know to be able to understand what is meant by the term tourism multiplier effect? Make sure you stick around until the end of the article and I can promise that you will know a lot more about the tourism multiplier effect than you did before you arrived on this page!

What is the tourism multiplier effect?

Sales or transaction multiplier, output or production multiplier, income multiplier, employment multipliers, the official or government revenue tourism multiplier, direct tourism expenditure, indirect tourism expenditure, induced tourism expenditure, why is the tourism multiplier effect important, how to calculate the tourism multiplier, limitations with the tourism multiplier, further reading.

So lets start off by explaining, in simple terms, what the tourism multiplier effect is…

The tourism multiplier effect occurs when the economic benefits of tourism are multiplied.

This is largely fuelled by the growth in the tourism industry and associated industries that grow as a result of tourism. It can bring wide-reaching benefits to people involved directly and indirectly with the tourism industry.

So how can the economic impacts of tourism be multiplied…?

Types of tourism multipliers

There are many ways that the economic impacts of tourism can be multiplied. Jickorish and Jenkins (1997) explain that the types of tourism multipliers can be broken down into five major categories.

This is when the number of sales or transactions made increases. These can be directly involved with the tourism industry (i.e. selling hotel rooms) or indirectly involved (i.e. increased sales of produce (that will later be used to feed the tourists ) at the local farmers market).

The output multiplier is when the amount of products or services increase (but are not necessarily always sold). Examples could include the opening of new eco lodges in the Gambia , more padi diving courses being offered in Dahab or more hotels for families opening up in Shanghai .

Income multiplier is when employee income generates further income through their expenditure. For example, a waiter who works in a hotel may spend part of his wages on schooling for his child. The school then makes extra money that they may use to pay their teachers. The teachers may then spend their money on produce in the local store. Etc….

An employment multiplier measures the impact of tourism activity on jobs. So, for every hotel that is built, for example, many jobs will be created, from construction workers to cleaners, to hotel receptionists and more. These are jobs that are directly created as a result of tourism.

Alongside this, there will be a number of jobs that are indirectly created, for example, the fisherman now has more people (the tourists) to feed so he has more work and can hire more staff. And because more people are using the roads the roads will have more wear and tear, resulting in the need for more road workers.

The ‘official’ tourism multiplier will often be determined by the local Government. Using the statistics that they have (and remember, not ALL money made from tourism is recorded- think the child street seller or the tuk tuk driver- do you think they are formally reporting on all of their income??), Governments will determine the net value of the tourism industry i.e. how much money it is worth.

How does the tourism multiplier effect work?

The tourism multiplier effect occurs when the economic impacts of tourism are multiplied. This can happen in three ways:

Direct tourism expenditure is when is the money that tourists spend on tourism-related products and services. This includes paying for their hotel room or hire car, buying tickets to go to a tourist attraction or to watch a show or paying for a meal at a restaurant, for example.

Indirect tourism expenditure is when money is spent on aspects that are related to the tourism industry but that may not directly involved with the tourism industry. For example, tourists will use the roads to travel along, so there will be a need for more road workers to repair and maintain the roads. These road workers are paid to be there because the tourists exist, but they do not work directly with the tourists.

Induced tourism expenditure is when there is an increase in economic activity in the area, which has resulted from tourism. For example, a person may be hired to work as a cleaner at a hotel. That person may then use the money that they earn to buy birthday presents for their child that they may not otherwise have been able to afford. This is spending that has occurred as a result of tourism (because if the tourists didn’t come the cleaner would not have a job).

The tourism multiplier effect is an example of a positive economic impact of tourism, i.e. it is a good thing (most of the time, at least)! The tourism multiplier effect demonstrates that the economic consequences of a single action (i.e. a tourist going on holiday) can have a greater impact economically on the local and global economy.

If tourism is managed in a sustainable way, the tourism multiplier effect has the potential to bring about many positive changes in society. Money raised can be invested into areas such as healthcare or 3education, for example. This can then have wide-reaching benefits for years to come.

If you want to calculate how much the tourism multiplier has made a difference, then you will need a bit more knowledge than I have provided in this article! Whilst this job will usually be down to economists who have a thorough understanding of economic multipliers, this video will give you an idea of how this can be done-

One of the major problems that can occur with the tourism multiplier, is when the money multiplies outside of the host destination. In other words, economic leakage occurs. When foreign employees are hired or when foreign organisations, such as multinational corporations, have a significant presence in the tourism industry it is likely that lots of the money raised from tourism will leak out of the country, known as economic leakage. This is a problem for many destinations around the world and is an example of a negative economic impact of tourism and this further highlights the importance of sustainable tourism management and adequate tourism development planning .

If you enjoyed this article, I am sure that you will find these articles helpful too-

• Economic leakage in tourism explained
• Economic impacts of tourism
• Butler’s Tourism Area Life Cycle Model: A simple explanation
• Leiper’s Tourism System: A simple explanation
• Different levels of tourism policy and planning

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Tourism Multiplier

Concept of Tourism Multiplier : Tourism being a multi-faceted and interdisciplinary industry has a great potential in generating income and employment (direct and indirect). Tourism , being one of the largest industries for many countries, has a high multiplier effect. The inflow of money from Tourist Generating Region to Tourist Destination Region through various sectors of the economy is very high which contributes to the economic development.

Tourism is on higher trajectory of creation as it not only creates jobs in its own tertiary sector, it also reassures growth in the related primary and secondary sectors of industry. This phenomenon is known as the multiplier effect. In other words, how many times a money spent by a tourist circulates in a particular country’s economy.

You may read Tourism Product Concept

Money spent in a hotel or restaurant helps to create jobs directly in the hotel premises. It also generates jobs indirectly in related or allied industry elsewhere in the economy. For example, the hotel buys food from local farmers or market supplier, who may spend some amount of this money on clothes or other products. Tourists often buy souvenirs from destination this increases demand for local products, which upsurges secondary employment in locally.

Also read about Hospitality

The multiplier effects continue or have ripple effect until the money in due course ‘leaks’ from the economy through imports or other methods. 

Multiplier concept is based on Keynesian analysis. It tracks the money spent by the tourists as it filters through the economy. The revenue decreases in a geometric progression at each round as a result of leakages. 

Direct tourism expenditures occur when different suppliers of tourism services such as travel agencies, hotels, restaurants etc. provide services. Similarly, indirect expenditures occur due to purchase of handicrafts and availing services during the entire tourism experiences. Again, these expenditures on tourism lead to providing wages and companies can make profit out of tourism business and government may generate revenue through taxes. Causing a wide spread impact on the economy in terms of income, employment and further new investment, this figure also shows how leakages may occur due to high imports causing multiplier weak. 

You may read Tourism Product Concept  

Tourism Expenditure and Multiplier

Tourism Expenditure can be broadly divided into three types. Namely

• Direct Expenditure,
• Indirect Expenditure
• Induced Expenditure
• Direct Tourism Expenditure consists of expenditures by the tourists on goods and services on hotels, shops, and other tourism related services. It is otherwise known as tourist’s initial spending which creates direct revenue.
• Indirect Tourism Expenditure includes the transaction between businesses caused by direct tourism expenditures. It is otherwise known as the initial process of re-spending i.e., employees’ salary. For example, purchase made by hotels from local suppliers and goods bought by suppliers from the wholesalers. 
• Induced Tourism Expenditure consists of increase consumption resulting from increase in income provided by direct tourism expenditure.  It is otherwise known as the secondary process For example, the employees of the hotel purchase goods  and services otherwise known as re-spending.

Types of Multiplier

According to Lickorish and Jenkins, tourist multipliers can be classified into five main broad categories:

• Sales or transaction multiplier : The sales or transaction multiplier measures direct, indirect and induced turnover generated by extra unit of tourism expenditures or additional business turnover. 
• Output or production multiplier: The output or production multiplier measures the extra production and accounts an increase in stock levels at hotels, restaurants and shops as a result of increase in commercial or trading activities. The output multipliers are mainly concerned with actual levels or changes in production or output rather than the volume of sales or value.

Read more on Tourism Product Life Cycle

• Income multiplier: An income multiplier measures the income (receipt) generated by an additional unit of tourist expenditure. The salaries remunerated to overseas residents are not counted, only the proportion of these that has been spent in the area should be included while measuring Income multiplier.
• Employment multipliers: Employment multipliers measure the effects of extra economic activities on employment i.e., the increased number of primary and secondary jobs generated by an extra unit of tourism expenditure. This multiplier can be expressed in namely direct and indirect employment.
• The official or government revenue tourism multiplier: It indicates the net value ie, taxes less subsidies, of government income from tourism .

Use of Multiplier

Multiplier is a tool used to analyze the economic effect of increase in tourism expenditure and its influence on other sectors of the economy. The value of multiplier depends on the particular features of the tourism in the area studied and the characteristics of the local economy.

The greater the range of activities in the areas the greater would be the chance of higher number of exchange between them. Therefore, the greater is the size of multiplier then the export would be more than import.  However, a higher number of imports can reduce the value of multiplier.

Factors Affecting the Size of Tourism Multiplier

The size of the multiplier is affected by different factors. These include:

• The initial volume of tourism expenditure,
• Supply constraints in the area of the economy,
• The size of the area economy,
• Value added in the first round expenditure,
• Tourism industry linkages with the area of economy, and

The size of the multipliers depends on four basic factors:  

• Size and economic diversity. The overall size of region or country and economic diversity of its economy have a significant role in determining multipliers. Regions with large and diversified economies and producing goods and services of higher order will have high multipliers. As the households and business firms will consume most of the goods and services produced locally. 
• Geographic Extent and its Role:   It denotes the geographic extent of a region or country and its role within the broader region. Regions of a large geographic extent will have higher multipliers than small areas other things remaining constant, as transportation costs will tend to constrain imports. Regions or countries that serve as central location for the surrounding area or regions will have higher multipliers than those isolated areas. 
• Nature of the Economic Sectors: The nature and characteristics of the economic sectors under consideration also have substantial impacts. Multipliers vary across all sectors of the economy as the mix of labor and other inputs of every sector have their own propensity to buy goods and services available within the region. As Tourism and allied businesses are labor intensive, it tends to have greater induced rather than indirect effects on sector. When a single multiplier  describes a region, mostly it represents an aggregate or average value across many sectors. For more precise and accurate estimates sector-specific multipliers are to be used if possible. A sector-specific multiplier will precisely estimate the secondary effects within a given sector on sales of services and product.  
• Year: A multiplier represents the nature of the economy at a given point in time. As any changes over time in response in the economic structure or price changes may change multipliers for a given region. While using regional economic models or multipliers any changes in spending are generally price adjusted to the model year for region.  Sales or income multipliers are more directive to general price inflation than employment multipliers and ratios have more chances to change over time.

Limitations of Tourism Multiplier

Insufficient Data : It is observed that due to insufficient data regarding the tourism activities, it is not accurate enough to be used in tourism planning.

Variation in MPC: Variation in marginal propensity to consume leads to measurement in accurate effects on inflation.

Inelasticity of Supply:  It is assumed that supply is elastic in all sectors of production. However, developing countries are confronted with a number of problems including

• Lack of availability of resources
• Shortage of foreign currencies
• Inefficiency and insufficient productivity.

The Static Feature of Production Function: Multiplier concept can only explain about the past but not forecast the future.

The Time Factor: The study of multiplier does not consider the length of time necessary for the multiplier effect to influence the economy.

Also read Cost-Benefit Analysis

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What Is the Multiplier Effect?

• How It Works

The Keynesian Multiplier

Money supply multiplier effect, types of multipliers, impact of multiplier effect.

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What Is the Multiplier Effect? Formula and Example

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The multiplier effect is an economic term, referring to the proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal, of capital. In effect, Multipliers effects measure the impact that a change in economic activity—like investment or spending—will have on the total economic output of something. This amplified effect is known as the multiplier .

Key Takeaways

• The multiplier effect is the proportional amount of increase or decrease in final income that results from an injection or withdrawal of spending.
• The most basic multiplier used in gauging the multiplier effect is calculated as the change in income divided by the change in spending and is used by companies to assess investment efficiency.
• The money supply multiplier, or just the money multiplier, looks at a multiplier effect from the perspective of banking and money supply.
• The money multiplier is a key concept in modern fractional reserve banking.
• Other multipliers include the deposit multiplier, fiscal multiplier, equity multiplier, and earnings multiplier.

Investopedia / Mira Norian

Understanding the Multiplier Effect

Generally, economists are most interested in how infusions of capital positively affect income or growth. Many economists believe that capital investments of any kind—whether it be at the governmental or corporate level—will have a broad snowball effect on various aspects of economic activity.

As its name suggests, the multiplier effect provides a numerical value or estimate of a magnified expected increase in income per dollar of investment. In general, the multiplier  used in gauging the multiplier effect is calculated as follows:

Multiplier = Change in Income Change in Spending \begin{aligned}\text{Multiplier}=\frac{\text{Change in Income}}{\text{Change in Spending}}\end{aligned} Multiplier = Change in Spending Change in Income ​ ​

The multiplier effect can be seen in several different types of scenarios and used by a variety of different analysts when analyzing and estimating expectations for new capital investments.

Example of the Multiplier Effect

For example, assume a company makes a $100,000 investment of capital to expand its manufacturing facilities in order to produce more and sell more. After a year of production with the new facilities operating at maximum capacity, the company’s income increases by $200,000. This means that the multiplier effect was 2 ($200,000 / $100,000). Simply put, every $1 of investment produced an extra $2 of income.

Many economists believe that new investments can go far beyond just the effects of a single company’s income. Thus, depending on the type of investment, it may have widespread effects on the economy at large. A key tenet of  Keynesian  economic theory is that of the multiplier, the notion that economic activity can be easily influenced by investments, causing more income for companies, more income for workers, more supply, and ultimately greater aggregate demand .

Essentially, the Keynesian multiplier is a theory that states the economy will flourish the more the government spends, and the net effect is greater than the exact dollar amount spent. Different types of economic multipliers can be used to help measure the exact impact that changes in investment have on the economy.

For example, when looking at a national economy overall, the multiplier would be the change in real GDP divided by the change in investments, government spending, changes in income brought about by changes in disposable income through tax policy, or changes in investment spending resulting from monetary policy via changes in interest rates.

Some economists also like to factor in estimates for savings and consumption. This involves a slightly different type of multiplier. When looking at savings and consumption, economists might measure how much of the added income consumers are saving versus spending. If consumers save 20% of new income and spend 80% of new income, then their marginal propensity to consume (MPC) is 0.8. Using an MPC multiplier, the equation would be:

MPC Multiplier = 1 1 − MPC = 1 1 − 0.8 = 5 where: MPC = Marginal propensity to consume \begin{aligned}&\text{MPC Multiplier}=\frac{1}{1-\text{MPC}}=\frac{1}{1-0.8}=5\\&\textbf{where:}\\&\text{MPC}=\text{Marginal propensity to consume}\end{aligned} ​ MPC Multiplier = 1 − MPC 1 ​ = 1 − 0 . 8 1 ​ = 5 where: MPC = Marginal propensity to consume ​

Therefore, in this example, every new production dollar creates extra spending of $5.

Economists and bankers often look at a multiplier effect from the perspective of banking and a nation's money supply. This multiplier is called the money supply multiplier or just the money multiplier. The money multiplier involves the reserve requirement  set by the Federal Reserve, and it varies based on the total amount of liabilities held by a particular depository institution.

In general, there are multiple levels of money supply across the entire U.S. economy. The most familiar ones are:

• The first level, dubbed M1 , refers to all of the physical currency in circulation within an economy.
• The next level, called M2 , adds the balances of short-term deposit accounts for a summation.

When a customer makes a deposit into a short-term deposit account, the  banking institution  can lend one minus the reserve requirement to someone else. While the original depositor maintains ownership of their initial deposit, the funds created through lending are generated based on those funds. If a second borrower subsequently deposits funds received from the lending institution, this raises the value of the money supply even though no additional physical currency actually exists to support the new amount.

The money supply multiplier effect can be seen in a country's banking system. An increase in bank lending should translate to an expansion of a country's money supply. The size of the multiplier depends on the percentage of deposits that banks are required to hold as reserves. When the reserve requirement decreases, the money supply reserve multiplier increases, and vice versa.

Back in 2020, prior to the COVID-19 pandemic, the Fed mandated that institutions with more than $127.5 million have reserves of 10% of their total deposits. However, as the pandemic sparked an economic crisis, the Fed took a dramatic step: On Mar. 26, 2020, it reduced the reserve ratio to 0%—essentially, eliminating these requirements entirely to free up liquidity.

Money Supply Reserve Multiplier

Most economists view the money multiplier in terms of reserve dollars and that is what the money multiplier formula is based on. Theoretically, this leads to a money (supply) reserve multiplier formula of:

MSRM = 1 RRR where: MSRM = Money supply reserve multiplier RRR = Reserve requirement ratio \begin{aligned}&\text{MSRM}=\frac{1}{\text{RRR}}\\&\textbf{where:}\\&\text{MSRM}=\text{Money supply reserve multiplier}\\&\text{RRR}=\text{Reserve requirement ratio}\end{aligned} ​ MSRM = RRR 1 ​ where: MSRM = Money supply reserve multiplier RRR = Reserve requirement ratio ​

For example, in the case of banks with the highest required reserve requirement ratio—10% prior to COVID-19—their money supply reserve multiplier would be 10 (1 / 0.10). This means every one dollar of reserves should have $10 in money supply deposits.

If the reserve requirement is 10%, then the money supply reserve multiplier is 10 and the money supply should be 10 times reserves. When a reserve requirement is 10%, this also means that a bank can lend 90% of its deposits.

Money Supply Reserve Multiplier Example

Investopedia / Sabrina Jiang

Looking at the money multiplier in terms of reserves helps one to understand the amount of expected money supply. In this example, $651 equates to reserves of $65.13. If banks are efficiently using all of their deposits, lending out 90%, then reserves of $65 should result in a money supply of $651.

If banks are lending more than their reserve requirement allows, then their multiplier will be higher, creating more money supply. If banks are lending less, then their multiplier will be lower and the money supply will also be lower. Moreover, when 10 banks were involved in creating total deposits of $651.32, these banks generated a new money supply of $586.19, for a money supply increase of 90% of the deposits.

A multiplier may occur in a variety of ways, impacting different instruments or balances. The most common types of multipliers are below.

• The money multiplier demonstrates how central bank reserves are amplified by commercial banks
• The deposit multiplier demonstrates how fractional reserve banking can amplify deposits through new loans
• The fiscal multiplier measures the effect that increases in fiscal spending will have on a nation's economic output, or gross domestic product (GDP).
• The investment multiplier quantifies the additional positive impact on aggregate income and the general economy generated from investment spending.
• The earnings multiplier relates a company's current stock price to its per-share earnings.
• The equity multiplier calculates how much of a company’s assets are financed by stock rather than debt.

The multiplier effect as several implications on an economy. First, the multiplier effect often has a positive impact on the economy and economic growth. Instead of being limited to the actual quantity of funds in possession or in circulation, the multiplier effect can scale programs and allow for more efficient use of capital.

Multiplier effects may also impact economies in different ways. First, economies experience direct impacts when an economic factor is directly attributed to an entity. For example, when a government awards a tax incentive to an individual, that individual is said to have received the direct financial impact.

However, the multiplier effect incorporates two additional impacts: the indirect impact and the induced impact. The indirect impact of the government benefit above is that the individual takes their tax benefit and spends it. These funds do not sit idly by in one bank account; it may be spread across a dozen different businesses potentially relating to grocery stores, restaurants, car dealerships, or online purchases.

The last impact (induced impact) highlight the true benefit of multiple effects. Although a single individual received a tax benefit, many companies and their employees benefited. For example, imagine the individual dined at a restaurant and left a tip. That tip would now be the benefit of the waitstaff who may buy a crafted item at a local market and increase the income of a local artist. As currency flows through an economy, more than one individual or entity may residually receive benefit from a financial instrument. Therefore, the single tax benefit is said to have a multiplier effect on the economy.

What Is a Multiplier?

In economics, a multiplier broadly refers to an economic factor that, when changed, causes changes in many other related economic variables. The term is usually used in reference to the relationship between government spending and total national income. In terms of gross domestic product, the multiplier effect causes changes in total output to be greater than the change in spending that caused it.

How Does the Multiplier Effect Fit Into Keynesian Economics?

The multiplier effect is one of the chief components of Keynesian countercyclical fiscal policy. A key tenet of Keynesian economic theory is the notion that an injection of government spending eventually leads to added business activity and even more spending which boosts aggregate output and generates more income for companies. This would translate to more income for workers, more supply, and ultimately greater aggregate demand.

How Is the Multiplier Effect Related to MPC?

The magnitude of the multiplier is directly related to the marginal propensity to consume (MPC), which is defined as the proportion of an increase in income that gets spent on consumption. For example, if consumers save 20% of new income and spend the rest, then their MPC would be 0.8 (1 - 0.2). The multiplier would be 1 / (1 - 0.8) = 5. So, every new dollar creates extra spending of $5. Essentially, spending from one consumer becomes income for a business that then spends on equipment, worker wages, energy, materials, purchased services, taxes, and investor returns. When a worker from that business spends their income, it perpetuates the cycle.

Is a High Multiplier Good?

Each type of multiplier is individually defined and often has different metrics that define success. Very broadly speaking, most multipliers that are high indicate higher economic output or growth. For example, a higher money multiplier by banks often signals that currency is being cycled through an economy more times and more efficiently, often leading to greater economic growth.

What Causes the Multiplier Effect?

Some multiplier effects are simply the product of metric analysis as one number is compared to another. In other cases, the multiplier effect is a product of public policy or corporate governance. For example, the government may establish boundaries on how many times a deposit may be cycled through an economy. These regulations are often in place to restrict the multiplier effect; otherwise, financial institutions may become encumbered with too much risk.

Multiplier effects describe how small changes in financial resources (such as the money supply or bank deposits) can be amplified through modern economic processes, sometimes to great effect. John Maynard Keynes was among the first to describe how governments can use multipliers to stimulate economic growth through spending. In fractional reserve banking, the money multiplier (or deposit multiplier ) effect shows how banks can re-lend a portion of the deposits on-hand to increase the amount of money in the economy. In this way, commercial banks have a large degree of influence on economic outcomes.

Federal Reserve Board. " What Is the Money Supply? Is It Important? "

Federal Reserve Board. " Reserve Requirements ."

International Monetary Fund. " What Is Keynesian Economics? "

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Tourism Multiplier Effect

Tourism not only creates jobs in the tertiary sector, it also encourages growth in the primary and secondary sectors of industry. This is known as the multiplier effect which in its simplest form is how many times money spent by a tourist circulates through a country's economy.

Money spent in a hotel helps to create jobs directly in the hotel, but it also creates jobs indirectly elsewhere in the economy. The hotel, for example, has to buy food from local farmers, who may spend some of this money on fertiliser or clothes. The demand for local products increases as tourists often buy souvenirs, which increases secondary employment.

The multiplier effect continues until the money eventually 'leaks' from the economy through imports - the purchase of goods from other countries.

Tourism multiplier effect

The concept of tourism multiplier effect has been gaining traction in recent years. Certainly, the tourism industry has a multiplier effect that extends beyond the direct spending by tourists. This multiplier effect creates jobs, stimulates economic growth, and promotes community development.

What is the tourism multiplier effect?

The tourism multiplier effect refers to how many times the money spent by a tourist circulates in the country’s economy (Byju’s, 2023). Broadly, it refers to the economic impact of tourism that extends beyond the initial spending by visitors.

When tourists spend money, it creates a ripple effect that stimulates economic activity in various sectors. This multiplier effect can be quantified by measuring the direct and indirect effects of tourism on the economy.

The multiplier effect occurs because the money spent by tourists does not only benefit the businesses that directly serve tourists, but also spreads throughout the local economy. This effect can be seen in a wide range of industries, including transportation, accommodation, food and beverage, and retail.

The tourism multiplier effect is especially important for countries that rely heavily on tourism as a source of revenue. For example, tourism accounts for more than 28% of the GDP of Maldives (Michigan State University, 2023).

Likewise, tourism and related services contribute approximately 70 percent to the GDP of Bahamas and employs over half of the workforce (ITA, 2022). Therefore, understanding the tourism multiplier effect is essential for policymakers and stakeholders in the tourism industry.

Types of tourism multipliers

There are two types of tourism multipliers: direct and indirect. Direct multipliers refer to the initial spending by visitors, such as accommodation, food, and transportation. Indirect multipliers refer to the subsequent spending by businesses that supply goods and services to the tourism industry.

For example, a hotel that purchases food from a local supplier creates indirect economic activity for the supplier. The local suppliers that provide food to hotels and restaurants may experience an increase in sales during peak tourism season, which can lead to the hiring of additional staff and a boost in tax revenue for the local government.

The tourism multiplier effect also creates induced multipliers, which refer to the spending by employees and business owners who benefit from the direct and indirect effects of tourism. For example, a hotel employee who earns a salary spends money on goods and services, which creates additional economic activities.

The economic effects of tourism on local businesses

The tourism industry can have a significant impact on local businesses. When tourists spend money on goods and services, it creates income for local businesses. This income can be reinvested in the local economy, creating a multiplier effect that stimulates economic growth.

However, the tourism industry can also have negative effects on local businesses. For example, if a large hotel chain opens in a small town, it can put small local hotels out of business. Therefore, policymakers must balance the benefits and costs of tourism to ensure that local businesses are not negatively impacted.

Jobs created by the tourism industry

The tourism industry is a significant source of employment for many countries. In some countries, such as Maldives and Bahamas, it is indeed the primary source of employment.

The jobs created by the tourism industry can vary from low-skilled to high-skilled positions, such as tour guides, hotel managers, and chefs. These jobs provide opportunities for people with different levels of education and skills.

The number of jobs created by tourism depends on the level and type of activities. For example, a large-scale resort may create thousands of jobs, while a small bed and breakfast may only create a few jobs.

The total number of tourism employees in the USA is around 6 million (IBISWorld, 2023). Tourism supports around 3.8 million jobs in the UK. Just imagine the impact of the spending of all these people on the economy!

Community development from tourism

Tourism can promote community development by generating income and creating jobs. This income can be used to improve infrastructure, support local businesses, and invest in community projects.

For example, a city that attracts a large number of tourists may use the tax revenue generated by tourism to improve public transportation or build new community facilities.

Tourism can also have a cultural impact on local communities. It can promote cultural exchange and understanding, as tourists learn about local customs and traditions. This can help to preserve and promote local culture, which can have a positive impact on the community.

Environmental impact of tourism

Tourism can have a positive environmental impact. It can promote conservation and the protection of natural resources. For example, a national park that attracts tourists may receive funding for conservation efforts, which can help to preserve the park’s ecosystem.

However, tourism can also have a negative impact on the environment. The construction of new hotels and resorts can lead to deforestation, habitat destruction, and pollution. Tourists can also contribute to environmental degradation by generating waste and consuming natural resources.

Therefore, the tourism industry must adopt sustainable practices to minimize its impact on the environment. This includes reducing waste, conserving energy, and protecting natural habitats.

How to measure the tourism multiplier effect?

Measuring the tourism multiplier effect can be challenging because it involves the analysis of multiple factors. However, there are several methods that can be used to measure the effect, including input-output analysis, employment multipliers, and value-added multipliers.

Input-output analysis involves examining the flow of money through the local economy. This analysis can be used to determine the direct and indirect impacts of tourism spending on local businesses.

Employment multipliers measure the number of jobs created by a given level of tourism spending. This method can be used to estimate the employment impact of tourism in a particular area.

Value-added multipliers measure the additional income generated by a given level of tourism spending. This method can be used to estimate the overall economic impact of tourism in a particular area.

Examples of successful tourism multiplier effect in different countries

Many countries and regions have successfully harnessed the power of the tourism multiplier effect to stimulate economic growth and promote community development. For example, tourism and the night-time economy contribute £36 billion a year to London’s economy overall and employ 700,000 people (Greater London Authority, 2023).

The tourism industry has been a significant contributor to the economic growth of the USA. It has created jobs and stimulated economic activities in various sectors, such as agriculture, transportation, and retail. It has contributed nearly $1.3 trillion to the GDP (Statista, 2022). It indeed supports millions of American jobs.

The tourism industry contributes around19.96 billion Canadian dollars to Canada’s GDP. Likewise, Australia’s direct tourism gross domestic product reached around 35.14 billion Australian dollars in 2022.

Costa Rica has developed a sustainable tourism industry that promotes conservation and community development. Its tourism industry generates significant income and employment opportunities, while also protecting its natural resources.

Similarly, Iceland has developed a tourism industry that promotes its unique natural features, such as geysers, glaciers, and hot springs. Its tourism industry has created jobs and generated income, while also promoting sustainable tourism practices.

Limitations of the tourism multipliers

One of the key challenges concerning tourism is economic leakage. It occurs when international companies provide hotel, flight, car hire, food, and excursions at a destination and a lot of money generated from these activities goes out of the destination to the country whether their headquarters are located.

Faith (2023) reports that 80% of the revenue generated from tourism activities go away from the local communities to foreign countries. This shows how the local communities that are supposed to benefit from the tourism multiplier effects are not benefiting optimally.

Conclusion: Tourism multiplier effect

In conclusion, the tourism multiplier effect is a powerful force that can drive economic growth and promote community development. By understanding its various components and adopting sustainable practices, the tourism industry can unlock its full potential and create a better future for all. However, it is also important to recognise the potential negative impacts of tourism and explore steps to mitigate them.

To harness the power of the tourism multiplier effect, the tourism industry must adopt sustainable practices that minimize its impact on the environment. The industry must also promote cultural exchange and preserve local traditions and heritage.

Hope you like this article? Please share the article link on social media to support our work. You may also like the following articles:

Enclave tourism – definition and characteristics

Advantages and disadvantages of eco-tourism

Last update: 03 April 2023

References:

Byju’s, (2023) What is the tourism multiplier effect? Available at: https://byjus.com/ias-questions/what-is-the-tourism-multiplier-effect/ (accessed 02 April 2023)

Faith, S. (2023) Tourism’s dirty secret, available at: https://www.euronews.com/travel/2023/02/26/tourisms-dirty-secret-what-is-tourism-leakage-and-how-can-you-avoid-contributing-to-it (accessed 01 April 2023)

Greater London Authority (2023) Supporting the tourism sector, available at: https://www.london.gov.uk/programmes-strategies/business-and-economy/supporting-londons-sectors/supporting-tourism-sector (accessed 02 April 2023)

IBISWorld (2023) Tourism in the USA, https://www.ibisworld.com/industry-statistics/employment/tourism-united-states/ (accessed 02 April 2023)

ITA (2022) Bahamas- the country economic guide, available at: https://www.trade.gov/country-commercial-guides/bahamas-market-overview# (accessed 03 April 2023)

Michigan State University (2023) Maldives economy, available at: https://globaledge.msu.edu/countries/maldives/economy (accessed 03 April 2023)

Statista (2022) Total contribution of travel and tourism to the gross domestic product in the United States, available at: https://www.statista.com/statistics/292518/contribution-of-travel-and-tourism-to-gdp-in-us-time-series/ (accessed 03 April 2023)

Photo credit: Research Gate/Travel and Tourism

Author: M Rahman

M Rahman writes extensively online and offline with an emphasis on business management, marketing, and tourism. He is a lecturer in Management and Marketing. He holds an MSc in Tourism & Hospitality from the University of Sunderland. Also, graduated from Leeds Metropolitan University with a BA in Business & Management Studies and completed a DTLLS (Diploma in Teaching in the Life-Long Learning Sector) from London South Bank University.

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African tourism: the ‘multiplier’ effect

For every one person employed by certain high-end tourism lodges in southern Africa, seven people benefit from the downstream flow of that income. Meanwhile, staff employed in these sorts of ventures help grow the local economy by spending their wages at community stores where they do their grocery shopping. Or they drive secondary employment through hiring people for child care or to tend their livestock while they work. Or they’re sending their children to school.

‘This is the multiplier effect of tourism in remote regions of the subcontinent,’ explains Dr Sue Snyman, an EfD research fellow associated with the University of Cape Town’s Environmental Policy Research Unit (EPRU).

Snyman, presenting the findings of her doctoral research at the ATLAS Africa tourism conference in Dar es Salaam in June this year, showed how the immediate benefits of a pay cheque can distribute economic benefits widely in a community where few other employment opportunities exist.

During a survey of 16 different eco-tourism lodges in six countries, Snyman found that staff were earning, on average, US$ 278 dollars per month, from which seven dependents usually benefitted directly. Meanwhile this money was kept in circulation within the local economy.

‘If you were to extrapolate the findings of the staff that I interviewed, to encompass all 683 people employed at the 16 different lodges where I did my interviews, that means that 4 781 people are downstream beneficiaries of those pay cheques.’

‘This has a huge economic impact.’

She also found that for every one tourism bed, 14 people benefitted indirectly from the associated employment, because of the cash remittances which staff sent home.

‘These wages are helping to build human capital in rural areas where there aren’t many other economic opportunities,’ she says. 

However, it’s still important for civil society organisations, the private sector, and government to invest in capacity building within these communities, so that they can become equal and well equipped partners in tourism ventures. This is key, particularly if tourism ventures want to bring local communities into partnership arrangements in running lodges and concessions.

‘If we want people to thrive in business like this, we need to be sure we don't try to get them to run before they can walk. People need to be trained in book keeping, management, and accounting. They need to understand the industry, for instance that if someone spends US$ 400 a night, that that isn’t a clean US$ 400 profit but that expenses need to be covered first.

‘People need to understand the role of marketing and communications. Many development projects in this sector don’t invest enough in this sort of development.’

Snyman also presented the closing keynote address at the ATLAS Africa tourism conference. Read more on the conference here . 

Dr Sue Snyman works with private tourism operator Wilderness Safaris in various capacities, and recently completed her doctorate through the EPRU. In addition to being an EPRU fellow, she is the vice-chair of the IUCN ’ s Tourism and Protected areas Specialist Group. 

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• IAS Questions
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• What Is The Tourism Multiplier Effect

What is the tourism multiplier effect?

Tourism multiplier effect indicates how many times the money spent by a tourist circulates in the country’s economy. You can read about the Money Supply in Economy – Types of Money, Monetary Aggregates, Money Supply Control in the given link.

Further readings:

• Monetary Policy – Objectives, Roles and Instruments (UPSC Indian Economy)
• Topic-Wise GS 3 Questions for UPSC Mains

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