An Introduction to Tourism Economics
Lecture 1

What is Tourism Economics?

1. Tourism economics has the following components

1. Leisure - time remaining after work, commuting, house chores, sleeping, etc.
2. Recreation - activities during leisure time
   • Reading a book
   • Sports
   • Tourism
3. Tourism - visiting for at least one night for leisure and holiday
   • Visiting a place outside the normal home and work environment
4. Tourist organizations - produce goods and services used in leisure time

2. People's wants are unlimited and exceed resources to satisfy these wants

People make choices because goods and services are scarce. Economics - choices that arise from scarcity

3. Opportunity cost - the highest valued alternative that must be sacrificed in choosing a good.

• Ensures we use resources for the best uses
• Are subjective, because a good's value is subjective; individual's preferences matter!
• Includes the value of time.
• The value of purchasing power spent.
• Examples:
  1. A couple chooses Paris over Rome. Rome is the opportunity costs.
  2. College education - a student attends college as opposed to work
• Note - even though going to college is expensive, students expect to recoup these costs from higher lifetime incomes.
  

4. Allocative mechanism - a society uses a means to allocate resources

1. Free market economy
   • Private ownership of firms and resources
   • Profits motivate firms
   • Firms only supply profitable activities
   • Price and quantity are determined by interaction of consumers (demand) and producers (supply)
2. Centrally planned economy
   • Government owns all firms and resources
   • A central committee determines prices, quantities, and production
   • Usually shortages and surpluses
   • Consumers have more limited choices and stand in long lines for products and services
3. Mixed economy
   • Mix of both systems
   • Government owns property and resources in some industries and allows private enterprise in others
   • Examples - China and Cuba
   • All countries - government uses taxes, subsidies, regulations, and spending power to control a society

5. Analysis

1. Macroeconomics - study the whole economy of a country in broad sectors
   • Macro means “large” or “aggregates”
   • Aggregate - combine together many units
   • Four sectors: Government, households, businesses, and international
   • Examples:
     • Inflation
     • Unemployment
     • Government debt
     • Total consumer expenditures
     • Trade deficit
2. Microeconomics - study specific economic units
   • Micro means “small”
   • Examples:
     • An individual
     • A firm
     • A market
   • We will use both in this class
3. Ceteris paribus
   • Latin term
   • "other things constant"
   • Q _d = f(P _Coca-cola, P _Pepsi, Income, Tastes/preferences, etc.)
     • Q _d: Quantity demanded of coca-cola.
     • P _Coca-cola:   Price of coca-cola.
     • P _Pepsi: Price of Pepsi.
   • How does the quantity of Coca-Cola change, if consumer income changes? Other things must be held constant. Then exact relationship can be determined.
   • In reality all other factors do change, so it is difficult to determine exact relationships.
     • Economics is a social science!
     • Not like physics or chemistry, where one variable can be changed at a time in a laboratory

6. Cost-Benefits Analysis

• As the benefits increase for choosing a product, a person more likely chooses that product
• As the costs increase for choosing a product, a person less likely chooses that product
• Example:  "Law of Demand"
• As the price of computers , consumers buy

7. Economic analysis are based on marginal costs and marginal benefits

• marginal - "change in number of units,"
  • "additional units,"
  • "extra units"
• Marginal refers to slope of demand and supply curves
  • Relates to elasticities
• Example:

Characteristics of Tourism

1. Types of Tourism

1. Leisure Tourism - relax and explore a new place
2. Business Tourism - tourist explores new places for business activities or establish new contacts
3. Health Tourism - tourist travels for health reasons
   • Medical operations and surgery
     • U.S. has many restrictions and regulations, so tourists go to India, Malaysia, etc. for medical operations
     • Experimental surgeries and operations
     • Surgeries and operations may also be cheaper
   • Visit a health spa or resort
4. Winter Tourism - tourists travel during winter time
   • Spend a weekend skiing, sledding, etc.
   • Escapes the cold winters and travel to tropical destinations
5. Education Tourism - tourist attends a conference, temporary training, etc.
6. "Sin" Tourism - tourists engage in activities that may be illegal or immoral at their normal residences
   • Tourists may participate in activities that they would never do at their normal residence
   • Gambling
   • Illegal products and services
7. Hundreds of categories

2. Top Tourist Destinations

Assumptions

• Does the tourist spending include airfare?
• How were the different currencies converted to U.S. dollars?
• How accurate are the numbers?
• How does a gov. official distinguish between a local and tourist spending?
• Are tourists accurately counted?
  • Airports is easy
  • Land borders are more difficult

3. Multiplier Effect – increase of $1 of spending by tourists boost incomes by more than $1

• Tourists spent $18.5 million at hotels, airlines, restaurants, cafes, etc.
• These businesses earn more profits and hire more workers
  • More workers earn salaries that they spend at stores, cars, houses, etc.
  • Businesses for houses, cars, and stores earn more profits and hire more workers
• Thus, $1 of tourist spending leads to more than a dollar of generated income
• Example
  • Assume the tourist multiplier is 2
  • If tourists spend $18.9 billion in Malaysia, then the multiplier effect leads to $37.7 billion creation of incomes in the Malaysian economy

Advantages and Disadvantages of Tourism

1. Advantages

• Economic
  • Increases GDP
    • Increases incomes
    • Provides employment opportunities
  • Generates foreign exchange
  • Expand existing infrastructure
    • Help stimulate local commerce and industry
  • Can be developed with local products and resources
  • Diversifies the economy
  • Tends to be compatible with other economic activities
  • Spreads development
  • High multiplier impact
  • Increases governmental revenues
• Social
  • Broadens educational and cultural horizons
  • Improves quality of life - higher incomes and improved standards of living
  • Justifies environmental protection and improvement
  • Local population can use the tourist and recreational facilities
• Cultural
  • Preserve heritage and tradition
  • Creates local interests in artists, musicians and other performing artists
  • Breaks down language barriers, sociocultural barriers, class barriers, racial barriers, political barriers, and religious barriers
  • Creates a favorable worldwide image for a destination
  • Promotes a global community
  • Promotes international understanding and peace

2. Disadvantages

• Economic
  • Develops excess demand
  • Results in high leakage
  • Leakage – an outflow flow of income from the economy (savings, taxes, and imports)
    • Examples
      • Gov. loses potential tax revenue by passing tax exemptions
      • Gov. spends funding for tourism advertising
  • Creates difficulties of seasonality
  • Causes inflation
  • Can result in unbalanced economic development
  • Increases vulnerability to economic and political changes
• Social
  • Creates social problems
  • Degrades the natural physical environment and creates pollution
  • Degrades the cultural environment
  • Threatens family structure
  • Commercializes culture, religion, and the arts
  • Creates misunderstanding
  • Creates conflicts in the host society
  • Contributes to disease, economic fluctuation, and transportation problems

Production Possibilities Curve (PPC)

1. Production Possibilities Curve (PPC) - shows how much goods and services can be produced for society given its limited resources.
   • Macroeconomics example
   • Only two products are produced in this society
     • Hotels and milk
   • Resources are used efficiently
     • Resources
       • Land
       • Capital, i.e. machines and equipment
       • Labor
       • Entrepreneur - a person who seeks profits by introducing new products or lowering production costs.
         • Bill Gates, Sam Watton, etc.
   • No technological progress

PPC for U.S.
Milk (in thousands)
	Hotels (in thousands)

• Point X - indicates society is not using resources efficiently, e.g. recession.
  • Unemployment - not all workers are working
  • Within the interior
• Point Y - beyond the resources for society to produce
• Point A - The U.S. produces 5 (thousand) milk and 0 hotels
• How to get to Point B from Point A? - The U.S. wants to produce more hotels! The U.S. produces 1 (thousand) less bottles of milk and 4 (thousand) more loaves of bread
  • Opportunity costs of moving from Pt A to Pt B
  • Had to switch resources from milk to hotel production.

All points, A, B, and C are efficient; need more information to determine which point.

• PPC is straight line if all resources are perfect substitutes.
  • Example: Land is input to farms and hotels
  • Reality - land quality varies
  • As we approach an extreme of all farms or all hotels, then losses occur because of land quality.
    • Some land is better suited for farms while other land is more suitable for hotels.

PPC for U.S.
Farms
	Houses

The shape of the PPC - some resources are better suited for the production of one good, while other resources are better suited for producing the other good.

2. Shifting the Production Possibilities Curve Outward

1. Economic growth - economy produces more goods and services over time
2. Economy's resource base increases
   • More labor
   • Investment:
     • More machines
     • More education (human capital)
3. Technology progress
   • Invention / Innovation - creation of a new product or process
   • Entrepreneur creates new products
4. "Improved legal structure"
   • Well-defined property rights
   • Laws that allow corporations to form - allows mass production
5. Work harder and give up leisure time

3. Shifting the Production Possibilities Curve Inward

1. War
2. Natural disaster
3. Poor legal structure

4. Economic growth from investment

• In Year 2008, both China and U.S. have same PPC
• China produces more machines at Point A , while U.S. produces more bread at Point C
• In Year 2009, both economies grow, because they have more machines (i.e. capital). PPC curves shift outward.
• However, China produces more machines, therefore its PPC shifts more than the U.S.' s PPC.

China	U.S.
Machines	Machines
Bread	Bread

Terminology