What is the tourism multiplier effect and how does it work? Searching for the term ‘multiplier effect’ often brings up complicated economic jargon. However, for most students of travel and tourism, especially at undergraduate level or below, it is the basic principles that matter most.
This article explains the tourism multiplier effect in simple terms, including the main types of tourism multipliers, how the multiplier effect works, how it can be calculated and its limitations.
What is the tourism multiplier effect?
In simple terms:
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. Lickorish and Jenkins (1997) explain that the types of tourism multipliers can be broken down into five major categories.
Sales or transaction multiplier
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).
Output or production multiplier
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
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 their wages on schooling for their 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. And so on.
Employment multipliers
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, a local fisher now has more people (the tourists) to supply, so they have 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 or government revenue tourism multiplier
The ‘official’ tourism multiplier is often estimated by government. Using the statistics available – and remembering that not all money made from tourism is recorded, as much of the informal economy, such as street vendors and tuk-tuk drivers, goes unreported – governments estimate the net value of the tourism industry to the economy.
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
Direct tourism expenditure 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
Indirect tourism expenditure is when money is spent on aspects that are related to the tourism industry but that may not be 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
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).
Video: The multiplier effect in tourism explained
Why is the tourism multiplier effect important?
The tourism multiplier effect is an example of a positive economic impact of tourism, meaning that it is usually a good thing for destinations. 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 education, for example. This can then have wide-reaching benefits for years to come.
How to calculate the tourism multiplier
Calculating a precise tourism multiplier is a job for economists, often using input-output models or tourism satellite accounts. However, the basic idea can be shown simply. The size of the multiplier depends on how much of each pound or dollar spent by tourists is re-spent within the local economy, rather than ‘leaking’ out through savings, taxes and imports. A simple version of the formula is: multiplier = 1 ÷ (proportion of income that leaks out of the local economy). For example, if 60% of every pound leaks out of the local economy at each round of spending, the multiplier is 1 ÷ 0.6 = around 1.67, meaning that every £100 of tourist spending generates around £167 of total income in the local economy. The more money that leaks out, the smaller the multiplier.
Limitations with the tourism multiplier
One of the major problems with the tourism multiplier is that much of the money may flow out 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 much of the money raised from tourism is likely to leak out of the country. In some small island destinations dominated by foreign-owned, all-inclusive resorts, it has been estimated that the majority of tourist spending leaks away. 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.
Tourism multiplier effect: FAQs
Below are answers to some of the most common questions about the tourism multiplier effect.
What is the tourism multiplier effect?
The tourism multiplier effect is the way in which money spent by tourists is re-spent in the local economy, so that the total economic impact of tourism is greater than the original amount that tourists spent.
What are the types of tourism multipliers?
Lickorish and Jenkins identify five main types: the sales (transaction) multiplier, the output multiplier, the income multiplier, the employment multiplier and the government revenue multiplier.
What is the difference between direct, indirect and induced tourism spending?
Direct spending is what tourists spend on tourism products, indirect spending is by tourism businesses on their suppliers, and induced spending is when people who earn income from tourism spend it in the local economy.
How is the tourism multiplier calculated?
In simple terms, the multiplier equals 1 divided by the proportion of income that leaks out of the local economy at each round of spending. Economists use more complex input-output models to calculate it accurately.
What reduces the tourism multiplier effect?
Economic leakage reduces the multiplier – for example, when tourism businesses are foreign-owned, when goods and staff are imported, or when profits are sent abroad.
Tourism multiplier effect: Further reading
If you found this article on the tourism multiplier effect useful, these articles may also be of interest:
- 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
- 21 reasons why tourism is important
- Different levels of tourism policy and planning
