Economic Economic EnvironmentEnvironment

Learning outcomesLearning outcomes

• By studying this section students will By studying this section students will be able to:be able to:– identify the key variables in the identify the key variables in the

economy which affect leisure and economy which affect leisure and tourism organizationstourism organizations

– understand and evaluate government understand and evaluate government economic policy and the significance of economic policy and the significance of the budgetthe budget

– understand the global economic understand the global economic environmentenvironment

Where are the tourists?Where are the tourists?

• What factors in the What factors in the economic economic environment affect environment affect the demand for the demand for tourism?tourism?

What are the key variables?What are the key variables?

• The economic environment affects The economic environment affects organizations in the leisure and organizations in the leisure and tourism sector in two main ways. tourism sector in two main ways. – Changes in the economic environment Changes in the economic environment

can affect the demand for an can affect the demand for an organization’s productsorganization’s products

– Changes may affect an organization’s Changes may affect an organization’s costs.costs.

– Additionally background factors Additionally background factors such as share and property prices may affect such as share and property prices may affect organizations. organizations.

Borrowing Employment Taxes

Expectations Disposable

Income

Benefits

Government

Expenditure

Household

Consumption

Savings

Exports Demand Imports

Investment Rec, Leisure and Tourism Organisation

The economic environment The economic environment and demandand demand

The economic environment The economic environment and demandand demand

• The key macroeconomic factors The key macroeconomic factors affecting demand for recreation affecting demand for recreation leisure and tourism industries are:leisure and tourism industries are:– household consumptionhousehold consumption– export and import demandexport and import demand– government expendituregovernment expenditure– investmentinvestment

Household consumptionHousehold consumption• Defined as Defined as

– the total expenditure on goods and the total expenditure on goods and services for immediate consumption.services for immediate consumption.

– Current price measurement includes Current price measurement includes inflationary elementinflationary element

– Constant price measurement has had Constant price measurement has had the inflationary element removed and is the inflationary element removed and is therefore a more useful guide. therefore a more useful guide.

– Real household consumption = money Real household consumption = money household consumption - inflationhousehold consumption - inflation

What determines the level What determines the level of household consumption?of household consumption?

Borrowing Employment Taxes

Expectations Disposable

Income

Benefits

Household

Consumption

Savings

Imports

What determines the level What determines the level of household consumption?of household consumption?

• real household’s disposable real household’s disposable incomeincome

• employmentemployment• benefits and taxesbenefits and taxes• borrowing and savings borrowing and savings • expectationsexpectations

Real household’s disposable Real household’s disposable incomeincome

Real income = money Real income = money income - inflationincome - inflation

Real household’s Real household’s disposable income = real disposable income = real household’s income – taxes household’s income – taxes + benefits+ benefits

Employment and wagesEmployment and wages

– The change in the income component of The change in the income component of real household’s income is determined by real household’s income is determined by the level of employment and the amount the level of employment and the amount of wages and salaries earned. of wages and salaries earned.

– As the level of employment in the As the level of employment in the economy grows, so generally does the economy grows, so generally does the level of income.level of income.

Taxes and BenefitsTaxes and Benefits• Changes in Changes in

taxes and taxes and benefits can benefits can cause cause significant significant changes to changes to the the disposable disposable element of element of disposable disposable income. income.

Borrowing, saving and Borrowing, saving and interest ratesinterest rates

• Borrowing enables households to Borrowing enables households to spend in excess of their current spend in excess of their current disposable income. The level of disposable income. The level of borrowing depends on several borrowing depends on several factors including factors including – the ease of obtaining creditthe ease of obtaining credit– future incomefuture income– interest ratesinterest rates

ExpectationsExpectations• Expectations (or business confidence) Expectations (or business confidence)

refers to the degree of optimism or refers to the degree of optimism or pessimism with which consumers and pessimism with which consumers and business people view the future.business people view the future.

• Expectations tend to be influenced byExpectations tend to be influenced by– recent experiencerecent experience– the mass mediathe mass media– asset prices (particularly property prices) asset prices (particularly property prices)

andand– the level of unemployment. the level of unemployment.

Export and import Export and import demanddemand

• Some household consumption is spent on Some household consumption is spent on imports. For the recreation, leisure and tourism imports. For the recreation, leisure and tourism sector this can be a significant amount. sector this can be a significant amount. – The demand for imports is affected by overseas The demand for imports is affected by overseas

costs, quality and uniqueness and the exchange rate. costs, quality and uniqueness and the exchange rate.

• On the other hand some demand for the goods On the other hand some demand for the goods and services of domestic firms arises from and services of domestic firms arises from overseas customers in the form of imports. overseas customers in the form of imports. – The demand for exports is similarly affected by The demand for exports is similarly affected by

relative costs, quality and uniqueness, the exchange relative costs, quality and uniqueness, the exchange rate and the prosperity of overseas economies. rate and the prosperity of overseas economies.

Government expenditureGovernment expenditure• Leisure and tourism organizations which Leisure and tourism organizations which

are sensitive to changes in government are sensitive to changes in government expenditure are those which depend upon expenditure are those which depend upon government for their income. government for their income.

– Examples of these include arts organisations Examples of these include arts organisations including museums, community sports including museums, community sports organisations and national and local tourist organisations and national and local tourist marketing organisations. marketing organisations.

• The level and detail of government The level and detail of government expenditure tend to reflect two things.expenditure tend to reflect two things.– the state of government financethe state of government finance– the political party in power. the political party in power.

InvestmentInvestment

• Some organizations do not supply Some organizations do not supply goods and services to consumers, but goods and services to consumers, but specialize in supplying capital goods specialize in supplying capital goods to other firms.to other firms.

• For example, the aircraft For example, the aircraft manufacturer Boeing, selling to manufacturer Boeing, selling to airlines and tour operators, finds that airlines and tour operators, finds that demand for its products is sensitive to demand for its products is sensitive to the level of investment in the economythe level of investment in the economy

The economic environment The economic environment and costsand costs

Interest Rates

Exchange Rate

Inflation Rate

R,L & T Organization

Indirect Taxes

The economic environment The economic environment and costsand costs

• The key macroeconomic factors The key macroeconomic factors affecting costs of recreation, leisure affecting costs of recreation, leisure and tourism goods and services are:and tourism goods and services are:– interest ratesinterest rates– InflationInflation– the exchange ratethe exchange rate– indirect taxesindirect taxes

Economic cycles Economic cycles

Cycles and the circular Cycles and the circular flowflow

Government policyGovernment policy

– low inflationlow inflation– low unemploymentlow unemployment– balance between government spending balance between government spending

and income over the medium term and income over the medium term (balanced budget)(balanced budget)

– balance between overseas earnings and balance between overseas earnings and expenditure (balanced trade)expenditure (balanced trade)

– economic growtheconomic growth

Economic policyEconomic policy• This refers to a set of measures This refers to a set of measures

designed to affect the economy.designed to affect the economy.• Classic Keynesian policies can be Classic Keynesian policies can be

divided into:divided into:– Fiscal policy. This uses changes in the Fiscal policy. This uses changes in the

level of taxation or government level of taxation or government spending to influence the economy.spending to influence the economy.

– Monetary policy. This uses changes in Monetary policy. This uses changes in interest rates, and thus the cost of interest rates, and thus the cost of borrowing, to influence the economy.borrowing, to influence the economy.

Economic policyEconomic policy• Monetary policy would reduce Monetary policy would reduce

interest rates to stimulate spending.interest rates to stimulate spending.– However an increase in spending and a However an increase in spending and a

reduction in taxes meant that the reduction in taxes meant that the government budget would fall into government budget would fall into deficit which could cause other deficit which could cause other economic problems – particularly economic problems – particularly inflation.inflation.

Review of key terms 1Review of key terms 1

• Real household consumption = Real household consumption = money household consumption - inflationmoney household consumption - inflation

• Disposable income = Disposable income = income – direct taxes + government income – direct taxes + government

benefits.benefits.

• Recession = Recession = two consecutive quarters of falling output.two consecutive quarters of falling output.

• Public sector net cash requirement = Public sector net cash requirement = government spending – taxes.government spending – taxes.

Review of key terms 2Review of key terms 2

• GDP = gross domestic product = GDP = gross domestic product = total value of output of an economy in a year.total value of output of an economy in a year.

• Economic cycle = Economic cycle = up and down movement of economic activityup and down movement of economic activity

• Fiscal policy = Fiscal policy = use of tax and government spending levels to use of tax and government spending levels to

influence the economy.influence the economy.• Monetary policy = Monetary policy =

use of interest rates to influence the economy.use of interest rates to influence the economy.

The EndThe End