1

Leakage and Multiplier Analysis Dr Jan Mosedale

Economic Development and

Tourism Tourism has been seen as an important form of

economic development.

It also promoted as an agent of an economic and social change

A service based industry capable of creating employment and income.

An important form of economic activity

The impact and role of tourism will vary from region to region.

Destinations can rise and fall in popularity.

Economic benefits

Foreign exchange earnings and the balance of

payments

Economic benefits

Foreign exchange earnings and the balance of

payments

Generation of income

Economic benefits

Foreign exchange earnings and the balance of

payments

Generation of income

Generation of employment

Economic benefits

Foreign exchange earnings and the balance of

payments

Generation of income

Generation of employment

Improvement of infrastructure

2

Economic benefits

Foreign exchange earnings and the balance of

payments

Generation of income

Generation of employment

Improvement of infrastructure

Encouragement of Entrepreneurial

activity

Economic benefits

Foreign exchange earnings and the balance of payments

Generation of income

Generation of employment

Improvement of infrastructure

Encouragement of Entrepreneurial

activity

Stimulation of regional economies and mitigation of regional economic disparities

http://www.youtube.com/watch?v=C0u9s0LWxqo&

context=C46ab5caADvjVQa1PpcFPtMPoYGrhrrrSHNY

5sCot5ISTBF75syjY=

Economic Cost of Tourism

Incidental costs

Economic Cost of Tourism

Incidental costs

Opportunity cost

Economic Cost of Tourism

Incidental costs

Opportunity cost

Overdependence on tourism

3

Economic Cost of Tourism

Incidental costs

Opportunity cost

Overdependence on tourism

Inflation and land values

Economic Cost

of Tourism

Incidental costs

Opportunity cost

Overdependence on

tourism

Inflation and land

values

Leakage

Economic Cost of Tourism

Incidental costs

Opportunity cost

Overdependence on tourism

Inflation and land values

Leakage

Seasonality

Economic Cost of Tourism

Incidental costs

Opportunity cost

Overdependence on tourism

Inflation and land values

Leakage

Seasonality

Cost of tourism management (development,

marketing, operations…)

Using tourism as tool for

economic development

Developing nations - foreign exchange

Developed nations - post industrial development

Regional economies - economic transition

Urban economies - rejuvenation

Remote economies - economic survival

Rural economies - diversification and reversing

population trends

• Multiplier inversely related to

leakage

Leakage

• Common sources of leakage

- Overseas promotion

- Import of materials

for construction

- Consumables

- Repatriation

- Foreign loans

4

Import leakage

The average import-related leakage for most developing

countries today is between 40% and 50% of gross

tourism earnings for small economies and between 10%

and 20% for most advanced and diversified economies,

according to UNCTAD.

Export leakage (Repatriation)

Multinational corporations and large foreign businesses

have a substantial share in the import leakage.

A study of tourism 'leakage' in Thailand estimated that

70% of all money spent by tourists ended up leaving

Thailand (via foreign-owned tour operators, airlines,

hotels, imported drinks and food, etc.). Estimates for

other Third World countries range from 80% in the

Caribbean to 40% in India. Source: Sustainable Living

Impacts explained

http://www.youtube.com/watch?v=1WgvKEqDI3k&l

ist=PL0B4B5A329608FA23&index=1&feature=plpp_vi

deo

Economic Impact Direct

visitor expenditure minus the value of imports

Indirect

Re-spending of tourism expenditures expenditure,

such as payments to employees, payments to

suppliers, builders, accountants, banks

Induced

re-spending of the income in the local economy

generating another round of economic activity

Might sound simple, but actual collection of

data is very difficult, especially for induced

effects!

Multiplier

‘multipliers are coefficients that express the amount generated in an area by an incremental unit of tourist expenditure’ (Getz, 1994: 442)

The multiplier is a numerical ratio which seeks to express the relationship between a unit of tourism expenditure and its wider impact in the economy.

1. transaction (or sales) multiplier

2. output multiplier

3. Income multiplier

4. employment multiplier

5. government revenue multiplier

5

The Multiplier

• Allows total impact of initial expenditure to be calculated

• Can calculate MULTIPLIER by dividing a unit of tourist

expenditure by the proportion of it which leaks out of the

economy in the form of savings or imports

• Inversely related to LEAKAGE

Basic Measurement of Economic

Impact with Multiplier Method

Economic impact of tourism= Number of tourists *

Average Spending per visitor * Multiplier

To assess impact of new tourism devt -Three steps:

estimate change in number of tourists to region due

to proposed action/policy

estimate average level of spending in local area

apply the change in spending to a regional economic

model or set of multipliers to determine secondary

effects

The Use of Multiplier Figures:

Policy making and planning

Analysing the national or regional effects of public or private sector investment in tourism

Simulating the economic impact, sector by sector of any proposed tourism developments

Examining the relative magnitudes of the impacts made by different types of tourism

Comparing tourism with other sectors

(Cooper et al 1998)

Regional & national variation in

multipliers

Leakage varies from:

• 60% small island communities

• 10% more developed destinations

• Thus multipliers also vary:

• NZ 2.4

• UK 1.7

• Dominica 1.2

• Antigua 0.88

• Caymen Is 0.65

What are the factors influencing

the level of leakage?

Size of country

Economy

Policy re imports

Supply/demand relationships

Type of tourism

Stage of development

Visitor

Location

cultural considerations

National vs regional

• National multipliers usually higher than regional

• Larger economic base

• Smaller leakages

• Thus national multipliers are a POOR GUIDE to

regional economies

6

Use and Abuse

Multiplier varies with tourist type

E.g Vaughan (1977) Edinburgh

Day trippers 0.203, Guest House 0.330

Weaknesses of multipliers

• Data deficiencies

- Secondary data inadequate

- Time, expense of collecting primary data

- Partial industrialisation

• Restrictive assumptions

• Supply constraints

• Static nature of models

References Archer, B.H. 1982. The value of multipliers and their policy

implications. Tourism Management 3(2): 236-241.

Cooper, C., Fletcher, J., Gilbert, D. and Wanhill, S. 2005,

Tourism principles and practice, Pitman Publishing,London.

Wall, G. and Mathieson, A., 2006, Tourism : change, impacts,

and opportunities, Wiley, Harlow, Essex, England.

Smith, S.L.J., 1995, Tourism analysis: A handbook, Longman

Group, England.

http://www.uneptie.org/pc/tourism/sust-tourism/economic.htm