Tourism and Economic Development Issues - Tourism and Development: Concepts and Issues - page 92

Nevertheless, the contribution of first-round tourism spending does not
fully reflect tourism's total contribution to the economy which is calculated
over a one-year period. In the second round, first-round recipients spend their
revenues to settle their accounts. First-round tourism partners transfer
money to supplier accounts and, in subsequent transactions, funds are then
transferred in turn to the accounts of their supplies. This is referred to as the
indirect effect of tourism expenditure. At the same time, induced local
demand causes the induced effect. Household income rises as the tourism
expenditure expands economic activity and increases employment. A propor-
tion of the increased income is re-spent on goods within the local economy,
thus generating induced effects on income, employment and governmental
revenues. The sum of all these effects (direct, indirect and induced) repre-
sents the total change in the economy resulting from the initial tourist
expenditure and has a positive effect on economic growth. 5
The multiplier can be calculated for different aggregates: the increase in
the host economy's level of output, income, employment, government reve-
nue and (where applicable) foreign exchange flows (Fletcher, 1994). However,
there are several different and conflicting types of tourism multipliers, such
as income, transaction, output and employment multipliers and their varia-
tions. In addition, there are also different methods of calculation, from the
base model to the Keynesian, input-output (I-O) or social accounting matrix
(SAM) models. This diversity has led to a number of deficiencies in multiplier
analyses. A number of studies (Archer, 1977; Fletcher, 1994; Mathieson &
Wall, 1982; Vanhove, 2005) have found that the multiplier is often incor-
rectly calculated and interpreted and, very often, it is not clear which multi-
plier has been calculated. Vanhove (2005) claims that orthodox income
multipliers, based on direct income, hold little value as they only give an idea
of the degree of internal linkages in the local economy. In contrast, the
unorthodox multiplier, based on a change in final demand, gives lower values
and demonstrates how much income is created by each additional unit of
tourist expenditure. Vanhove (2005), for example, calculated both multipliers
for Flanders: the orthodox was 1.30 while the unorthodox was 0.57. Indeed,
in the tourism literature there are many more calculations that reveal signifi-
cant variations in the value of multipliers. On the one hand, these variations
are due to the multiplier type, model used and different definitions of the
variables. On the other hand, the multiplier value also differs from economy
to economy and is determined by the size of the economy, its level of devel-
opment and degree of economic diversification, the number of transactions
that happen in a one-year period, taxation legislation, share of foreign labour
force, propensity to save and propensity to import. Bigger, more developed
and diversified economies tend to have larger multipliers since they are sub-
ject to fewer leakages and the potential to satisfy the growing demand inside
the economy is larger. Any reduction of the amount of money flowing in an
economy reduces the multiplier value. Money is reduced on account of