Tourism and Economic Development Issues - Tourism and Development: Concepts and Issues - page 107

noticeably higher in developing countries, mainly because they have less-
developed crisis management institutions. However, external factors, such as
oil shocks or the global financial crisis, also lead to price reductions and if
tourism firms are unable to adjust to the corresponding cost-cuts, the pre-
mium value will disappear in the disparity between the price and cost reduc-
tions and may even become negative.
The infl ationary/defl ationary consequences of tourism
Inflation is a major problem of the world economy. Rising prices, often
the consequence of economic expansion, have spared neither developed nor
developing countries. Evidently, tourism also contributes to the price spiral.
Rising tourism prices may be due to either an increase in tourism demand or
higher production costs.
Tourism-pull inflation is caused by increases in aggregate demand due
to the additional financial resources international tourists bring to a coun-
try. If the supply of goods and services in the destination country cannot
adapt to the increased effective demand, the general price level will rise.
Similarly, in the tourism-spending country international tourism creates an
outflow of money and thus a reduction in demand which, ceteris paribus , has
an anti-inflationary effect. Theoretically, this may cause deflation or a
reduction of the current inflation rate (Mihalič, 2002c). In addition, tourism
may also cause cost inflation if prices are pushed up by the rise in costs. In
a labour-intensive tourism industry increased demand leads to stronger
employment in local service industries and an acceleration of the wage-price
spiral as the higher labour costs of production are passed on as higher prices
for tourism services. Further, higher fees and taxes on some tourist products
or services will have the same effect.
Since additional tourism demand is primarily oriented to the supply of
services where the production quantity can to some extent be quickly
adapted, tourism has a certain capacity to absorb the additional demand.
This capacity depends on the elasticity of the tourism supply, which varies
according to the type of supply and availability of resources and how
employed the existing capacities are. The same amount of tourism consump-
tion may have a different impact on an increase in the production quantity
and price level if the supply curve is less or more steep.
Figure 3.1 assumes that, in the absence of international tourism, the pur-
chasing funds of local inhabitants equal the funds of goods and services and
the economy is in equilibrium P 0 Q 0L . In this case, tourism expenditures
increase the supply of money and bring about inflation. The additional tour-
ism demand shifts total demand from D 0L which represents local demand to
D 1(L+T) which represents the sum of local and tourist demand. A direct or
primary effect of tourism expenditure is a new equilibrium at P 1 Q 1( T+L) ,
where more products are traded, but at a higher price. Since local consumers,