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When tourists visit a destination, they spend money on various goods and services like accommodation, food, souvenirs and activities. But the impact of this spending doesn't stop there! The money continues to circulate through the local economy, creating a ripple effect that generates additional economic activity. This ripple effect is known as the multiplier effect.
Key Definitions:
Imagine a tourist spends £100 at a local hotel. This is just the beginning! The hotel uses some of that money to pay staff wages, buy food from local suppliers and pay for services like laundry and maintenance. The staff then spend their wages in local shops and those suppliers buy from other businesses. Each time the money changes hands, it creates new economic activity and supports more jobs.
The multiplier effect is typically expressed as a number that shows how much total economic activity is generated from each unit of tourist spending. For example, if the tourism multiplier is 1.7, it means that for every £1 spent by tourists, a total of £1.70 is generated in the local economy. Different destinations have different multiplier values depending on their economic structure.
The multiplier effect creates three main types of economic impacts. Understanding these helps us see how tourist spending ripples through an economy:
This is the initial spending by tourists on goods and services in the destination. Examples include:
This occurs when tourism businesses buy goods and services from other local businesses:
This happens when people who earn income from tourism spend their wages locally:
The basic formula for calculating the multiplier effect is:
Multiplier = Total Economic Impact ÷ Initial Tourist Spending
For example, if tourists spend £1 million in a destination and this creates a total economic impact of £1.8 million (including all direct, indirect and induced effects), the multiplier would be 1.8.
A small coastal town receives £5 million in direct tourist spending annually. This leads to:
Total economic impact = £10 million
Multiplier = £10 million ÷ £5 million = 2.0
This means every £1 of tourist spending generates a total of £2 in the local economy.
Not all destinations benefit equally from the multiplier effect. Several factors influence how much economic benefit is retained locally:
The Lake District National Park in Cumbria is one of the UK's most popular tourist destinations, attracting over 15 million visitors annually who spend around £1.4 billion.
The tourism multiplier in the Lake District is estimated at around 1.65, meaning every £1 spent by tourists generates £1.65 in the local economy. This relatively high multiplier is due to:
However, leakages still occur through national chain hotels, imported goods and visitors who bring their own food rather than buying locally.
The size of the multiplier effect varies significantly between different types of destinations:
Multiplier: 1.5-2.0
Countries like the UK, France and the USA typically have moderate multipliers. They have diverse economies that can supply many tourism needs locally, but also have high imports and international ownership.
Multiplier: 0.8-1.3
Places like the Maldives or Caribbean islands often have lower multipliers due to limited local production, high imports and foreign-owned resorts. Some money leaves the economy before it can circulate.
Multiplier: 1.2-1.8
Rural tourism destinations can have varying multipliers. Those with strong local food production and crafts retain more spending, while those dependent on imported goods see more leakage.
While the multiplier effect is a useful concept, it has some limitations we should be aware of:
Destinations can take several actions to increase their tourism multiplier:
Understanding the multiplier effect helps us see that tourism's economic impact goes far beyond the initial spending by visitors. By recognising the factors that influence the multiplier, destinations can develop strategies to maximise the local economic benefits of tourism.
Remember that a successful tourism economy isn't just about attracting more visitors it's about ensuring that their spending circulates through the local economy, creating jobs and income for local people. The multiplier effect is a key concept for understanding how this process works and how it can be improved.