Economic Impacts » Tourism Multiplier Effect

What you'll learn this session

Study time: 30 minutes

The concept of the Tourism Multiplier Effect
How money circulates through the local economy
Primary, secondary and tertiary economic impacts
How to calculate the multiplier effect
Factors affecting the size of the multiplier
Real-world case studies of the multiplier effect
How to maximise economic benefits for destinations

Introduction to the Tourism Multiplier Effect

When tourists visit a destination, they spend money on various goods and services. But the economic impact doesn't stop there! This money continues to circulate through the local economy, creating a ripple effect that generates additional income for the area. This phenomenon is known as the Tourism Multiplier Effect.

Key Definitions:

Tourism Multiplier Effect: The way in which initial tourist spending circulates through a local economy, creating additional rounds of income and spending.
Leakage: Money that leaves the local economy rather than being recirculated within it.
Multiplier Value: A number that represents how many times the initial tourist spending circulates in the local economy.

Why It Matters – The Big Picture

Understanding the multiplier effect helps governments and tourism planners measure the true economic value of tourism beyond just direct spending. It shows how tourism can benefit people who don't directly work in tourism-related jobs and helps destinations make better decisions about tourism development.

How the Tourism Multiplier Effect Works

The tourism multiplier effect works in cycles or "rounds" of spending:

💰 Initial Tourist Spending (Round 1)

Tourists spend money on accommodation, food, attractions, souvenirs and transport. This is the direct injection of money into the local economy.

🏡 Business Spending (Round 2)

Tourism businesses use this income to pay local suppliers, staff wages, rent and other operating costs. This keeps the money circulating locally.

👪 Employee Spending (Round 3)

Local employees who receive wages from tourism businesses spend their income on housing, food, entertainment and other goods and services in the area.

🔃 Continued Circulation

This process continues with each recipient of tourism money spending a portion locally, creating multiple rounds of economic activity from the initial tourist spending.

Types of Economic Impacts

The tourism multiplier effect creates three types of economic impacts:

📈 Direct Impacts

The immediate result of tourist spending on tourism businesses like hotels, restaurants and attractions. For example, a tourist paying £100 for a hotel room.

📋 Indirect Impacts

The effect of tourism businesses spending money with suppliers. For example, the hotel buying locally grown food or hiring a local cleaning service.

👥 Induced Impacts

The effect of employees in tourism and supplier businesses spending their wages locally. For example, a hotel receptionist spending their wages at local shops.

Calculating the Multiplier Effect

The tourism multiplier is calculated as a ratio that shows how many times the initial tourist spending circulates in the local economy:

The Multiplier Formula

Multiplier Value = Total Economic Impact ÷ Initial Tourist Spending

For example, if tourists spend £1 million in a destination and this creates a total economic impact of £1.7 million, the multiplier value would be 1.7.

Different destinations have different multiplier values:

Developed economies with diverse local supply chains might have multipliers of 1.5-2.0
Small island economies might have lower multipliers of 0.6-1.2 due to higher leakage
Large, diverse economies like the UK might have multipliers around 1.8-2.2

Factors Affecting the Size of the Multiplier

Several factors determine how large the multiplier effect will be in a destination:

🛒 Local Supply Chains

If tourism businesses can source supplies locally (food, furniture, services), more money stays in the local economy. Destinations with strong local supply chains have higher multipliers.

🌎 Leakage

Money that leaves the local economy reduces the multiplier effect. This happens through imported goods, profits sent to foreign owners, or tourists booking through international companies.

🏠 Size of Local Economy

Larger, more diverse economies can meet more tourism needs locally, resulting in higher multipliers. Small economies often need to import more goods, creating leakage.

💼 Ownership Patterns

Locally-owned businesses tend to spend more money locally compared to international chains that may repatriate profits to headquarters abroad.

Case Studies of the Tourism Multiplier Effect

Case Study: The Lake District, UK

The Lake District National Park attracts over 15 million visitors annually, generating around £1.4 billion in tourism spending. Studies estimate a tourism multiplier of approximately 1.7, meaning the total economic impact is around £2.38 billion for the regional economy.

The "Taste the Lakes" initiative encourages hotels and restaurants to source ingredients locally, strengthening the multiplier effect by reducing leakage and supporting local farmers and food producers.

Case Study: Maldives

The Maldives, despite being a luxury tourism destination, has a relatively low multiplier of around 0.7. This is because:

Many resorts are foreign-owned with profits going overseas
Limited local agriculture means most food is imported
Many staff are expatriates who send money home
Construction materials and luxury goods are imported

Despite high tourist spending, much of the money quickly leaves the local economy, limiting the multiplier effect.

Maximising the Tourism Multiplier Effect

Destinations can take several actions to increase the multiplier effect and maximise economic benefits:

🍱 Promote Local Sourcing

Encourage tourism businesses to buy local products and services. This could include "buy local" campaigns or creating directories of local suppliers.

🎓 Skills Development

Train local people for tourism jobs to reduce reliance on imported labour and keep wages in the local economy.

📅 Extend Tourist Season

Develop year-round attractions to provide more stable employment and reduce seasonal unemployment.

🏠 Support Local Ownership

Provide loans or grants to help locals start tourism businesses rather than relying on international chains.

📦 Develop Local Products

Create distinctive local souvenirs and products that tourists want to buy, keeping manufacturing benefits local.

📊 Diversify the Economy

Develop industries that can supply the tourism sector, reducing the need for imports.

Challenges and Limitations

While the tourism multiplier effect offers significant benefits, there are challenges to consider:

Accurate Measurement: It can be difficult to track all the rounds of spending accurately.
Globalisation: In our interconnected world, it's increasingly difficult to prevent leakage.
Opportunity Costs: Resources devoted to tourism might have generated more economic benefits in other sectors.
Uneven Distribution: The benefits of the multiplier effect may not be equally distributed throughout the community.

Real-World Application: Cornwall, UK

Cornwall has actively worked to increase its tourism multiplier effect through:

The "Cornish Food and Drink" initiative promoting local produce to visitors and tourism businesses
Training programmes for local residents to work in the tourism industry
Support for local entrepreneurs to develop tourism-related businesses
Marketing campaigns highlighting authentic Cornish experiences and products

These efforts have helped increase Cornwall's tourism multiplier from approximately 1.5 to 1.8 over a decade, generating millions in additional economic benefits.

Summary: Key Points to Remember

The tourism multiplier effect describes how initial tourist spending circulates through a local economy.
It creates direct, indirect and induced economic impacts beyond the initial spending.
The multiplier value varies between destinations based on factors like local supply chains and leakage.
Destinations can increase their multiplier effect by promoting local sourcing, developing skills and supporting local ownership.
Understanding the multiplier effect helps destinations maximise the economic benefits of tourism.