ECONOMIC IMPACT ANALYSIS OF TOURISM IN THE PHILIPPINESUSING INPUT-OUTPUT MODEL1
1A thesis proposal submitted in partial fulfillment of the requirements for graduation with the Degree of Bachelor of Science in Economics, College of Economics and Management, University of the Philippines Los Baños. Prepared at the Department of Economics under the supervision of Prof. Jhoana V. Alcalde.
Creissa Anne A. Rostrata
CHAPTER IINTRODUCTION
Background of the Study
Tourism is becoming one of the fastest growing sectors in the world. It plays an
integral part of economic development strategies in developing nations since the 1960’s
(Lin and De Guzman, 2007). For decades, it has been a major component in the increased
of economic activity in the different parts of the world. It created jobs in both large and
small communities and provide additional income in the community. In fact, the growth
of this sector has large impact on employment, foreign exchange earnings, balance of
payments and the economy in general (Pao, 2005).
In the Philippines, tourism plays an important role in the economy. It started to
flourish in the 1970’s up to 1980’s. Fast growth in Philippine tourism was more obvious
in the early 1990’s. In the year 2000, net tourism income in the Philippine totaled to 2.1
billion U.S dollars. Moreover, based on the PTSA study conducted by Virola (2003),
total tourism expenditures amounted to Php 140 billion in 1994 and increases at Php 274
billion in 1998. This implies an average annual increase of 11%.
Although tourism has become a fast-growing industry, pertinent economic analyses
have been somewhat limited, possibly because it is not a single independent industry but
rather comprises businesses from different sectors (Tooman, 1997). Yet, interest in the
effects of tourism on the economy and on employment has grown gradually as the role of
tourism as an industry has become emphasized.
The economic contribution of tourism is not a new field of research. Both the demand
and supply sectors of the industry have been under the scrutiny during the past few
decades. The scope of tourism has been developed and grown immensely, but still, the
structure of investigation has remained largely unchanged. “The links between tourists
and tourism enterprises constitute the mainstay of the economic impact analysis of
tourism” (Paajanen, 1999).
In general, economic impact analysis estimates the changes in economic activity
within a region resulting from an action. In tourism, Archer (1989) defines economic
impact analysis as an approach used to measure inter alia the amount of income,
government revenue, employment and import generated in an economy by direct and
secondary effects of visitor expenditure.
Moreover, there are a variety of methods that can be used to measure the economic
impacts and effects associated with tourist expenditure. Any assessment of the overall
economic impact of tourism requires detailed information about the visitor expenditures,
prices, tax revenues, and expenditures by other sectors of the economy. Also, most of the
studies incorporate the application of multiplier to determine the impact of tourism. The
common methods used for the economic impact analysis of tourism include the input-
output analysis, computable-general equilibrium model and simple multiplier analysis.
Stynes (1999) defines the different levels of tourism impacts. Direct effects are the
changes in economic activity at the first round of spending. This involves the impacts on
businesses directly selling to tourist. Secondary effects, which are composed of indirect
and induced effects, are the changes in the economic activity from the subsequent rounds
of re-spending tourism income. Indirect effects is defined as the changes in sales, income
and employment within the region in “backward-linked industries” supplying the goods
and services to tourism businesses while induced effects are the increased sales within the
region from household spending of the income earned in tourism and supporting
industries. Furthermore, the sum of direct, indirect, and induced impacts constitutes the
total impact of tourism.
In this study, input-output analysis was used to evaluate the economic impact of
tourism in the Philippines. This method of impact analysis for tourism has been widely
used in the analysis of tourism in many countries.
Statement of the Problem
The Philippine government recognizes the importance of tourism industry as a major
contributor in the country’s economic growth. In fact, tourism development is among the
top priority of the country as stated in the Medium-Term Philippine Development Plan
(MTPDP) for 2004-2010.
As cited by Nhu (2007), the MTPDP 2004-2010 includes the tourism industry as one
of the sectors that has a potential to boost the Philippine economy. MTPDP 2004-2010
stated that tourism industry is one of the top priorities for the national development
because it was considered as a powerful and efficient industry such that its impacts on
social development are broad and deep.
The Philippines also adopted the Tourism Satellite Accounts to provide an overview
on the status of tourism in the country. Although considered as a reliable measure to
identify the role of tourism in the Philippine economy, the Philippines Tourism Satellite
Account (PTSA) concentrates more on reporting the status of the tourism sector. Also,
even though it provides a measure for the tourism expenditure, it does not offer the
comprehensive view on the impact of tourism in the economy.
Despite the recognition of the tourism contribution in the Philippine economy, still,
only limited studies has been conducted to emphasize the economic impact of tourism in
the country. As discussed, it includes the PTSA study of Virola under the National
Statistics Coordination Board. Nhu (2007) also conducted a study on the impacts of
tourism in the economy using a CGE model which also utilized the 1994 input-output
table to identify the tourism subsectors.
In response to this, the study intends to investigate the economic impact of tourism in
the country and provide a more comprehensive view on the total effects of tourism
expenditure in the economy. This also identifies the sectors that have relationship to the
tourism industry and evaluates the impacts on tourism subsectors. Moreover, the study
will evaluates the status of the tourism industry in the country using the latest available
data on the tourism sector.
Significance of the Study
“The recognition of tourism and leisure as a fast growing industry has led to its
identification as a potential driver of regeneration in economically disadvantaged
localities” (Jones and Munday, 2001). Unfortunately, while tourism is becoming more
dominant, yet, the impacts of tourism to a community are not widely understood.
Faulkner and Tideswell (1997) stressed that economic impact analysis can provide
tangible estimates of tourism’s contribution to an economy. In applying an economic
model, economic impact analysis can provide estimates of the total economic impact of
tourism activities that will influence an economy. The economic contribution under
consideration often results in public policies or decisions that are favorable to tourism
development.
The analysis of the impact of tourism in the Philippines provides a more empirical
view about the importance of tourism in the country. The study traces the flows of money
from tourist spending since it revealed the interrelationship among economic sectors and
provide an estimate about the changes that take place in the economy due to the changes
in the trends of tourism in the country. Aside from that it shows how the tourist arrival in
the Philippines contributes to the progress of some businesses and sector that may be
affected by tourism.
With the use of the input-output analysis, a wider perspective on the tourism impacts
could be obtained. It details how changes in one or more sectors in an economy will
affect the total economy. Although this model has various restrictive assumptions, it can
still be considered as a suitable method for economic impact analysis of tourism
(Fletcher, 1999).
Objectives of the Study
Generally, the objective of the study is to assess the economic impact of tourism in
the Philippines. Specifically, it aims to:
1. Provide an overview on the status and trends of Philippine tourism
2. Identify the sectors that are linked with the tourism industry and evaluate
the linkages among them
3. Evaluate the impact of tourism in the Philippine economy in terms of
output, income, employment indirect tax, and imports generated
4. Identify policy implications regarding the development of tourism industry
in the country.
Scope and Limitations of the Study
The study is limited in an economic perspective for assessing the impact of tourism.
Moreover, the scope of the analysis is the impact of tourism in the Philippine economy
which excludes the analysis of social, cultural, political and environmental impact of
tourism.
The study also utilized the input-output model in the evaluation of tourism impacts
which also works on various assumptions and restrictions.
A wider scope of analysis may include the social cultural and environmental impacts
of tourism. Additional research could also identify the costs of tourism and compared it
with the revenues that can be generated in tourism. Moreover, other methods for
analyzing tourism impacts can also be done particularly the computable-equilibrium
model.
CHAPTER IIREVIEW OF RELATED LITERATURE
As cited by Calma (1997), tourism is viewed as “a manifestation of modern’s
society’s need for recreations and leisure”. It is a result of paid vacation and available
disposable income of the aging society. It is also an expression of an informal
communication and technological change which makes mass travel to distant places
possible.
Crawford (1991) observed that the growth of tourism can be attributed to
demographics, transportation deregulation, unprecedented development of
accommodation, previously unimaginable political alliances and aggressive initiatives of
forces associated with travel and migration. Tourism is also considered as a volatile
industry in which potential visitor can easily abandon popular destination because of
great competition and also due to threats to health and security, range of pressures and
peculiar influences that may affect tourism’s role in development.
Today, the trend of tourism was described as the age of mass tourism or tourism
activities that takes place in large scale. According to the World Bank assessments,
tourism today is one of the largest developing world industry. The World Tourism
Organization announced that 2006 was a peak year for world tourism (WTO, 2006).
Figure shows that the number of tourists visiting other countries increased by 4.5%
against the year 2005 and amounted to 842 million persons. Data also shows that the
greatest influx of tourists occurred in South Asia.
According to the estimates of the WTO, the number of international movements of
people around the world will surge to 1602 million by 2020 while tourism receipts will
reach some 200 billion US dollar. Furthermore, World Tourism Travel Council estimates
that the scale of the world tourism industry which is roughly 10.4% of world’s GDP in
2004 will increase up to 10.9% in 2014. “The long-term forecasts point to a mature but
steady phase of growth for world Travel & Tourism between 2009 and 2018, averaging a
growth rate of 4.4% per annum, supporting 297 million jobs and 10.5% of global GDP by
2018 (WTTC, 2005).
Although tourism is now one of the world’s fastest growing industries, previous
studies emphasized that tourism is likely to grow much faster in developing countries
than in developed countries. It is the most promising complex and understudied industry
in developing countries today. In 1950’s, most studies assured that the extension of the
industry in developing countries was a good thing that certain problems of the industry
can be surpassed through time (Lin and de Guzman., 2007).
Generally, tourism tends to play a major role in the economy of poor countries.
According to the World Tourism Organization (WTO), tourism contributes over 2
percent of gross domestic product (GDP) and 5 percent of exports to the economies of 11
of the 12 developing countries (Ashley and Goodwin, 2001).
Impacts of Tourism
Tourism industry has been the focus of study in recent times due to emerging
consensus that this sector increases foreign direct income, creates employment
opportunities, stimulates the growth of the tourism industry and triggers economic growth
as a whole. Thus, the development of the tourism sector has become an important target
of many countries (Lee and Chang, 2007).
Moreover, tourism became one of the main sources of income in the balance of
payments in many countries. In fact, in some small countries which are highly dependent
on tourism, the income from the sector outweighs exports of goods (Martin, 2004).
Some described tourism as an “invisible export industry” where there is no tangible
product. And the fact that tourists have to travel to a destination to make personal use of
facilities they desire, only few freight cost are incurred by the host country because the
means of travel are generally foreign-owned (Martinez, 1997).
Most studies give emphasis on the economic impact of tourism due to its undeniable
effects on several countries’ economy. Tourism increases employment opportunities.
Additional jobs, ranging from low-wage entry level to high-paying professional positions
in management and technical fields generate income and raise standards of living.
Particularly, in rural areas, the diversification created by tourism helps communities that
are possibly dependent on only one industry. As tourism grows, additional opportunities
are created for investment, development and infrastructure spending. Likewise, tourism
often induces improvements in public utilities and transport infrastructure. It encourages
new elements to join the retail mix, increasing opportunities for many business
enterprises that boost a community’s tax revenues (Kreag, 2001).
“Tourism as a source of employment is particularly more important for areas with
limited alternative sources of employment.” This sector easily influences employment
since tourist activities are more labor-intensive. Leones (1995) emphasized that because
of tourism’s labor-intensive character, its impact on direct employment was considerable.
Indeed, “the very flexible nature of tourism employment, together with what are often
moderate skill requirements, may render it suitable for those who cannot obtain more
formal employment.” Thus, by employing formerly unemployed labor, or more fully
utilizing the underemployed, tourism may increase regional output or incomes while
incurring low opportunity costs (Jones and Munday, 2001).
In terms of foreign exchange earnings, tourists are expected to spend money on goods
and services during their vacation. This money injected to the local economy creates
foreign exchange (Belisle and Hoy, 1982). Tourism also affects the balance of payments
(BOP) of a certain country since tourist spending gives rise to inward and outward
currency flows which favors to the BOP of developing countries.
Tourism, for some is not just a simple industry but a series of activities. As such,
tourism touches many different industries such as lodging, recreation, entertainment,
retail trade and transportation. The challenge lies in measuring tourism share of these
factors (Pike, 2007).
Moreover, researchers have been concerned with developing models to estimate the
economic impact of changes in the final demand for more than a century. Most of the
models use some form of ratio as a means of expressing the relationship between an
exogenous change in final demand and the resultant change in economic variables such
as income, employment and government revenue.
Economic impact can be seen on its effects on (1) income, including all forms of local
income, (2) employment, generally expressed as full-time equivalent jobs, (3) output,
including sales and transactions multipliers which are adjusted for changes in inventories,
(4) government revenue, in terms of tax revenues and operational surplus, and (5)
imports, including goods, services and repatriated income (Fletcher, 1999).
There is also a question of impact levels. It is important to recognize that economic
impacts occur across a wide range of economic variables and at three different levels.
The above variables can be estimated in three levels of impact- direct effects, indirect
effects, and induced effects. Stynes (1999) defines the different levels of impact of
tourism
Direct effects, also known as first-round effects, are those economic impacts derived
directly from changes in tourist spending as it occurs in the tourism-related
establishments. As an example, direct income effects will include the increase in wages,
salaries, and profits accruing to hotels as a result of an increase in tourist spending in
those hotels.
Indirect effects or secondary effects are those effects that occur because of the
increase purchases of the tourism-related businesses. These are the effects on sales,
income and jobs resulting from the secondary round of purchases tourism enterprises
makes to other sectors in the region.
Induced effects are related to sales, income, or jobs, resulting from the household
spending as a result of income earned from visitor spending. During the direct and
indirect effects, local income will have accrued in the form of wages, salaries, profits,
rent and dividends. When this money is re-spent within the local economy, this will
generate additional economic impacts. Furthermore, the sum of the direct, indirect and
induced effects constitutes the total economic impact of tourism.
Tourism in the Philippines
The Philippine government is aware of the importance of tourists in the country
because of the income generated from tourism in the form of tax and contributions in
business operations. Since the total employment in the industrial sector in the country is
still moderate, tourism sector creates possibilities to have employment for many people.
In fact, there is a claim that developing the industrial sector is more difficult than tourism
(Hogeschool, 2008).
However, it was only in 1970’s when tourism sector was emphasized as a significant
contributor to the countries development especially in the aspect of foreign exchange
generation, employment creation, regional development and the promotion of small and
medium enterprises. In 1970’s, the country experience a boom in the construction of
tourism infrastructure and support facilities. Nevertheless, the development was
concentrated within Metro Manila area which possessed the greater potential for growth
and development at that time (cited by Calma, 1997).
The tourism sector in the Philippines derives its business from both foreign and
domestic markets. In addition, most of the existing attractions of the Philippines are
located mainly in Luzon area reflecting the size and concentration of tourism to this area.
Other major attractions are located in Visayas and Mindanao. However, although many
are outstanding, they have generally been difficult to access and therefore have placed a
lesser role in Philippine tourism.
In developing countries like Philippines, tourism sector is highly dependent on the
climate and scenic attraction of its country. Since the Philippines is composed of 7,107
islands, tourism focuses more on the development and beautification of beach resorts in
some of the country’s provincial islands (Lea, 1988).
The country’s tourism industry also has various limitations that refrained them from
developing other parts of the Philippines such as cities in Visayas and Mindanao. The
restraints to expansion are the inability to move large number of tourists to other cities
and lack of trained human resources, strong competition for public and private sector and
finance, land use planning and development policies that make it difficult to develop
large resort estates and the unpredictable natural calamities and political crises (Calma,
1997).
Yet, data shows that tourism industry in the Philippines continues to prosper. Based
on the release of the World Economic Forum (WEF), the global ranking of the Philippine
tourism industry has improved from 86th to 81st in its 2008 Competitiveness Report. The
WEF estimates that the Philippine Tourism industry is worth $5.7 billion in 2007 which
reflects an annual growth rate of 4.4 percent and employing about 1.3 million people.
2007 was deemed a year of breakthroughs for DOT as foreign visitor arrivals hit more
than three million and tourist expenditure was posted US$ 4.885 billion (DOT, 2008).
Methods to Estimate Economic Impact of Tourism
A great deal of studies has been published about the estimation of economic
contribution of tourism. Most of these involve tourist expenditure which generates
economic activity directly in the form of output or sales, labor earnings and employment.
Archer (1973) identifies the four major factors in the determination of tourism
impact. These are (1) the nature of the main facility, (2) number of visitors, (3) spending
of visitors, and (4) the degree to which spending re-circulates in the local economy. In
practice, reliable estimates of tourism expenditures and information on the structure of
the local economy are sufficient to estimate tourism impacts.
Furthermore, Archer (1973) introduced the use of tourism regional multiplier
approach and discussed the Keynesian multiplier which is relatively straightforward to
calculate. However, this multiplier only provides a limited and partial perspective on the
impact of tourism because they focus on simple aggregates and are unable to address the
nature of linkages between sectors.
Frechtling (1994) developed a cost-factor model for estimating travel expenditures at
the national and regional level. The difficulty of tourist in reporting accurately their
expenditures was discussed.
Other methods for estimating economic impact of tourism includes demand analysis,
cost-benefit analysis, standard multiplier analysis, use of econometric techniques and
Computable General Equilibrium framework (Lin and De Guzman, 2007).
Another model for assessing the local income and employment effects of tourism is
the Nordic model of tourism. However, it was not adopted as a new method but an
innovative construction of two methods- the expenditure and income method. It can be
considered as an equal method of input-output method. The application of the income and
expenditure methods constitutes the heart of the Nordic model. These two methods are
taken independently to yield data in the demand and supply sectors of tourism. The
accuracy of the Nordic model of tourism draws on the parallel analysis of the data
obtained using the income and expenditure method (Paajanen, 1999).
Tourism Satellite Accounts (TSA) is also used to measure the tourism impacts. The
World Tourism Organization recommends the use of TSA that are based on a common
conceptual framework for the design of TSA. It analyzes in detail all aspects of the
demand for goods and services which might be associated with tourism in the economy.
It is built on information from existing national accounts and provides basis for the
calculation of industry’s value-added. In the case of the Philippines, TSA is also done by
NSCB to provide a comprehensive database of tourism status in the country. However, as
pointed out by Nhu (2007), this concentrates only on the direct impact of tourism
expenditure.
Many studies adopted the use of input-output (I-O) approach to estimate the
economic impact of tourism because of its advantages. First, Input-output tables provided
an excellent resource with which to estimate indirect impacts of economic activity across
regional industries. Second, the use of existing tables enabled targeted data collection
regarding the nature of tourism operators’ activity and tourists’ expenditure in a region.
Third, I-O frameworks have been used successfully for the analysis of tourist related
economic activity in the past. Fletcher (1994) identifies input-output analysis as a
relatively reliable method to trace the effects of tourism spending in an economy.
According to Fletcher, “input-output models are preferable since they operate in a
general equilibrium framework, provide a comprehensive view of the economy, pay
attention to sectoral interdependencies, and are flexible and policy neutral.
On the other hand, weaknesses of input-output analysis include the assumption of
uniform consumption functions for all household income levels, the aggregation of
competitive and non-competitive imports, massive data requirements and the static nature
of the input-output models. Fletcher also stated the restrictive assumptions of the input-
output model concerning the production process of the various industrial sectors and the
consumption function of household. However, he argued that, in most cases, these
assumptions do not offer significant distortions to the result. Nhu (2007) cited the four
major categories of input-output limitation namely: (1) substantive issues, (2)
aggregation, (3) structural change and prediction, and, (4) intangible impacts.
Meanwhile, Leontief presents input-output model in its theoretical form wherein
multipliers can be calculated to show the benefits of tourism which include the increased
output, earnings and employment. Multipliers are derived from the input-output tables
representing the structure of an economy (Horvath and Frechtling, 1999).
Archer and Fletcher show how input-output model can be used to estimate the
economic impacts of tourism. It was discussed that all exogenous injections of
expenditure into an economy have a multiplier effect. They also assert that “policy
implication concerns the structure of the economy, backward and forward inter-industry
linkages, supply constraints and capital and labor intensities.”
Computable General Equilibriums (CGE) model is also one of the widely-used
methods to analyze the tourism impacts. It is said that CGE models have their historical
origins in the I-O methodology, but have developed to overcome many shortcomings of
the I-O models. Conceptually, it includes more general specifications of the behaviors of
consumers and producers than those allowed in I-O models. However, there are claims
that CGE are more expensive, and produces almost similar results as I-O method. There
are also claims that its assumptions entail the same pitfalls as the I-O analysis.
Despite this, CGE method was adopted by Nhu (2007) to analyze the tourism impacts
in the Philippine economy. The study by Nhu utilized the TARFCOM model wherein two
experiments are done: (1) increase in tourism output, and, (2) increase in tourism exports.
Based on related literature reviewed, since no study was yet conducted using input-
output table of 2000, the study estimated the impact of tourism in the Philippine economy
using input-output method.
CHAPTER IIITHEORETICAL AND CONCEPTUAL FRAMEWORK
Theoretical Framework
Economic Base Theory
Economic base theory is commonly used to explain growth of a region. It states that
some activities in a region are peculiarly ‘basic’ such that “their growth leads and
determines the region’s overall development while other activities or the ‘non-basic’ are
simply consequences of the region’s overall development. It assumes that all local
economic activities can be identified as basic or non basic activity.
The basic sector is composed of local firms that are entirely dependent upon external
factors. Manufacturing and local resource-oriented firms such as logging and mining are
usually considered as basic-sector firms because they depend largely on non-local factors
or since they usually export their goods. On the other hand, the non–basic sector is made-
up of firms that largely depend upon the local business conditions. Almost all local
services are identified as non-basic because they depend almost entirely on local factors.
Also, this theory states that firms that sell to both local and an export market must be
assigned to one of these sectors or that some means of apportioning their employment to
each sector must be employed. If the basic activities are identified, the regional growth
can be explained by determining the location of basic activities and tracing the processes
by which these basic activities in any region give rise to the development of non-basic
activities”. The basic economic base theory identifies the basic activities as those which
bring in money from the outside world, generally by producing goods and services for
export (Hoover, 1975).
Furthermore, it asserts that the means of strengthening and growing the local
economy is to develop the basic sector. Thus, the basic sector is identified as the engine
of the local economy.
Moreover, the economic base theory answers the question about how regions grow. It
answers that exports fuel the economic growth in the region. “Expenditure from outside
a region or a region's exports stimulate local businesses, both through local supply chains
(inputs to the exported production) and through the earnings and spending of local
employees (payment for labor).” These expenditures will generate a chain reaction effect
which is known as multiplier. Local industries buy inputs from local suppliers which pay
local employee and buy further inputs from local suppliers, and so on. Thus the effect of
an expenditure on a region’s exports from outside the region must be multiplied by these
further rounds of local income and spending (Blumenfeld, 1955).
“Economic Base Theory also position that the local economy is strongest when it
develops those economic sectors that are not closely tied to the local economy. By
developing firms that rely primarily on external markets, the local economy can better
insulate itself from economic downturns because, it is hoped, these external markets will
remain strong even if the local economy experiences problems. In contrast, a local
economy wholly dependent upon local factors will have great trouble responding to
economic slumps” (Klosterman, 1990).
In relation to this, tourism can be fit into the base theory model as a basic activity
since tourist buy goods and services to meet their needs and their trip, the region has
somehow exported value mostly through its natural resource or recreational services
provided by the region.
Furthermore, using the economic base theory, a ‘community multiplier’ was
commonly obtained which can be expressed as (I-A)-1 wherein A is a constant
coefficients which denotes the proportion of inputs that comes from the community itself.
However, it was determined that this multiplier denoted only casual relationship. Its value
in the analysis can only be applied where stability exists and the system and less value
where extremely change can be expected in the system. Thus, an input-output model is
mostly used because it can provide a more detailed analytical framework than what is
provided by the community multiplier (Harmston and Lund, 1967).
Input-output analysis is related to the economic base theory because it estimates the
importance of exports, which bring new income into the local economy. The major
difference lies in the extent of aggregation since I-O analysis combined those that possess
similar input patterns and trading characteristics which are called ‘industries’. This results
to the construction of a multi-dimensional model which is generally identical to the
community multiplier, but the data may be placed in rows and columns. Multiplier
produced by the economic base theory appeared as single numbers while I-O model
handled these in such a way that total output and exports are in row of elements in a
table. Each element in the row denotes output of a particular industry. Moreover, instead
of one A denoting an input-coefficient, a multi-dimensional A is constructed in which
each element can denote the relationship among local industries.
Thus, input-output model can be denoted as a stratified form of the community
multiplier that was produced by the economic base concept. On the other hand, the
community multiplier can be regarded as a one-dimensional input-output model.
Theory of Multiplier
Increase in the volume in transaction results to economic growth in income and
employment. This increase in the volume in transaction, however, has a “ripple effect” or
the multiplier effect. Figure 3.1 provides an overview on how an economy works.
It shows that if an industry or an economic unit experienced an increase in the volume
of sales, this would cause an initial or immediate effect in the local economy. For
example, an increase in revenues would lead to increased in payments for primary inputs
such as labor. Moreover, households who receive greater incomes would spend higher
amounts within the economy. Firms who exhibit greater sales would demand higher level
of intermediate inputs from other producers or industries within the economy. Thus, the
benefits of that initial increase in the volume of sale of a business or a single firm do not
end there. Since households receive greater income, household expenditure on
commodities sold within the locality will also increase. This also means increased in the
demand for the commodities produced by other businesses which will further means
increased in the supplies of inputs from other producing sectors. Again, the income for
these sectors would increase causing further increase in consumption and the demand for
other goods and services and so on. Thus, the effect of one initial transaction or economic
movement would ripple, or multiply through the numerous rounds of transactions (cited
by Cortez, 1997).
It can be applied in the study, since tourist’s expenditure will cause changes in the
transactions within the local economy. Increase in income of tourist-related firms due to
tourism expenditure will further increase income and employment. It also results to the
increase in sales for suppliers of inputs and other sectors including households within the
locality. Moreover, increase in household income also results to further increase in
consumption and so on.
(3)
(2)
(1)
(1) (1)
(2) (2)
(3) (3)
(1)
(2)
(3)
Figure 1. Economic Income and Expenditure Pattern (cited in Cortez, 1997)
BusinessHouseholds
Conceptual Framework
Figure 2. Schematic Diagram of the Economic Impact Analysis of Tourism in the Philippines
The study provides an overview about the status and trends of Philippine tourism
using descriptive analysis. Different sectors related to tourism were identified with the
use of input-output and descriptive analysis. Moreover, data on tourist expenditure and
the latest input-output table of 2000 were utilized in order to analyze the economic
impact of tourism to different sectors. Impacts of tourism were also estimated in terms of
output, income, employment, indirect taxes, and imports.
ECONOMIC IMPACT ANALYSIS OF TOURISM IN THE PHILIPPINES
Status and Trends of Philippine
TourismIMPACTS OF
TOURISM
Identification of Sectors Related to
Tourism
Descriptive Analysis
Tourist Expenditure
Input-Output and Descriptive Analysis
Input-Output Table of 2000
Impacts on Different Sectors
Output Indirect TaxesEmploymentIncome Imports
Input-Output Analytical Framework
Input-output (I-O) analysis describes the economic transaction within a region. This
transaction represents a ‘snap shot’ and creates a mathematical representation of the
economic activity occurring within the region. I-O analysis uses an economic model that
traces the flow of goods and services, income, and employment among related sectors of
the economy. It provides a means for examining relationships within an economy among
and between different sectors. The model also allows the examination of impact on the
entire economy of a change in one or several economic activities (Pao 2005).
Thus, the study adopted the input-output analysis to estimate the status and impact of
the tourism industry in the Philippine economy because of the following reasons: (1) An
I-O model is suited to measure both the relative sizes of sectors that make-up the
economy including the linkages among them, (2) It is one of the most commonly used
method to assess the economic impact of tourism., and, (3) It provides impact estimates
in the general equilibrium framework instead of single-market analysis wherein it capture
the direct, indirect, and induced impacts of tourist expenditures in an economy.
Input-Output Tables
Input-output tables are analogous to national account tables for the economy
which can be constructed at national and sub-national levels. Figure 3 shows the four
different areas or quadrants of an input-output table structure.
Figure 3. The Structure of an Input- Output Table (Fletcher, 1999)
Quadrant A represents the area in the table that registers the sales and purchased
made by each sector from each other sectors including itself within the local economy.
The column in this quadrant can be seen as the input of goods and services required by
each local sectors of production from each other local sectors.
Quadrant B is the area of the table that describes the purchases of the primary inputs
(i.e. income, government revenue and imports) that each sector of the economy makes.
This includes all forms of income that is paid to the factors of production within the
economy such as wages, salaries, profits, rent, interest and dividends. It also includes all
form of government revenue including direct and indirect taxes, excise duty and trading
surplus.
Quadrant C is the area that shows how each productive sectors sells its output to final
users (final demand) including households, governments capital formation and exports.
And lastly, quadrant D is the area which shows the direct use of primary inputs for final
demand.
QUADRANT A QUADRANT B
QUADRANT DQUADRANT C
Because the sum total of each column represents all the inputs of that sector, it will be
exactly equal to the sum total of the corresponding row regardless of the nature and
origin of that input. Figure 3.3 provides an example of an input-output table.
SALES TO
PURCHASES FROM
INTERMEDIATE DEMANDProductive Sectors
FINAL DEMANDFinal Demand Sectors
Industry1 2 3 4 .……. m H I G
E
Prod
uctiv
e S
ecto
rs
Industry 1Industry 2Industry 3Industry 4 ------- -------Industry m
X11 X12 X13 X14 …….. X1m X21 X22 X23 X24 …….. X2m X31 X32 X33 X34 …….. X3m X41 X42 X43 X44 …….. X4m ---- ---- ---- ---- ..…… -------- ---- ---- ---- ..…… ----Xm1 Xm2 Xm3 Xm4 …….. Xmm
C1 I1 G1
E1
C2 I2 G2
E2
C3 I3 G3
E3
C4 I4 G4
E4
---- ---- ---- ---- ---- ---- ---- ---- Cm Im Gm
Em
X1
X2
X3
X4
------Xm
Prim
ary
Inpu
ts
Wages and Salaries
Profits/ Dividends
Taxes
W1 W2 W3 W4 ……... Wm
P1 P2 P3 P4 ……... Pm
T1 T2 T3 T4 ……... Tm
WC W l WG
WE
PC P l PG
PE
TC Tl TG TE
W
P
T
Imports M1 M2 M3 M4 ……... Mm MC M l MG
ME M
TOTAL INPUTS
X1 X2 X3 X4 .…….. Xm C I G E
X
Where X= output E= exports FINAL DEMAND SECTORSC= consumption(households) M= imports H= household consumption sectorI= investment (private) W= wages and salaries I= investment expenditure sectorG= govt. expenditure P= profits and dividends G= govt. expenditure sector
T= taxes E= exports sectors
Figure 4. Basic Input-Output Transaction Table (Fletcher, 1999)
Transaction Table
Transaction table is divided into two parts. First is the purchasing sectors portion of
the table which depicts the type and degree of inter-industry linkages between sectors of
the regional economy. The other part is the final demand section which shows the sales to
final consumers of the product.
The transaction table offers two perspectives about the relationship between
production and consumption of the region’s output. Rows are the ‘producing’ sector and
columns are the ‘purchasing’ sectors in the economy wherein columns and rows are
buyers and sellers, respectively. The ‘purchasing sectors’ section describes the
transactions between the producing sectors of the economy. Each industry group
purchases inputs from other sectors within the region. These are termed “inter-industry
transactions.” Other inputs to local production include imports from outside the region
and payments to households in exchange for labor, rents, investment, etc.
Reading down a column of the table describes the total value of purchases made by
each sector listed at the top of a column. The purchases are made from each of the sectors
listed at the left side of the table. Thus, reading down the column, the inter-industry
purchases of inputs for production from other regional sectors are depicted.
Reading across the table rows provides an alternative interpretation of economic
activity wherein local sales from each sectors listed at the left side of the table to other
local sectors listed at the top are shown. Thus, for any production sector it is possible to
track to whom sales are being made.
Direct Requirements Table
Direct requirements table, also called the ‘technical coefficients matrix’ shows the
proportion of inputs required to produce one peso value of output. It is calculated by
dividing each of the column values in the transaction table by the column sum. This
allows the direct requirements to be expressed in percentages. Reading down the table
shows the proportion of input required from each sector to other sectors.
Total Requirements Table
The total requirements table is based on mathematical manipulation of the direct
requirements table or I-A matrix. Only the producing sectors which are considered the
endogenous portion of the A matrix are utilized. The final payments sectors are
disregarded for computation of the total requirements.
The total requirements table recognizes that an increase in demand for a sector’s
output has a greater impact on the regional economy than the direct effect. Firms that
supply inputs to the sectors experiencing the increase in demand must also increase their
purchase of inputs for their production. These support firms purchase materials and labor
in order to meet the inter-industry demand from the sector initially stimulated by final
demand changes. The effects on supporting sectors reflect the backward linkages in the
economy as firms within the region buy and sell to one another. These additional
“ripples” of the economic activity are the indirect effects of an initial increase in final
demand. The total requirements table captures the combined direct and indirect effects
from a change in final demand.
Inverse Matrix
The input-output framework can be fully utilized with the derivation of the inverse
matrix. As discussed, impacts due to a change in the economic activity also have
resounding effects that resulted from the consequent rounds of re-spending. The inverse
matrix can be derived by subtracting the direct coefficient matrix by the identity matrix
wherein the resulting [I-A] will then be inverted to [I-A]-1.
Then, from this inverse matrix, production, income and employment multipliers can
be derived. But, unlike other multiplier, input-output multipliers are specific to certain
industries. They show the direct, indirect and even induced effects of the changes in the
final demand.
Economic Multipliers
Multipliers are another means of estimating the overall change in the economy due to
changes in final demand. A change in final demand generates activity in the regional
economy wherein various industries buy and sell from one another. These inter-industry
relations cause the total effect on the economy to exceed the initial change. The ratio of
the total change in the economy to the initial change in final demand is the economic
multiplier.
Economic multipliers are a product of input-output analysis which is often used to
estimate the impact of changes in production or sales in a given sector of the economy.
The basic types of economic multipliers are usually derived from I-O models includes the
output multiplier, income multiplier, employment multiplier and the indirect business tax
multiplier.
‘Output Multiplier’ for a sector is defined as the total production of all sectors of the
economy that is necessary to satisfy a peso worth of final demand for the sector’s output.
In other words, it is changes in the total value of output in all sectors for every peso
change in final demand spending (direct output).
‘Income multiplier’ can be defined as the change in the income for each sector for
every peso change in the final-demand spending.
‘Employment multiplier’ indicates the change in the number of jobs generated in the
economy for every million peso change in the final demand spending or direct output.
And lastly, the ‘indirect business tax multiplier’ estimates the change in indirect
business taxes for every peso change in final-demand spending.
Input-output Framework for Tourism
In the input-output model, the total output of each industry (X) is said to be equal to
the intermediate sales plus the final demand sales. Letting X as a vector of the total sales
of goods and services of each industry in the economy; A as a matrix of the inter-
industrial sales or purchases; Y as a vector of the final demand sales, including tourism;
and, I as the identity matrix which is equal to one, input-output model can be expressed
as:
X= AX + Y
It can be also be expressed such that the total output of each industry (X) less the
output used for intermediate production (AX) is equivalent to the output left for final
demand (Y). This can be expressed as:
X-AX =Y (1)
Rearranging this to derive an expression for X will produce:
(I-A) X=Y (2)
X= (I-A)-1 Y (3)
To trace the impact of a change in final demand, which in this case is the tourist
spending, let the change in final demand be ∆Y. This change in the final demand will
lead to further changes in the level of output of each of the industries within the
economy. This can be expressed by the following formula:
∆X= (I-A)-1 ∆ Y (4)
Thus, the change in final demand ∆Y will lead to a change in the output of the
economy by ∆X. In this case, ∆Y is the incremental tourists’ expenditure. Economic
impacts of the incremental tourists’ expenditure are represented in the changes of outputs
across sectors (∆X). The basic input-output model shown above can be developed
further to provide much broader range of information. Impacts on output, income,
employment, and tax revenues, as well as their multipliers, can therefore be derived from
the input-output model.
Assumptions of the Input-Output Model
The input-output model works on several restrictive assumptions: (1) It assumes a
linear production function which means constant returns to scale and constant production
functions for each firm within an industry, (2) Output is assumed to be homogenous, (3)
It assumes that there are no constraints on the supply of any commodity, and, (4) It
assumes that the “full employment” is maintained.
Despite these assumptions, it can still be considered as a suitable method for
economic impact an analysis of tourism (Fletcher, 1999).
CHAPTER IVMETHODOLOGY
Research Design and Sources of Data
The study applied a combination of descriptive analysis and input-output framework
in the assessment of the economic impact of tourism. Secondary data were utilized
wherein the sources of data are the Department of Tourism (DOT) and Philippine
Tourism Satellite Accounts (PTSA) of the National Statistics Coordination Board
(NSCB). Moreover, the latest NSCB national input-output table of 2000 was used by the
study.
To have an overview on the status and trends of the Philippine Tourism, descriptive
analysis was carried-out using the indicators provided by the DOT and PTSA. It includes
data on tourist receipts including average tourist expenditure, average length of stay and
visitor arrivals.
Moreover, to identify the sectors and subsectors, the study followed the sector
classification provided by the PTSA. The linkages of the sectors and subsectors that were
identified as related to tourism were evaluated using input-output (I-O) analysis that
provides the interrelationship between sectors as depicted by the I-O coefficients.
Using the NSCB latest input-output table of 2000, the impact of tourism expenditure
on output, income, employment, indirect taxes, and imports were estimated.
Data Analysis
In tourism, tourist expenditure has repercussive effects throughout the economy.
Aside from the direct effects, tourist expenditure also has indirect effects in other industry
aside from those who directly receive tourism income. Using the I-O analysis, the impact
of change in the final domestic demand generated by tourism on the economy was
examined. The input-output multipliers provides the detailed picture on the impact of the
tourism expenditure on output, income and employment throughout the locality.
Using input-output analysis, the effect on output was calculated as:
X=(I-A)-1 Dt (5)
Where: X= column vector of domestic output generated(I-A)-1= Leontief inverseI= identity matrixA= input-output coefficients matrixDt= vector of tourist expenditure, and, t= sectors
Using the formula above, the impact on output was estimated by multiplying the
tourist expenditure vector by Leontief inverse matrix.
The income generated for each sectors was obtained using the formula:
Inc= W (I-A)-1 Dt (6)
Where: W is the labor-income coefficient (ratio of wages to gross output of each sector)
Using the formula, income impact for each sector was obtained by multiplying the
labor-income coefficients which is equivalent to ratio of wages to gross-output of each
sector by the inverse coefficients and tourism expenditure (Albqami, 2000).The wages or
compensation and the gross output data was derived from the input-output (I-O) table.
Moreover, the impact on employment from other sectors was calculated as:
E= L(I-A)-1 Dt (7)
Where: L is the labor-output ratios
Impact on employment was estimated by multiplying the labor-output ratios by the
inverse coefficient and tourist expenditure (Albqami, 2000).
Impact on the indirect tax payments to government was estimated using the following
formula:
S= St (X) (8)
Where: S= vector of net indirect taxes (less subsidies)St= diagonal matrix of net indirect tax coefficientsX= matrix of total output requirements.
From the formula, impact on taxes was estimated in terms of the indirect taxes less
subsidies by multiplying the diagonal matrix of net indirect tax coefficients from the I-O
table and the matrix of the total output requirements. (Albqami, 2000)
Moreover, the impact on imports was obtained using the I-O model. To obtain the
estimates on the total import requirements, the following formula was used:
M= M t (X) (9)
Where: M= vector of sectoral import requirementsMt= diagonal matrix of sectoral imported input coefficientsX= matrix of total output requirements.
Thus, using the formula discussed above, the impact of tourism expenditures in terms
of output, income, employment, indirect taxes and imports were obtained.
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