©2005 Monetary Authority of Macao

A Review of Economic Impact Analysis for Tourism

and Its Implications for Macao

Jay W. Pao

Abstract

The importance of tourism in economic developments of many countries is well

documented, and the contribution of tourism to economic growth has long been a
subject of great interest from a policy perspective. Although tourism is a leading
industry in Macao, specific research on its economic impacts on the territory is
basically lacking. This paper presents alternative methods of economic impact
analysis for tourism. Through reviewing extant literatures, this paper attempts to
draw some lesson for future impact studies of Macao tourism.

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 A Review of Economic Impact Analysis for Tourism and Its Implications for Macao

1. Introduction

Tourism has burgeoned in the last two decades worldwide and outshined traditional
industries to become one of the world’s largest and fastest growing economic
activities. The view that tourism is an export industry is of considerable appeal to
communities in search of economic development. Its growth has had large impact on
employment, foreign exchange earnings, balance of payments and the economy in
general.

Although tourism has become a conspicuously large and fast-growing industry,

pertinent economic analyses have been somewhat limited, possibly because it is not a
single industry but rather comprises businesses from numerous industrial
classifications (Tooman 1997). However, most of the studies since the 1980s have, in
particular, measured the impacts of tourism operations on employment, income or
overall economic activity.

According to the estimates from the World Travel and Tourism Council (WTTC) in
2004, tourism generates around 214.7 million jobs worldwide (or 8.1% of world
employment) and accounts for over 10% of global gross domestic product (GDP).
The recent expansion and proliferation of tourism has spurred debates at all levels of
government around the world. There may be debates about the precise scale of
tourism’s impact on the world economy, but few would argue against its major
contribution.

In Macao, tourism plays a significant role in the economy while its development is
closely linked to gaming. It is a major source of tax revenues for the SAR
Government, and has exhibited promising long-term prospects. Over the past decade,
the average growth in tourism receipts has been double that of Macao’s GDP (Pao
2004). The impacts brought about by the ups and downs of the leading industry are
hence worthwhile for in-depth studies.

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 A Review of Economic Impact Analysis for Tourism and Its Implications for Macao

This paper attempts to provide some fundamental concepts for estimating the impacts
of tourism on the Macao economy. The remainder of the paper is structured as
follows. Section 2 introduces concepts of economic impact analysis for tourism.
Section 3 reviews and discusses the alternative methods of economic impact analysis
and their applications. Concluding remarks are drawn in the final section.

2. The Conceptual Foundation of Economic Impact Analysis for Tourism

In general, economic impact analysis estimates the changes in economic activity

within a region resulting from some action. Archer (1989) states that impact analysis
is an economic approach used to measure inter alia the amount of income,
government revenue, employment and import generated in an economy by the direct
and secondary (indirect and induced) effects of visitor expenditure. Direct effects are
the changes in the industries associated directly with visitor spending. For example,
$100 spent on lodging will directly increase sales in the hotel sector. This is the direct
sales effect of the visitor spending. The hotel will hire employees and pay salaries,
creating direct employment and income effects.

Indirect effects are sales, income, or jobs resulting from secondary rounds of
purchases the hotel makes to other linked industries in the region. In the previous
example, a hotel buys linen supply and food from other industries to deliver the
services to its customers. The linen company, on the other hand, also buys raw
materials and equipment such as cotton and machinery from other industries. The
sales of these linked industries and the associated income and jobs generated from
these sales come from indirect effects. Induced effects are related to sales, income or
jobs resulting from household spending as a result of income earned from visitor
spending (either directly or indirectly). The employees of hotels and catering
companies, for instance, will spend their salaries in the region and hence generate new
rounds of sales, income and jobs.

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 A Review of Economic Impact Analysis for Tourism and Its Implications for Macao

At each stage, however, some visitor expenditure is lost to the system because it is
used to purchase imported goods and services1 and some induced expenditure may be
partially lost through savings. These losses from the system are generally referred to
as leakages.

Clearly then the initial expenditure by visitors can have significant additional effects
throughout the rest of the economy, resulting in increased income and expenditure by
a wide range of household groups not necessarily directly connected with tourism.
This process of spending and re-spending is commonly described as the “multiplier”
effect. As pointed out in Archer (1982), the term of multiplier is used to describe the
final change in output in an economy relative to the initial change in visitor
expenditure and is central to any measure of the economic impact of tourism.
Generally speaking, the larger the multiplier, the greater the impact an unit of visitor
spending will have on the region’s economy.

Multipliers2 capture the size of all effects, usually expressed as a ratio of total effects
to direct effects (Miller and Blair 1985). For example, the sales multiplier for the
lodging industry was 1.5 in a region. This means that a visitor spending $100 on
lodging will have a total effect of $150 in sales within the region; that is, $100
received by the hotel as direct sales effect and another $50 received by other related
industries in the region as secondary effect. As a result, the true impact of tourism is
not simply the actual expenditure by visitors.

In applying an economic model, economic impact analysis can produce estimates of

the total economic impact of holding a sport event, operating a museum, and other
actions that will influence an economy. Furthermore, economic impact analysis also
helps policy analysts and decision makers to evaluate current and proposed projects by

1
In many small island economies, as mush as 50% of visitor expenditure may be lost overseas, with
food and beverages often found to have particularly high import content. See Wilkinson (1987) for
example.
2
Different multiplier values can be calculated depending on which outcome is of interest. Output
multiplier, for instance, measures the impact of visitor expenditure on the output of an economy.
Income multiplier measures the impact on income, and employment multiplier measures the impact on
employment.

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 A Review of Economic Impact Analysis for Tourism and Its Implications for Macao

providing estimates that are measurable and comparable. Clawson and Knetsch (1966)
claim that economic impact analysis can provide tangible estimates of tourism’s
contribution to an economy. The economic contribution under consideration often
results in public policies or decisions that are favourable to tourism development.

3. Methods of Economic Impact Analysis and their Applications to Tourism

The previous section highlights concepts of economic impact analysis for tourism.
However, any assessment of the overall economic impact of tourism requires detailed
information relating to visitor expenditures, prices, tax revenues, and expenditures by
other sectors of the economy. The problem remains that relevant data and
information are often insufficient. And yet if governments are to make sensible
decisions regarding the future development of the tourism sector, a rigorous and
reliable measure of the impacts (covering both benefits and costs) is essential.

The fundamental problem of measuring the impact of visitor spending is simply that
tourism does not exist as a distinct sector in any system of national accounts.
However, as concluded in Fletcher (1994), tourism is essentially an activity that is
defined by consumers at the point of consumption. In fact, a very large proportion of
visitor expenditure goes into identifiable tourism characteristic sectors such as
transport, hotels, recreation, etc. Yet, visitors will also spend money in other sectors –
clothing, gifts and food – which are not normally associated with tourism. In this
context, any attempt to examine the economic contribution of tourism, which looks at
the United Nations’ System of National Accounts (SNA) only and considers only
what might be classified as tourism-related sectors is likely to under-estimate the
visitor expenditure and hence its economic impacts.

Given that the economic contribution of tourism is spread across different sectors, it is
consequently very difficult to identify how tourism can contribute to an economy by
using standard national accounts and existing statistical resources. In the early stage,

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 A Review of Economic Impact Analysis for Tourism and Its Implications for Macao

economic impact analysis for tourism relies on the simple Keynesian multiplier stated
as follows (Archer 1982):

1
Multiplier =
1− c + m

where c is the marginal propensity to consume and m is the marginal propensity to

import. Essentially, the basic model shows that the multiplier is calculated by
dividing a unit of visitor expenditure by the proportion of it “leaking” out of the
economic system due to savings and spending on imports.

Archer (1973) provides one approach to apply the Keynesian multiplier to tourism
and recreation. While adapting the basic model, Archer’s tourism regional multiplier
approach includes two important components for tourism applications – the
propensity of consumption by different visitor segments, and shares of visitor
spending in different industries. With this context, the multiplier approach is
equivalent to the aggregation of multipliers for different sectors. For each sector, its
multiplier is weighted in proportion to visitor spending it receives. Overall, the key
concept of his study is that the multiplier not only represents the tourism development
of an economy, but also reflects visitor-spending profiles.

Keynesian multipliers are relatively straightforward to calculate and provide a quick

and simple way of assessing the overall magnitude of a change in visitor expenditure.
However, such multipliers only give a rather limited and partial perspective on the
impact of tourism, not least because they focus on simple aggregates and are unable to
address the nature of linkages between sectors (Cooper et al. 1998).

Consequently, interest has moved towards the use of general equilibrium techniques
such as Input-Output (I-O) analysis. 3 I-O analysis is a method of tabulating an
economic system in matrix form (I-O table) to show as rows the sales made by each

3
The I-O analysis is based on the pioneering research by Wassily Liontief in the late 1930s, for which
he later received the 1973 Nobel Prize in Economic Science. For details about the I-O analysis, please
refer to Akundi (2003) and Fetcher (1989).

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 A Review of Economic Impact Analysis for Tourism and Its Implications for Macao

sector of the economy to each of the other sectors and as columns the purchases made
by each sector from each of the others. The I-O method analyses the effects of
tourism by charting the movement of initial visitor expenditure through different
sectors of an economy. A simplified I-O model is illustrated as below:

X - AX = Y

where X and Y are the respective vectors of output and final demand and A is the
matrix of technical coefficient. By restoring an identity matrix I to the equation, it
can be written as:

(I - A) * X = Y
or X = (I - A)-1 Y

where (I - A)-1 is the “Leontief Inverse Matrix” or called “Inter-industry

Interdependence Coefficient Matrix”.

The elements of the matrix represent the purchases from one industry to others in
order to produce another unit of output for the final demand. Since multiplying this
matrix by a vector of final demand Y will produce output X, this matrix also
represents the multiplier effect. In general, the more a region is self-sufficient and
purchases goods and services from within the region, the higher the multiplier would
be for the region.

The use of the I-O analysis to estimate economic impacts of tourism has become
increasingly popular because of its ability to provide accurate and detailed
information. Loomis and Walsh (1997) conclude that the major strength of the I-O
analysis is that it provides detailed information on direct, indirect and induced effects
of visitor spending on all economic measures for different industries in the local
economy. In addition, Fletcher (1989) asserts that the I-O technique is particularly
valuable for the measurement of second and further round economic effects of
tourism.

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 A Review of Economic Impact Analysis for Tourism and Its Implications for Macao

Despite its elegance, the I-O technique is not without drawback. As pointed out by
Fletcher (1989), it is a relatively expensive tool of analysis in terms of both time and
financial/manpower resources. Most secondary data is unsuitable for this method of
analysis, because it is rarely accurate at the level of detail needed in I-O models and,
in most cases, inter-sectoral transaction data is not available at all. It is suggested that
“where the lack of available data and resources prevent the researcher from
constructing a complete I-O model, it is possible to construct ‘hybrid’ models which
only desegregate the tourism-related sectors and present the rest of the economy as a
single sector of local production”. Fletcher (1989) applies this method to the
Republic of Palau, the Solomon Islands and Western Samoa and concludes that in
large economies with strong inter-sectoral links, application of this method would not
be satisfactory.

Furthermore, the I-O model is essentially linear and static. It does not allow for factor
substitution between sectors, and prices are taken as given (Zhou et al. 1997). In
reality, a change in visitor expenditure would result in changes in both quantity supply
and prices.4

Computable General Equilibrium5 (CGE) models have their historical origins in the I-
O methodology, but have been developed to overcome many shortcomings of I-O
models. Conceptually, CGE models include more general specifications of the
behaviours of consumers, producers and investors than those allowed in I-O models.
They treat an economy as a whole, allowing for feedback effects of one sector on
another. CGE models can make explicit assumptions about government policy
settings, and can incorporate more realistic set of an economy. In particular, CGE
modelling can allow for detailed inter-industry analysis together with an active price
mechanism.

4
For example, the business sector would experience an increase in demand resulting from higher
visitor expenditure, and hence prices and wages would rise.
5
CGE modelling is an approach to economic analysis that combines a general equilibrium setting with
numerical simulation. See Greenaway et al. (1994) for a general introduction and survey of the CGE
literature.

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 A Review of Economic Impact Analysis for Tourism and Its Implications for Macao

Typically, CGE models have been intensively used in the fields of international trade,
economic development, agricultural economics and environmental economics
(Greenaway et al. 1994). Over the last couple of years, however, there have been
initial applications of CGE models to the tourism field in many countries such as
Australia (Adams and Parmenter 1995), Hawaii (Zhou et al. 1997), Spain (Blake
2000), the UK (Blake et al. 2001) and the US (Blake and Sinclair 2002).

Broadly speaking, the construction of a CGE model is a process of setting up a series

of markets (for goods, services and factors of production), production sectors and
household demand groups (Shoven and Whalley 1992a, 1992b; Greenaway et al.
1994). Each market, sector or household has its own set of economic rules that
determine how it reacts to external changes. By setting up the economic conditions
whereby each market, sector or household reacts to changes in the economy, a CGE
model can then represent a variety of possible scenarios. With this context, this gives
CGE models a significant advantage in flexibility over other forms of modelling.

Zhou et al. (1997) analyse the economic impact of a decline of tourism demand in
Hawaii, and in doing so they draw comparisons as to the effectiveness of the I-O and
CGE analyses. They simulate a 10% decline in visitor expenditures in Hawaii’s CGE
and I-O models and compare the two results. It is found that a decline in visitor
expenditures reduces outputs in typical tourism sectors such as hotels, transportation,
restaurants and bars, with smaller reduction in outputs for other sectors. Generally, I-
O results provide estimates with larger magnitudes than CGE results because the I-O
model does not allow prices to fall. The CGE model apparently has specific
advantages such as the ability to account for resource flows between sectors, to show
price effects and to allow greater modelling flexibility.

Separately, Blake et al. (2001) use a CGE model to analyse the impact of foot-and-
mouth disease in the UK on tourism and on the rest of the economy. Among their key
findings is that the tourism revenue in 2001 fell by almost GBP7.5 billion and that
around 21% of this amount was attributable to a fall in domestic tourism, with
Scotland and London being the regions most affected. Overall, one of the important

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 A Review of Economic Impact Analysis for Tourism and Its Implications for Macao

contributions of this study is to demonstrate that the impact of foot-and-mouth disease

on tourism was far greater and more economically significant than its impact on
agriculture.

Meanwhile, the Tourism Satellite Account 6 (TSA) is also gaining attention among
those concerned with measuring the contribution of tourism to national economies as
it links to the existing SNA. As Smith (1997) points out, the term “satellite” refers to
the fact that the TSA is developed as an extension or satellite of the I-O framework of
the SNA.

The TSA is built on information from existing national accounts and also allows for
new information to be incorporated. It takes information from the SNA about what
industries produce and what inputs they use (I-O tables). Smith (1995) states that the
TSA provides the basis for the calculation of industry value-added (i.e. the difference
between the value of the outputs provided by an industry and the value of the inputs
that it uses), which, when summed, provides an estimate of GDP. The impact of a
change in final demand can be estimated using information from the I-O table.

For example, the effect of an increase in demand for hotel accommodation can be
traced through to increases in demand for the inputs used by the hotel industry
(including capital, labour and intermediate goods). Alongside the I-O table, the TSA
also uses estimates of visitor expenditure (usually based on visitor expenditure
surveys) and allocate visitor expenditures to different industries. By allocating visitor
expenditures by sector and then apportioning value added by sector, the TSA could
provide an estimate of overall value added through tourism and thus identify
tourism’s contribution to GDP (Smith 1997).

6
According to Paci (1998), the SNA adopted by the United Nations Statistical Commission in 1993
recommends the use of a new reporting concept called “satellite accounts” to expand the analytical
capacity of national accounting for selected areas, in a flexible manner without overburdening or
disrupting the central system. The TSA is one of the very first satellite accounts to have been
developed out of these conceptual underpinnings.

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 A Review of Economic Impact Analysis for Tourism and Its Implications for Macao

According to Paci (1998), Canada was the first country to release the results of its
TSA in October 1994. Since then, a number of countries in Europe (including France,
Poland and the UK), America (including Mexico, the Dominican Republic, Chile and
Colombia), Asia (i.e. Singapore, Indonesia and India) and Australia have undertaken
assessment programmers for the development of TSA.

However, differences often appear in objective and methodology among statistics

compilers. For example, the goal of the World Tourism Organization (WTO) is to
develop a TSA which could be applied universally and which, as stated above, are
fully consistent with the concepts and spirit of the SNA. The goal of the WTTC, in
contrast, is to convince governments of the world of the enormous contribution of
travel and tourism to national and world economic development, promote expansion
of travel and tourism markets in harmony with the environment and eliminate barriers
to growth of the industry (WTTC 1993). For this reason, Smith (1997) argues that
part of the WTTC’s strategy is to develop a methodology to generate the largest
number possible to illustrate the “enormous contribution of Travel & Tourism”. 7
For example, the WTTC estimate on tourism contribution in Canada is said to be
three times larger than the estimate of the Statistics Canada, and the Statistics Canada
also disagrees with the WTTC about how to estimate the size of the tourism industry.

Overall, it is worthwhile to note that the TSA typically concentrates on measuring the
direct and indirect impacts of visitor expenditures, and tends to ignore the issue of the
induced effects as discussed earlier. However, it provides basic and important
contents that can serve as a starting point for analysing the economic impact of
tourism.

7
As pointed out in Smith (1997), the WTO defines tourism as a subset of travel. Certain categories of
travellers, such as border workers, migrants, refugees, and students are excluded from the WTO’s
definition of tourism. In contrast, the WTTC adopts a much broader definition.

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 A Review of Economic Impact Analysis for Tourism and Its Implications for Macao

4. Concluding Remarks

Tourism is an activity integrated in the economic system, and it plays an important

role in an economy by stimulating other economic activities through multiplier effects.
The economic impact of tourism has long been a subject of interest to academics and
policy makers. However, the difficulty in measuring the impact, due to the fact that
tourism is not a distinct sector in the SNA and comprises business from numerous
industries, has given rise to considerable debates.

Traditionally, tourism impact models have relied on I-O modelling. More recently,
there have been initial applications of CGE models in the tourism field. I-O models
rely on a number of assumptions, such as fixed prices and fixed coefficients for
production, while CGE models provide more general approach. In particular, when
taking account of the interrelationships between different sectors within an economy,
CGE models allow prices to vary and resources to be reallocated between production
sectors.

Apart from the above-mentioned models, the TSA represents a major step forward in
the measurement of the economic impact of tourism as it links to the existing SNA.
The TSA uses data from national accounts, and is constructed based on national
accounting principles. With this context, the TSA provides an internationally
recognised and standardised method of assessing the scale and impact of visitor
spending. Furthermore, it can even provide a foundation for more sophisticated
analyses of the impact of tourism and the assessment of different policy regimes using
techniques such as CGE modelling.

While major economic impact models are introduced in this paper, none of them is
able to capture all dimensions and changes in the tourism industry. In applying
economic models to tourism, we can rarely select a suitable model “off the shelf”
without considerable modification. The choice of a suitable model requires good
judgement to be exercised, and it is hoped that this review of existing models and
concepts could provide a useful starting point for future research on economic impacts
of the Macao tourism.

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