MULTIPLIER EFFECTS
What is the multiplier process? An initial change in aggregate demand can have a much greater final impact on equilibrium national income
It comes about because injections of new demand for goods and services into the circular flow of income stimulate further rounds of spending – in other words “one person’s spending is another’s income”
This can lead to a bigger eventual effect on output and employment
When there is an increase in spending, business revenue will also increase. It will cause increase in income as well as employment. The increase on income will cause changes in customer spending. When consumer keeps on spending, the money will go back to the business as revenue.
In case of hospitality industry, when a new hotel is set up, it will create job opportunities and supplier will increase as well. It will result in other companies attracted to the area, more jobs are indirectly created and workers will spend their money in that area that make taxes increases. The taxes will be spends on improving infrastructure, superstructure, image and tourists services. The area will become a popular place for tourist’s destination; it will increase profit and revenue for re-investment. Then the money will be lost through leakage however the money will come back again to the economy system through injection or consumer spending.
Factors that affect the value of the multiplier effect
The higher is the propensity to consume domestically produced goods and services, the greater is the multiplier effect. The government can influence the size of the multiplier through changes in direct taxes. For example, a cut in the rate of income tax will increase the amount of extra income that can be spent on further goods and services
Propensity to purchase imports. If, out of extra income, people spend their money on imports, this demand is not passed on in the form of fresh spending on domestically produced output. It leaks away from the circular flow of income and spending, reducing the size of the multiplier.
The multiplier process also requires that there is sufficient spare capacity for extra output to be produced.
If short-run aggregate supply is inelastic, the full multiplier effect is unlikely to occur, because increases in AD will lead to higher prices rather than a full increase in real national output. In contrast, when SRAS is perfectly elastic a rise in aggregate demand causes a large increase in national output.
In short – the multiplier effect will be larger when
The propensity to spend extra income on domestic goods and services is high The marginal rate of tax on extra income is low
The propensity to spend extra income rather than save is high
Consumer confidence is high (this affects willingness to spend gains in income) Businesses in the economy have the capacity to expand production to meet increases
in demand
The formal calculation for the value of the multiplier is Multiplier = 1 / (sum of the propensity to save + tax + import)
MULTIPLIER
Multiplier in economic is a medium that is used to measure sectorial contribution towards local GDP. The type of multiplier will vary depending on the variety of sectors, for example tourism sector would use tourism multiplier, while agriculture sector would use agriculture multiplier. The size of multiplier would depend on the total leakages that happened in the sector itself, as a leakage could cause shortage in income and capital. Besides calculating the sectorial contribution, multiplier is also used to measure direct, indirect and induced effects of the economic sector. Direct effects related to the effects caused by arise spending done by consumer in certain industry, while indirect effects is the effect caused by arise spending towards those that support the industry. Induced effects are a result of direct/indirect spending money in the community.
Employment Multiplier
An employment multiplier measures the amount of direct, indirect and induced jobs created (or lost) in the area. In tourism sector, generally employment multiplier calculates how much additional employment generated for each $1 spends by tourists, suppliers, and employees in the local economy.
Income Multiplier
An income multiplier is a tool that is used to measure the impact of particular industry will receive from the amount of direct, indirect, and induced income generated in the area. In tourism sector, this means that how much additional income is generated in local economy for each $1 spends by tourists directly in tourism activities, or supplier and employees spending.
Output Multiplier
Output is a generic term for a tangible good or an intangible service that is the end result of the production/resource transformation process. This could also mean the final sales of one industry in economic sector. Relating it to multiplier, output multiplier is a tool to measure the amount of direct, indirect, and induced sales generated in the local economy. While for tourism sector, this means that how much additional sales is generated in the local economy from each $1 spends by tourists, suppliers, and employees spending.
INDONESIA’S TOURISM SIZE OF MULTIPLIER
Based on the data that we obtained from WTTC reports of Indonesia’s tourism impact analysis, we divided our search of multiplier to three aspects, which are Output, Employment and Income. For our study regarding Indonesia’s tourism in 2011, we will be using Type III Multiplier, as the data that we obtained includes as well the induced effect of the spending from tourism activities.
Multiplier Remarks
Output/ Sales Multiplier
Multiplier = Direct + (Indirect + Induced) / Direct Effects = 231,972 + 156,080 / 231,972
Based on the calculation above, we can see the size of output multiplier for Indonesia’s tourism in 2011 was 1.67. This means that every $1 spend in tourism activities, both from tourists direct spending as well as suppliers and employees spending in tourism industry will generate additional of $1.67 sales towards the local economy.
(data is on million $)
Multiplier Remarks
Income Multiplier Multiplier = Direct + (Indirect + Induced) / Direct Effects = 25 + 48/ 25
= 2.92
Based on the calculation above, we can see the size of income multiplier for Indonesia’s tourism in 2011 was 2.92. This means that every $1 spend in tourism activities, both from tourists direct spending as well as suppliers and employees spending in tourism industry will generate additional of $2.92 income towards the local economy.
Multiplier Remarks
Employment Multiplier Multiplier = Direct + (Indirect + Induced) / Direct Effects = 2,900 + 5,709/ 2,900
Based on the calculation above, we can see the size of employment multiplier for Indonesia’s tourism in 2011 was 2.97. This means that every $1 spend in tourism activities, both from tourists direct spending as well as suppliers and employees spending in tourism industry will generate additional of estimated 3 new employments towards the local economy.
LEAKAGES
In economy, leakage means a condition where the capital or income exits the economy.
Based on Keynesian leakage-injection model above (which shows the circular flow between national income, output, consumption, and factor payments) Savings, taxes, and imports are "leaked" out of the main flow, reducing the money available in the rest of the economy. This situation occurs when income is taken out through taxes, savings and imports. The exits of money through leakages may cause shortage in capital, and effecting on the local companies and industries to have to look for alternative of funds. Therefore, Government would inject their money to the economy system in this state to help covering the shortage of capital, as well as making policies to reduce leakages, as leakages cannot be stopped but only can be reduced.
Leakage happens to both open economy countries and closed economy countries. In a closed economy country, the country does not do any import and export, therefore the leakages happened domestically through savings and taxes. In open economy countries where import and export activities are included, the leakages happened through savings, taxations and imports.
In tourism sector, leakages occur when revenues from tourism-related economic activities in destination countries are not available for investment or consumption of goods and services
in the same countries. The income 'leak away' from the destination country to another country, particularly when the tourism company is based abroad and when tourism-related goods and services are being imported to the destination countries.
Therefore, there are two indicators that we could use to measure the leakage effects. Firstly, the leakage effects can be assessed using the net balance of foreign exchange (the difference between earnings from tourist expenditure and the input imports for tourism), or the net foreign exchange earnings ratio for tourism. Another indicator is the import multiplier, which measures the amount of imported inputs required for every unit of output consumed by tourists. (UNCTAD, New York & Geneva, 2007)
LEAKAGES SOURCES IN INDONESIA’S TOURISM
Indonesia is one of the countries that run the open economy system, whereby the import and export activities are included.
Based on the statistics that we obtained from WTTC (World Travel & Tourism Council)
report of Indonesia in 2011 above, it shows that Indonesia’s tourism leakage is quite low and normal compared to the bigger sector such as auto manufacturing and chemicals.
In the statistic that shows import indicator of leakages, we can see that travel & tourism sector in Indonesia experienced around 12% leakages of economy through imports of goods and services per $100 spend by tourists, both from supplier imports of input to serve tourists, as well as direct imports that the tourists bring to Indonesia with precisely around 4% for the supplier imports and mere 8% for the direct imports done by tourists.
In summary, every $100 spends by tourists in travel & tourism activities in Indonesia, a mere $12 is leaked out from the economy system. Considering the percentage compared to other sector such as auto manufacturing and chemicals which experienced estimated $37 and $32
of money leakages for every $100 spends in each sector, the leakage in tourism sector is considered as low.
SPILLOVER EFFECTS OF TOURISM INDONESIA
In economy, spillover effects means the effect that one sector brings to other sectors for each sales generated.
Based on the WTTC statistic above that shows the correlation between Travel & Tourism sector with other sectors in Indonesia which linked through supply chains and spread of incomes, each $1 million sales generated from travel & tourism activity would bring up until mere $133,000 gross value added to other sectors. The biggest sector that affected by sales from travel & tourism sector is agriculture sector, because Indonesia concentrated a lot on agriculture product (especially rice) since agriculture sector is also one of the biggest contributors of GDP. Therefore the government would always concentrate the additional revenue to develop agriculture sector.
While the second biggest sector that receives value added is wholesale and retail sector that receives mere $82,000 of gross value added from every $1 million sales of travel and tourism sector. This means that Travel & Tourism sector is one of the influential sectors in Indonesia as it brings much gross value added to other sectors, and at the same time having quite low percentage of money leakages which is very profitable.
LIMITATIONS OF IMPACT ANALYSIS
There are six factors or limitations are discussed when linking it to the impact analysis: 1. Permanent vs temporary increases in visitor numbers (and expenditure)
2. Progressive increases in visitor numbers 3. The threshold or scale effect
4. The source of data on the multipliers
5. The relative sizes of the autonomous increase in visitor numbers and expenditure 6. The relative size of tourism in the region's economy.
1. Permanent versus temporary increases in visitor numbers and expenditure
A feature of the multiplier process is that the increase must be permanent if the induced impact is to ensue. For example, if the number of tourists visiting a region increases by l000 in a particular month, the multiplier process ensues only if the higher total number of visitors applies in each succeeding month. Thus if the total number of tourists in October rises by 1000 to 20,000, and then declines back to 19,000 in the following months, there is no permanent multiplier impact (or more correctly, there is a positive effect in October followed by an equal negative effect in November so the permanent impact is zero). Therefore, as from the study we conduct regarding Indonesia’s tourism in 2011, we cannot see nor know will the Indonesia’s tourism increase last in the following years ahead.
2. Progressive increases in visitor numbers and expenditure
A one-off permanent increase in tourist numbers and expenditure will raise the region's employment and GDP levels but not in a continuing trends. Multiplier impact of the region's economy will give a new higher level of employment or GDP but not a level that progressively increases. For the expansion of tourism to contribute to a progressively rising level of employment or GDP, tourist numbers and tourist expenditure must also progressively increase over time, thus there will be no further stimulus if the increase in visitor numbers does not occur on a continuing basis. The impact analysis that we conduct could not also measures the trends in years ahead whether the number of visitors would increase continuously, therefore we cannot estimate whether the number of visitors that come to Indonesia would increase or decrease in the future.
3. The threshold or scale effect
One of the most important factors not considered in the application of a country’s multiplier s is the threshold or scale effect. The multiplier that we calculate is only an average ratio of additional sales, revenue, and employment generated in Indonesia’s economy and couldn’t be used to measures scale effect precisely.
4. The source of the data on multipliers
A very important consideration in applying a multiplier to any region is how and when the regional multiplier was estimated, and from where (which region) the relevant data were obtained. The reason for this is that each region has a different industry structure, and there is no a prior reason to suppose that estimates obtained from an empirical study of one region will apply to another region.
The danger of doing this in practice is that the structure of economic activity is not the same in all countries, and each country has its own distinctive economy. The region's industry structure, and technology used will change gradually over time, especially when the region's economy is growing. Therefore, since we have collected the date from WTTC, it may not be
accurate compared to the very own statistics that is own by Indonesia itself, and the prediction that comes out from it may not be accurate either because Indonesia is a developing country that is growing from time to time.
5. The relative size of the autonomous increase in tourism numbers and expenditure and the relative size of tourism in the region's economy
In assessing the impact of one particular project or development on a region, it is also important to relate that impact to the size of the regional economy. The impact on the region's economy (e.g., GDP) depends on three elements. The first is the relative size of the autonomous increase, or the initial increase in final expenditure or employment in given industry (e.g., tourism).
The second is the relative size of the given industry in the overall economy, that is the proportion of the region's GDP or employment accounted for by that industry.
The third is the extent to which the expansion of the given industry's output affects the output of other industries in the region (through increased purchases of intermediate inputs from these industries) or industries in other regions (through increased imports) as indicated by the value added multiplier.
The expansion of a given industry will have the greatest impact on the region's economy the larger the growth rate of that industry, the larger its contribution to the region's GDP or employment, and the larger the value added multiplier.
