ECONOMIC IMPACTS OF TOURISM: A Handbook for Tourism Professionals

Transcription

1 ECONOMIC IMPACTS OF TOURISM: A Handbook for Tourism Professionals Illinois Bureau of Tourism Illinois Department of Commerce and Community Affairs Prepared by the Tourism Research Laboratory at the University of Illinois at Urbana-Champaign. AUTHOR Daniel J. Stynes Professor Department of Park, Recreation and Tourism Resources Michigan State University East Lansing, Michigan Editor: Vanessa Arnold Tourism Research Laboratory Fall, 1997

2 ECONOMIC IMPACTS OF TOURISM: A Handbook for Tourism Professionals Introduction Chapter I. What is an Economic Impact Analysis? Chapter II. What Issues Does a Tourism Economic Impact Assessment Address? Common Tourism Applications for an EIA....8 Examples of Tourism Economic Impact Studies Chapter III. What Economic Impacts Does Tourism Have? Direct and Secondary Economic Effects Input-Output Models Illustration Economic Impacts Typically Ignored in EIA s Chapter IV. What Are Multiplier Effects? Chapter V. How Does One Measure Tourism s Economic Impacts? Various Approaches Chapter VI. How Does One Design a Tourism Economic Impact Study?...22 Chapter VII. How Does One Evaluate/Interpret a Tourism Economic Impact Study? Chapter VIII. What Does an Economic Impact Study Cost? Bibliography

3 INTRODUCTION Businesses and public organizations are increasingly interested in the economic impacts of tourism at national, state, and local levels. One regularly hears claims that tourism supports a certain number of jobs in an area, or that a festival or special event generated a specific amount of sales or income in a community. Multiplier effects are often cited to capture the secondary effects of tourism spending, and to show the wide range of sectors in a community which may benefit from tourism. Tourism s economic benefits are touted by the industry for a variety of reasons. For one, claims of tourism s economic significance lend the industry an air of increased respectability in the eyes of the business community, public officials, and the general public: this often translates into decisions or public policies favorable to tourism. Also, community support is important for tourism; the industry affects and is affected by the entire community. Tourism also involves economic costs: the direct costs incurred by tourism businesses; government costs for tourism infrastructure; and related costs, (such as inflated prices), borne by individuals in the community. Community decisions over tourism often involve debates between industry supporters touting tourism s economic impacts, and opponents emphasizing tourism s costs. Sound decisions should be based on a balanced assessment of benefits and costs, and on an understanding of who will gain as a result of tourism and who will pay for it. Tourism=s economic impacts are, therefore, an important consideration in economic development, in state, regional and community planning, and in marketing and management decisions. Communities need to understand the relative importance of tourism to their region, including tourism s contribution to economic activity in the area. A variety of methods ranging from pure guesswork to complex mathematical models are used to estimate tourism s economic impacts: studies vary extensively in terms of quality and accuracy, and with respect to which aspects of tourism are included. Technical reports are often filled with economic jargon that noneconomists do not understand, while media coverage of such studies tends to oversimplify and misinterpret results. As a result, decision makers and the general public are left with a distorted or incomplete understanding of tourism s economic effects. How can the non-economist learn to interpret these studies, differentiate the good from the bad, and make informed choices? This booklet provides a systematic 3

4 introduction to economic impact concepts and methods of analysis. It is oriented toward tourism industry analysts and public officials who wish to understand, evaluate, or conduct economic impact assessments. We address eight basic questions relevant to the economic impacts of tourism: 1. What is an economic impact analysis? 2. What issues does a tourism economic impact assessment address? 3. What economic impacts does tourism have? 4. What are multiplier effects? 5. How does one measure tourism s economic impacts? 6. How does one design a tourism economic impact study? 7. How does one evaluate/interpret a tourism economic impact study? 8. What does an economic impact study cost? 4

5 CHAPTER I: WHAT IS AN ECONOMIC IMPACT ANALYSIS? A variety of economic analyses are carried out to support tourism decisions: as these are frequently confused, this chapter begins by describing impact analyses. These analyses may be applied to any policy or action, but are defined here in the context of tourism. Each type of analysis is described in terms of the basic questions it answers. Economic Impact Analysis What is the contribution of tourism activity to the economy of the region? An economic impact analysis traces the flows of spending associated with tourism activity in a region to identify changes in sales, tax revenues, income and jobs due to tourism activity. The methods used to gather this information include: visitor spending surveys; analyses of secondary data from government economic statistics; economic base models; input-output models; and multipliers (Frechtling 1994a). Fiscal Impact Analysis Will government revenues from tourism activity, in the form of taxes, direct fees, and other sources, cover the additional costs for infrastructure and government services? Fiscal impact analysis identifies changes in demand for government utilities and services that have occurred as a result of some tourism-related action, and estimates the revenues and costs to local government of providing these services (Burchell and Listokin 1978). Financial Analysis Can Business X make a profit from this activity? A financial analysis determines whether a business will generate sufficient revenues to cover its costs and make a reasonable profit. It generally includes a short-term analysis of the availability and costs of start-up capital, and a longer-term analysis of debt service, operating costs and revenues. A financial analysis for a private business is analogous to a fiscal impact analysis for a local government unit. Demand Analysis How will the number or types of visitors to an area change as a result of changes in prices; promotion; competition; quality and quantity of facilities; or other demand shifters? A demand analysis predicts the number and/or types of visitors to an area via forecasting, demand or use estimation models. The number of visitors or sales is generally predicted based on judgment (Delphi method); historic trends (time series methods); or using a model that captures how visits or spending vary in reaction to key demand determinants such as population size, distance to markets, income levels, and measures of quality & competition (structural models) (Walsh 1986, Johnson and Thomas 1992). 5

6 Benefit/Cost (B/C) Analysis: Which policy will generate the highest net benefit to society over time? A B/C analysis estimates the relative economic efficiency of alternative policies by comparing benefits and costs over time. B/C analysis is frequently confused with economic impact analysis. Benefit cost analysis identifies the most efficient policies from the perspective of societal welfare, generally taking into account both monetary and non-monetary values, whereas economic impact analysis only measures benefits from actual market transactions (flows of money) and focuses on regional distribution of income, not economic efficiency. The income received by the tourism destination is largely offset by a corresponding loss of income in the origin (tourist-generating) regions, yielding only modest contributions to societal welfare. Benefit cost analysis makes use of a wide range of methods for estimating values of non-market goods and services, such as the travel cost method and contingent valuation method (Stokey and Zeckhauser, 1978; Sudgen and Williams 1978). Feasibility Study: Should this project or policy be undertaken? A feasibility study determines the feasibility of undertaking a given action taking into account political, physical, social, and economic factors. The economic aspects of a feasibility study typically involve a financial analysis and a market demand analysis to determine financial and market feasibility respectively. A feasibility study is the private sector s version of benefit cost analysis: the feasibility study focuses largely on the benefits and costs to an individual organization, while B/C analysis looks at benefits and costs to larger society (Warnell, 1986). Environmental Impact Assessment: What are the impacts of an action on the surrounding environment? An environmental impact assessment predicts the impacts of a proposed action on the environment, generally including changes in social, cultural, economic, biological, physical, and ecological systems. Economic impact assessment methods are often used along with corresponding measures and models for assessing social, cultural and environmental impacts. Methods range from simple checklists to elaborate simulation models (Williams, 1994). As each type of impact analysis is somewhat different, a given problem often calls for several kinds of analysis. An economic impact study will frequently involve a demand analysis to project levels of tourism activity. In other cases, demand is treated as exogenous or fixed, and the analysis simply predicts impacts if a given number of visitors are attracted to the area. A comprehensive impact assessment will also examine fiscal, social and environmental impacts. 6

7 Be aware that economic impact analyses by themselves provide narrow and often one-sided perspectives on the impacts of tourism, tending to emphasize only the benefits. On the other hand, environmental, social, cultural and fiscal impact studies tend to focus more on negative impacts of tourism. This occurs although there are potential negative economic impacts of tourism (e.g. seasonality and lower wage jobs), and potential positive environmental and social impacts (e.g. protection of the area s natural and cultural resources, and education of both tourists and local residents). Economic Impact Assessment (EIA): An economic impact assessment traces changes in economic activity and will identify which economic sectors benefit from tourism and its impacts. An economic impact assessment (EIA) traces changes in economic activity resulting from some action, identifies the economic sectors that benefit from tourism, and estimates resulting changes in income and employment in the region. However, EIAs usually do not assess economic efficiency, or potential environmental, social and fiscal impacts. These are important concerns if one is to be capable of making a balanced assessment, so an EIA should be one part of a broader analysis. 7

8 CHAPTER II. WHAT ISSUES DOES A TOURISM ECONOMIC IMPACT ASSESSMENT ADDRESS? An economic impact assessment determines the contribution of tourism activity to a region s economy. The basic issues addressed by an economic impact study are summarized below. An economic impact assessment also reveals the interrelationships among economic sectors, and provides estimates of the changes that take place in an economy due to some existing or proposed action. Why Conduct an Economic Impact Study?! To find out how much tourists spend! To determine how tourism impacts local businesses sales! To find out how much income tourism generates for area households and businesses! To measure the number of jobs supported by the tourism industry! To calculate the amount of tax revenue generated by tourism COMMON TOURISM APPLICATIONS FOR AN EIA EIAs are most commonly used in tourism for the following purposes: To evaluate the economic impacts of changes in tourism supply: Supply changes may take the form of a change in quantity, (e.g. the opening of new facilities, closing of existing ones, or expansions and contraction in capacity) or quality (with respect to the environment; the local infrastructure and public services that support tourism; or the local tourism products and services). To evaluate the economic impacts of changes in tourism demand: Population changes; changes in the competitive position or marketing of the region; or changing consumer tastes and preferences can alter levels of tourism activity, spending, and associated economic activity. An economic impact study estimates the magnitude and nature of these impacts. To evaluate the effects of policies and actions which affect tourism activity either directly or indirectly: Tourism depends on many factors that are frequently outside the direct control of the tourism industry. Economic impact studies provide information that helps decision makers understand the consequences of various actions on the tourism industry and other economic sectors. For example, in some regions, proposals to 8

9 increase air pollution standards are opposed by the argument that firms who cannot meet the new higher standards will have to close, with negative economic consequences. Tourism interests can sometimes counter this argument with estimates of the potential gains in income and tourism-related jobs as a result of improved visibility and air quality. To understand the economic structure and interdependencies among sectors of the economy: Tourism economic studies help us better understand the size and structure of the tourism industry in a given region and its linkages to other sectors of the economy. Such understanding is helpful when identifying potential partners for the tourism industry, and when targeting industries as part of regional economic development strategies. Issues such as economic growth, stability, and seasonality may be addressed as part of these studies. To argue for favorable treatment in allocation of resources or local tax, zoning or other policy decisions: By showing that tourism has significant economic impacts, tourism interests can often convince decision-makers to allocate more resources for tourism or to establish policies that encourage tourism. Based on demonstrated economic impacts in the local area, hotels, marinas and other tourism businesses have been granted the tax abatements and other incentives given to manufacturing firms. To compare the economic impacts of resource allocation/ policy/ management/ development proposals: Economic impact analyses are commonly used to assess the relative merits of alternatives. Using standard regional economic analysis tools, the economic contribution of expanded tourism offerings can be compared to that of alternatives such as resource extraction activities (mining, timber harvesting), or manufacturing. These tools also make it possible to compare diverse tourism development proposals: a tourism strategy that proposes outdoor recreation and camping development can be weighed against one which proposes a factory outlet mall in terms of potential economic impacts. EXAMPLES OF TOURISM ECONOMIC IMPACT STUDIES The National Park Service s Money Generation Model (MGM): This is a one-page cookbook that captures the essential elements of an economic impact analysis, though the approach it takes is extremely simple. The average spending; number of visits; and aggregate multipliers are entered on a simple worksheet: total estimates of the sales, income, employment, and tax effects of visitor spending are generated as a result. Provided the parameters are carefully 9

10 chosen, the MGM model can yield good ballpark estimates of economic impacts at minimal cost. The example cited in the bibliography estimates the impacts that visitors to Mammoth Cave National Park have on a three-county region in Kentucky. The Bureau of Economic Analysis s RIMS II Multipliers: These come from their user handbook, which explains how to apply published multipliers to estimate economic impacts. This approach starts with visitor spending divided into a number of spending categories, and applies sector-specific multipliers to estimate sales, income and employment effects. In the example referenced in the bibliography, the RIMS Multipliers are used to estimate the impacts that result from an increase in tourists visiting the state of Illinois. The MI-REC/IMPLAN System: The MI-REC system estimates the economic impacts of recreation and tourism, provides spreadsheet tools to estimate tourist spending, and applies them to regional input-output models estimated with the IMPLAN input-output modeling system. The example cited estimates impacts of tourist spending in Michigan using segments defined by residency and lodging type. 10

11 CHAPTER III: WHAT ECONOMIC IMPACTS DOES TOURISM HAVE? Tourism has a variety of economic impacts. Tourists contribute to a destination s sales, profits, jobs, tax revenues, and income. Primary tourism sectors, such as lodging, dining, transportation, amusements, and retail trade, are affected directly: most other sectors are impacted by secondary effects. An economic impact analysis of tourism activity usually focuses on regional tourism-related changes in sales, income, and employment. A standard economic impact analysis traces the path that money takes once it leaves a tourist s pocket: this is also referred to as the flows of money from tourism spending. The first flow, (direct effect), is to the businesses and government agencies to which the tourists pay money directly. The money then flows through the economy as (i) payments from these direct recipients to their suppliers, (ii) salaries and wages for households who provide labor for tourism or supporting industries, and (iii) various government taxes and charges payable by tourists, businesses and households. Continuing the fluid analogy, a leakage occurs when money escapes the economy of a region because a local consumer, (household, business or government), has purchased a product from an outside supplier. Final demand refers to sales to the final consumers of goods and services. The final consumers of tourism products are mostly households and governments. The methods used to estimate visitor spending can also be used to estimate the economic impacts of government spending to operate and maintain a park or visitor s center. DIRECT AND SECONDARY ECONOMIC EFFECTS Economists distinguish direct, indirect and induced economic effects. The total economic impact of tourism is the sum of direct, indirect and induced effects within a region. Indirect and induced effects are sometimes collectively called secondary effects. These impacts or effects may be measured in terms of gross output, sales, income, employment, or value added. Although they are often used somewhat loosely by non-economists, these terms have precise definitions that are important when interpreting economic impact study results. 11 Side Bar 3.1: Economic Effects of Tourism Direct effects:! Sales! Jobs! Tax revenues! Income levels Indirect effects:! Change in prices! Change in the quality and quantity of goods and services! Change in property and other taxes! Social and environmental changes Induced effects:! Household spending! Proprietor s increased income

12 Direct effects are production changes associated with the immediate effects of changes in tourism expenditures. For example, an increase in the number of tourists staying overnight in hotels would directly increase room sales in the hotel sector. The additional hotel sales and associated changes in hotel payments for wages, salaries, taxes, supplies and services are direct effects of the tourist spending. Indirect effects are the production changes resulting from various rounds of re-spending of the tourism industry's receipts in backward-linked industries (e.g. industries supplying products and services to hotels). Changes in sales, jobs and income in the linen supply industry, for example, represent indirect effects of changes in hotel sales. Businesses supplying products and services to the linen supply industry represent another round of indirect effects, eventually linking hotels by varying degrees to most other economic sectors in the region. Induced effects are the changes in economic activity resulting from household spending of income earned directly or indirectly as a result of tourism spending. For example, hotel and linen supply employees, supported directly or indirectly by tourism, spend their income in the local region for housing, food, transportation, and the usual array of household product and service needs. The sales, income, and jobs that result from household spending of added wage, salary, or proprietor s income are induced effects. Total Economic Impact Total Economic Impact = direct + secondary effects = direct + (indirect + Induced effects) A change in tourist spending can affect virtually every sector of the economy by means of indirect and induced effects. The magnitude of these secondary effects is directly related to the propensity of local businesses and households to purchase from local suppliers. Induced effects are easily visible when a large regional plant closes: supporting industries are hurt by the indirect effects, but the entire local economy usually suffers due to the reduction in regional household income. Retail stores may close, thereby increasing leakages as local consumers turn to outside suppliers. Similar but reversed induced effects are observable when there is a significant increase in regional jobs and household income. 12

13 INPUT-OUTPUT MODELS An input-output (I-O) model is a mathematical model that describes the flows of money between sectors within a region s economy. Flows are predicted based on the inputs that each industry must buy from every other industry to produce a dollar s worth of output. I-O models also determine the proportions of sales that go to wage and salary income, proprietor s income, and taxes. Multipliers can be estimated from input-output models based on the estimated re-circulation of spending within the region. Exports and imports are determined based on estimates of the propensity of households and firms to purchase goods and services from local sources (often called RPC s or regional purchase coefficients). The more selfsufficient a region is, the fewer the leakages, so that the multipliers are correspondingly higher. Input-output models make a number of basic assumptions: All firms in a given industry employ the same production technology and produce identical products. There are no economies or diseconomies of scale in production or factor substitution. I-O models are essentially linear: double the level of tourism activity/production and you must double all of the inputs. Analysts generally report the impact estimates as if they represent activity within a single year, although the model does not explicitly keep track of time. One must assume that the various model parameters are accurate and represent the current year. I-O models are firmly grounded in the national system of accounts which relies on a standard industrial classification system (SIC codes), and on various federal government economic censuses in which individual firms report sales, wage and salary payments and employment. I-O models are generally at least a few years out-of-date: this is not usually a problem unless the region s economy has changed significantly. An I-O model represents the region's economy at a particular point in time: tourist spending estimates are generally price adjusted to the year of the model. Multiplier computations for induced effects generally assume that jobs created by additional spending are new jobs involving the movement of new households to the area. Induced effects are computed assuming linear changes in household spending with changes in income. Estimates of induced effects are frequently inflated when these assumptions are not accurate, (for example, when new jobs are staffed by existing residents). As induced effects usually comprise the vast majority of secondary effects of tourism, they should be used with caution. 13

14 ILLUSTRATION Destination X attracts an additional 100 tourists, each spending $100 per day, for a total of $10,000 in new spending per day. If sustained over a 100-day season, the region would accumulate one million dollars in new sales. This million dollars would be distributed to lodging, restaurant, amusement and retail trade sectors in proportion to how each visitor spends their $100. Perhaps 30% of the million dollars would leak out of the region immediately to cover the costs of non-locally produced goods purchased by tourists, (only the retail margins for such imported items should normally be included as direct sales effects). The resulting $700,000 in direct sales might yield $350,000 in income within tourism industries and support 20 direct tourism jobs. Tourism industries are labor and income intensive, so a high proportion of sales translates into income and jobs. The tourism industry then buys goods and services from other local businesses, and pays out most of the $350,000 in income as wages and salaries to employees. This creates secondary economic effects in the region. The study might use a sales multiplier of 2.0 to indicate that each dollar of tourist spending generates another dollar in secondary sales in this region: $700,000 in direct sales produces $1.4 million in total sales. The secondary sales create additional income and employment, resulting in a total impact on the region of $1.4 million in sales, $650,000 in income and 35 jobs. While hypothetical, the numbers used here are fairly typical of what one might find in a tourism economic impact study. A more complete study might identify which sectors receive the direct and secondary effects, and might also identify differences in spending habits of the various market segments of tourists. One can also estimate the tax effects of tourist spending by applying local tax rates to the appropriate changes in sales or income. Tourist spending may not be the primary factor of interest: one could instead estimate the impacts of tourism-related construction or government activity. ECONOMIC IMPACTS TYPICALLY IGNORED IN EIA S Changes in prices: Tourism may cause inflation in local housing and retail prices, especially on a seasonal basis. Changes in the quality and quantity of goods and services: The variety of goods and services locally available may increase in response to tourism: the quality of such products may also vary. Changes in property taxes and others: Local service taxes may increase or decrease as a result of tourism. Taxes collected 14

15 directly or indirectly from tourists may benefit locals in the form of reduced taxes for schools, roads, etc. On the other hand, locals may be taxed more heavily to cover additional tourism-related infrastructure and service costs. The impacts of tourism on local government costs and revenues are addressed more fully in a fiscal impact analysis. Economic repercussions of social and environmental impacts: These may be positive or negative: for example, traffic congestion will increase the cost of transportation for host households and businesses. Improved amenities that attract tourists may also attract retirees, and businesses outside the tourism industry. 15

16 CHAPTER IV. WHAT ARE MULTIPLIER EFFECTS? Definition of a Multiplier: A multiplier is the total effects (direct, indirect and/or induced) divided by the direct effects of tourism. This concept is based on the recirculation of income: recipients use some of their income for consumption spending, which then results in further income and employment. (Frechtling, 1994). Multipliers capture the secondary economic effects, (indirect and induced), of tourism activity. Multipliers are frequently misused and misinterpreted in tourism studies, and are therefore a considerable source of confusion for non-economists. Multipliers represent the economic interdependencies of sectors within a particular region s economy: they vary considerably from region to region and sector to sector. There are many different kinds of multipliers depending on which secondary effects are included and which measure of economic activity is used (sales, income, or employment). For example, The Type I sales multiplier = direct sales + indirect sales direct sales The Type II or III sales multiplier 1 = direct sales + indirect sales + induced sales direct sales The multipliers above are called ratio type multipliers because they measure the ratio of a total impact measure to the corresponding direct impact. Comparable income and employment ratio type multipliers may be defined by replacing sales with measures of income or employment in the above equations. Ratio multipliers should be used with caution. One common error is to multiply a sales multiplier by tourist spending to get total sales effects. This generates an inflated estimate of tourism impacts because tourism spending (or sales) is not exactly the same as the direct effects in the multiplier formula. Tourist purchases of goods (vs. services) are the primary source of this difference. To properly apply tourist purchases of goods to an input-output model (or 1. The distinction between Type II and Type III multipliers involves a technical difference in how the induced effects are computed. Type II approaches include households as a sector of the economy and invert the technical coefficient matrix including the household sector, while Type III approaches treat households as exogenous. 16

17 corresponding multipliers), various margins (retail, wholesale and transportation) must be deducted from a good s purchaser price to arrive at the producer price. In an I-O model, retail margins accrue to the retail trade sector, wholesale margins to wholesale trade, transportation margins to transportation sectors (trucking, rail, air etc.), and the producer price of a good is assigned to the sector that produces the good. When tourists buy goods produced by outside (non-local) manufacturers, there is an immediate leakage in the first round of spending and therefore no local impact from production. Before applying a multiplier to tourist spending, one must first deduct the producer prices of all imported goods that tourists buy: only include the local retail margins and possibly wholesale and transportation margins if these are created within the region. Generally, only 60 to 70% of tourist spending shows up as local final demand. While all tourist purchases of services will accrue to the local region as final demand, only the margins on goods purchased at retail stores should be counted as local final demand. The ratio of local final demand to tourist spending is called the capture rate. Capture rates, like multipliers, vary as a function of the size and nature of the region as well as the kinds of tourist spending included. One must therefore be cautious about taking a multiplier or capture rate cited in one study and using it in another. Capture rate = local final demand local tourist spending Another way of calculating a multiplier (generally the preferred approach among economists) is as a ratio of income or employment to sales. This kind of multiplier is sometimes called a Keynesian multiplier or response coefficient. Income and Employment Multipliers: Type III Income Multiplier = Total direct, indirect, and induced income Direct sales Type III Employment Multiplier = Total direct, indirect, and induced income Direct sales This income (employment) multiplier produces total income (employment) impacts when multiplied by the direct sales. One must still be careful in distinguishing between tourism spending/sales and direct sales effects. Some studies may embed the capture rate in the multiplier, expressing the ratio in terms of tourism spending rather than direct sales. 17

18 CHAPTER V: HOW DOES ONE MEASURE TOURISM S ECONOMIC IMPACTS? The economic impacts of tourism are typically estimated by some variation of the simple formula: Defining the Economic Impact of Tourism: Economic Impact of Tourism = # of Tourists * Ave. Spending per Visitor * Multiplier Where # of tourists = numbers of tourists and ave. = average Estimate the change in the number and types of tourists to the region that will result from the proposed policy or action: Estimates or projections of tourist activity generally come from a demand model or some system for measuring levels of tourism activity in an area: economic impact estimates rely on good estimates of the number and types of visitors, which come from carefully designed measurements of tourist activity, a good demand model, or good judgment. This step is usually the weakest link in most tourism impact studies, as few regions have accurate counts of tourists, let alone good models for predicting changes in tourism activity or separating local visitors from visitors who originate outside the region. Estimate average levels of spending (often within specific market segments) of tourists in the local area: Spending averages come from sample surveys or are adapted from other studies. Spending estimates must be based on a representative sample of the population of tourists, and should take into account variations across seasons, market segments or types of tourists, and locations within the study area. As spending can vary widely by type of tourist, we recommend estimating average spending for a set of key tourist segments based on samples of at least visitors per tourism segment. Segments should be defined to capture differences in spending between local residents vs. tourists, day users vs. overnight visitors, type of accommodation (motel, campground, seasonal home, with friends and relatives), and type of transportation (car, RV, air, rail, etc.). In broadly-based tourism impact studies, it is useful to identify unique spending patterns of important activity segments such as downhill skiers, boaters, or convention & business travelers Multiplying the number of tourists by the average spending per visitor, (making certain that units are consistent), gives an estimate of total tourist spending in the area. Estimates of tourist spending will generally be more accurate if distinct spending profiles and use estimates are made for key tourism segments. The use 18

19 and spending estimates are the two most important parts of an economic impact assessment. When combined, they capture the amount of money brought into the region by tourists. Please note: multipliers are needed only if one is interested in the secondary effects of tourism spending. Apply the change in spending to a regional economic model or set of multipliers to determine secondary effects: Secondary effects of tourism are estimated using multipliers, or a model of the region s economy. Multipliers generally come from an economic base or inputoutput model of the region s economy. Often, multipliers are borrowed improperly or adjusted from published multipliers or other studies. Avoid taking a multiplier estimated for one region and applying it in a region with a quite different economic structure. As a general rule, multipliers are higher for larger regions with more diversified economies. A common error is to apply a statewide multiplier (since these are more widely published) to a local region. This will yield inflated estimates of local multiplier effects. Common Errors to Avoid With Respect to Multipliers: Don t apply statewide multipliers to specific regions - the resulting estimates of local multiplier effects will generally be inflated. As a general rule, don t take a multiplier estimated for one region and apply it to a region with a different economic structure. Don t multiply a sales multiplier by tourist spending in an attempt to get total sales effects: this generates an inflated estimate of tourism impacts because tourism spending (or sales) is not exactly the same as the direct effects in the multiplier formula. Multipliers can also be used to convert estimates of spending or sales to income and employment. Simple ratios are used to capture the amount of income or the number of jobs generated per dollar of sales. These ratios will vary from region to region and across individual economic sectors due to the relative importance of labor inputs in each industry, and different wage and salary rates in different regions of the country. Be aware that job estimates are generally not in full time equivalents, which makes it difficult to compare them across industries with different proportions of seasonal and part time jobs. Income and value added 2 are generally the preferred measures of tourism s contribution to a region s economy. 2 Value added includes wage and salary income, proprietor=s income, rents, profits, and indirect business taxes. It is a common measure of the net contribution of the industry or region to production (it does not include costs of the non-labor inputs). 19

20 VARIOUS APPROACHES Each of the three steps discussed above, (estimating tourist volume; spending; and multiplier effects), can be performed with varying degrees of detail, accuracy and expense. At the simple quick and dirty end of the spectrum, (level one), are highly aggregate approaches to determining tourism activity, spending and multipliers. Such estimates can be completed in a matter of hours at little cost and rest largely on the expertise and judgment of the analyst. At the other extreme, (level four), are studies that gather primary data from visitor spending studies and apply the spending estimates to formal regional economic models specific to the area in question. In between, (at levels two and three), are a wide range of options that employ varying degrees of judgment, secondary data, primary data and formal models. One can employ different levels of aggregation in terms of visitor segments, spending categories, multipliers, and economic sectors to fine tune the data and models to a particular application, and to yield more detailed information about the economic impacts. For example, spending data from previous surveys may be adjusted over time using consumer price indices (CPIs). If spending is itemized in several categories, separate CPIs may be used for food away from home, lodging, or gasoline. If not, an aggregate CPI, which may not reflect the mix of goods that tourists purchase, must be used. Data for distinct tourism market segments is also valuable in tailoring secondary data to a particular application. For example, separate estimates of the average spending for day users and overnight visitors allows one to adjust the spending estimate to reflect a given mix of day users and overnight visitors. Estimation can be performed at four possible levels of detail: Level One: Subjective estimates that rely mainly on expert opinion. Level Two: Secondary data in aggregate form, adapting existing estimates to suit the problem. Level Three: Secondary data in disaggregate form, permitting finer adjustment of data to fit the situation. Level Four: Primary data and/or formal models, usually involving visitor surveys and regional economic models. 20

21 Table 5.1: Techniques or methods are used in each step (A, B and C) to estimate at one of these four levels: Tourism Activity Spending Multipliers Level One (judgment) Rely on expert judgment Use expert judgment or An engineering approach* Use expert judgment Level Two Use existing tourism counts for the area or Total estimates from a similar area or facility Use spending averages from studies of a similar area/market (use as is or adjust) Use aggregate tourism spending multipliers from a similar region/study (use as is or adjust) or Region-specific multipliers from published sources Level Three Estimate tourism activity by segment or Revise estimates by segment from another area Adjust disaggregate spending within particular spending categories and segments Use sector-specific multipliers from published sources Level Four Survey visitors to estimate the number of tourists by segment or A demand model Survey a random sample of visitors to estimate average spending by segment and spending category Use an input-output model of the region=s economy * In an engineering approach, one estimates the costs of a trip by itemizing typical costs for each input. E.g. A typical overnight party of four visitors, staying two nights, will spend $50 per night for a motel room, $20 per person per day for meals, $10 for gas, and $50 for souvenirs. This amounts to $320 per party per trip. 21

22 CHAPTER VI: HOW DOES DESIGN A TOURISM ECONOMIC IMPACT STUDY? The process of designing an economic impact study can be broken down into four basic parts: Defining the problem (7 sub-steps) Estimating the change in final demand (specifically, the change in recreation and tourism spending) Estimating the regional economic effects of this change Interpreting, applying and communicating the results. DEFINING THE PROBLEM The most important part of any study is this first part: clarifying the nature of the problem that is to be addressed. This includes identifying the intended uses and users of the results. There are seven basic steps that should be followed when defining the study problem for an economic impact assessment. 1. Define the action: Begin by clarifying the action or actions involved in the problem. Regional economic analysis tools can be used to evaluate virtually any action that translates into changes in economic activity. Typical actions for which recreation/tourism impacts are estimated include: Opening or closing a park, recreation area, hotel, or tourist attraction. Changing the size or quality of any of the above in a way that would affect visitation and economic activity in the area. Changing government activity in an area. Examples include opening or closing a convention center or visitor information center; or changing government spending on promotion or transportation systems. Changing policy that affects the number or types of visitors: for example, by changing products and services offered; pricing; or promotional strategies. 2. Identify changes in recreation/tourism activity that result from the action: The action must be well-defined in step one so that it is possible to estimate changes in the number and type of visitors to the area, and/or their spending patterns. As a general rule, the analysis should concentrate on impacts with vs. without the action rather than simply before vs. after. To illustrate, if tourism has been growing by 5% per year and a new promotional program increases this to 10% this year, only half of the 10% growth can be attributed to the promotional program. In evaluating a change, one should always be clear about possible alternative situations, and evaluate the net change in activity between the action and its 22

23 alternative. For example, if a new hotel is built and serves 200,000 guests in its first year, should all of its customers be categorized as new visitors to the area? Not necessarily, because some of these guests may previously have patronized competing area establishments, meaning that the net gain in visitors to the area is less than 200,000. On the other hand, the new hotel's facilities, conventions, promotions or events may have attracted new visitors who stay elsewhere in the area making the net increase in number of new visitors to the area more than 200,000. It can be a complex and difficult task to identify the net changes in activity that are attributable to an action, but assessments of economic impact depend on such estimates, so attention to these details is very important. In situations where there is uncertainty, we recommend evaluating impacts by using a range of estimates, and establishing rough confidence intervals around these estimates. Evaluating a range of alternatives also makes it possible to evaluate the sensitivity of the results to the initial estimates of changes in activity levels. 3. Identify the kinds of spending to be included: Should the analysis include trip spending, durable goods purchases, government spending and construction costs? The answer to this question depends on how the problem is defined, and on whether spending changes can be attributed to the action of interest. If a visitor to a new campground has recently purchased a new $100,000 camping vehicle, should this be included as an impact of this new campground? Probably not. The appropriate question is again a with vs. without one: "Would the purchase have been made if the new campground had not been built?". Durable goods purchases can rarely be attributed to changes in individual sites, (one possible exception is a large boat that would not have been purchased had there not been an available marina slip in which to store it). Most recreation and tourism impact assessments focus on trip spending: even here, there are subtle with vs. without questions. Consider a local resident who stops and buys groceries while on a trip to a nearby park. Should the grocery purchase be included in the trip expenses? Probably not, as these groceries would have been purchased locally anyway and therefore do not constitute "new" spending resulting from the park. Recreation/tourism impact analyses often do not include spending that accrues to a public park or agency rather than to area businesses (such as spending on hunting and fishing licenses, park entrance fees). License and park receipts may be collected in the local region, but may accrue to a state or federal government office outside the area: such revenues may not be directly associated with the operational expenses of running the park. The operational expenses of a park or governmental agency could be evaluated independently of the impacts of visitor spending, but if park receipts were included in both visitor and agency spending, this would lead to double counting. When estimating impacts of a public recreation organization, analyze visitor spending impacts separately from the local economic impacts of park operations: visitor spending in the form of park receipts should not be included in the visitor spending analysis, and operating costs rather than receipts should be used to evaluate the impacts of the governmental operation. This approach avoids potential double counting of park fees paid by visitors, while including any government subsidy to the local area in the assessment of park operations impacts. 23

24 4. Identify the study region: This is an important, yet often neglected step: one must identify the region or regions of concern before carrying out an economic impact assessment. This step defines the area of interest, and the relevant types of visitor spending. To reiterate: visitor spending that takes place outside the study region (whether at home or en route) is not included, nor are businesses outside the region that benefit directly or indirectly from visitor spending within the region. When a tourist purchases a souvenir that is made outside the local region, only the retail margin, (and perhaps a wholesale and/or transportation margin), associated with the purchase accrues to the region. As previously discussed, the economic activity associated with the manufacturing of the item leaves the region if a good is imported. Hence, the definition of the region determines what direct visitor spending should be included in the analysis, as well as what indirect and induced effects will be counted. The study region should be large enough to constitute a viable economic region. Since little economic data exists below the county level, a county is generally the smallest region one should consider for a tourism impact assessment. Most regional economic modeling programs can estimate models for any grouping of counties in the United States, with a single county being the smallest region for which models are generally estimated. One should estimate impacts at the county or multi-county level even if the primary area of interest is a single community, (this larger region will usually be a better representative of a tourism economic region because it includes nearby places where tourists spend money, and business and workers in nearby communities that serve tourists directly or through secondary effects. Counties may be combined within or across states to form a meaningful region for analysis. See Side Bar 7.3 for a list of the key factors to consider when defining the region for a recreation/tourism impact analysis. By identifying visitors points of origin and excluding these areas from the region to be analyzed, one can distinguish new dollars, (those that come into the region as a result of tourist spending), from local resident spending. The region to be analyzed should include facilities and sites that are potential tourist attractions: it should also be a "functional economic area" with a sufficient variety of businesses as to be reasonably self-contained. The area should also include primary labor markets and shopping areas within a reasonable commuting distance. Key Factors to Consider when Defining the Region for a Recreation/Tourism Impact Analysis: Does the region defined for analysis: - exclude visitors points of origin? - include potential tourist attractions such as recreation/tourism facilities and businesses? - Include supporting and service industries so that it s relatively self-sufficient? - Include primary labor markets? 5. Identify key economic sectors and desired sectoral detail: The proposed action and anticipated uses/users of the results should suggest the key sectors that will be impacted. 24

25 Recreation and tourism activity typically have direct impacts on the lodging, restaurant, amusement, retail, transportation and government sectors. In the problem definition stage, consideration of impacted sectors helps to identify relevant categories of spending. The desired sectoral detail plays an important role in structuring the presentation of results. In some cases, only an aggregate measure of impacts may be desired. In other cases, clients may be interested in which particular sectors are most heavily affected and will want estimates of sales and jobs broken down by sector. If formal input-output models are used, impacts may be estimated in considerable sectoral detail. This is not possible if an aggregate tourism spending multiplier is used. 6. Identify the most important measures of economic activity: Tourism impacts may be reported in terms of visitor spending, business receipts/sales/ production, wage and salary income, proprietors income and profits, value added, and employment. When using an inputoutput model or set of multipliers, the impact measures can be further divided into direct, indirect, and induced effects. Impacts can also be reported in absolute or relative terms (e.g. one can report an increase of 1,000 jobs, or in an economy with 5,000 jobs, say that the number of jobs grew by 20%). In evaluating the economic effects of existing activity (say current visitors), one may be interested in what portion of total jobs, (or jobs in a particular sector), which are accounted for by existing tourist spending. 7. Identify the tolerable levels of error in the results: Although confidence intervals and estimates of error are rare in economic impact studies, it is important to have a ballpark idea of how much error you can tolerate in the analysis, as this will dictate how much effort and expense you must put into it. The higher the desired levels of accuracy, the greater the necessity of gathering up-to-date local data on visitation, spending and economic activity. Such data permits fine tuning of the spending estimates and input-output models or multipliers, but fine tuning requires time, knowledge and money that must be weighed against the benefits of the improved estimates. Estimates of impacts are based on three components: visits, spending and multipliers. Try to balance the errors across these components, (e.g. if estimates of the changes in visitation are off by 50%, it is wasteful to worry about errors of 10 or 20% in the other two components - instead devote effort to improving the visitation estimates). Carefully gathered spending data will generally have errors of at least 10% due to small sample sizes (sampling error); non-response error; or measurement error - less carefully gathered data may have errors of over 50%. In many cases, spending data gathered at a particular time for a particular population is generalized or extrapolated to a new situation. This introduces additional errors if the new 25 Important Measures of Economic Activity: Visitor spending Business receipts/sales/production Wages and salaries Proprietor s income and profits Value added Employment