The Macroeconomic Effects of Changes in Tourism Demand - A Simple Dynamic Model

Abstract

The paper studies the macroeconomic effects of an increase in tourism demand due to an exogenous increase in foreigner's income one the one hand and due to marketing activities in tourism of a small country that specializes completely in tourism production. Using a dynamic general equilibrium model, we show that an increase in tourism demand leads to an increase in relative price of domestically produced tourism services and rises tourism production. Because the dynamic transition is characterized by capital accumulation and a current account deficit, the economy ends up with a higher capital stock but a lower stock of net foreign assets. Higher foreign income has a welfare increasing effect, whereas an increase in marketing expenditures has ambiguous effects on residents' consumption and welfare. We also discuss the effects of a temporary demand stimulus, which is shown to have nonetheless permanent effects on the country's net foreign asset position and agents' consumption.

Keywords: tourism demand, marketing expenditures, economic dynamics, temporary demand shocks

JEL Classification: F41, M39