Tourism and the balance of payments

Tourism and the balance of payments Introduction Tourism is the movement of people from their normal places of work and residence to places they are not familiar with as well as the activities they carry out during the time they stay in such activities.In addition the activities they carry out are for fun to them.Advertising We will write a custom research paper sample on Tourism and the balance of payments specifically for you for only $16.05 $11/page Learn More Other definitions of tourism have also been given (Mathieson and Wall 4). Bhatia (5) says that tourism is travelling for enjoyment, business functions and recreational purposes. The people who engage in this are known as tourist. Tourists can either be local or international tourists. Local tourists travel in their own countries and enjoy the beautiful scenes. International tourists, on the other hand, come from other places for tourism purposes. In the modern day tourism has become a major activity in the world as compared in the pre vious years. There has been tremendous percentages increase in international travels by the tourists over the years. For instance, in the year 2011 there were more than 980 million tourists in the world. This represented a 4.6% increase as compared to the previous years. Tourism is an important aspect to different countries. It affects all aspects of life, that is, education, culture, economics and social aspects. One of the major contributions of the tourism is to ensure inflow of income to the country in which the tourists visits (Mathieson and Wall 20). Tourism is also a major source of employment to the citizens of the country either directly or indirectly. For example in the transport sectors, hotel industry and entertainment places (Holloway 3)Advertising Looking for research paper on advertising? Let's see if we can help you! Get your first paper with 15% OFF Learn More Balance of payments is records on all monetary engagements between a specific count ry and all outside countries. The engagement occurs in form of exchange of goods and services that are at issue. The balance of payments is recorded in form of account which records the exports as inflows and the imports as outflows. Goods received are positive gains while imports results to funds outflow. A balance of payment would be experiences if what is imported is more than what the country sells outside its territories. Conversely, if the country is exporting more than what is importing, the country is experiencing a surplus in terms of the balance of payments (Mathieson and Wall 26) Relationship between Tourism and the balance of payments Bhatia (10) says that imbalances are always possible in the different accounts of the balance of payments for example in the current and capital account. Continued existence of the deficit balance of payments will result to the country becoming highly indebted while imbalances as result of surplus will result to the country accumulating mor e wealth and hence growth in the economy. The central bank of any country is a major participant in the balanced of payment of any country. There is a great interrelationship between the tourism sector and the balance of payments. Most countries have started to develop measures to deal with the balance of payments through the use of the tourism sector. A good example is the countries in the Far East as their economy depend on the tourism activities. Bhatia (11) explains most of these countries could be experiencing weak balance of payment, if they were not relying on international tourism.Advertising We will write a custom research paper sample on Tourism and the balance of payments specifically for you for only $16.05 $11/page Learn More In other word, tourism is major contributor in a country having a strong balance of payments. These counties could have been forced to reduce the amount of import to other countries. The main source of information on the i ncome gained from the tourism sector is indicated in the balance of payment account. The travel part of the balance of payment account indicates the receipts in amount obtained from the tourism industry. This account also shows the position of the total inflows and outflows in terms of the income from the tourism industry. The balance of payments obtained from the tourism sector is known as the invisible balance of payments. This is because tourism is an invisible service (Nowak and Sgro 17). This mean that the exports of goods and services are put against exports and imports from foreign tourism to come up with the balance of payments. At the same time the income spent by the foreign tourists visiting the country is also compared with the expenditures the local tourist spends on the foreign countries. This will result to net balance of payments. In more simple terms, there is a difference between a country visible and invisible balance of payments. The visible one comes from the ex port and imports of visible goods. The one for invisible balance of payment is the one which results from the services industry with tourism, banking and investments sectors. Tourism balance of payment is term which has developed in the modern days. It refers to a country inflows and outflows. These inflows are the expenditures by foreign tourists in the country while the outflows are the tourism expenditures by the people of such country abroad (Nowak and Sgro18)Advertising Looking for research paper on advertising? Let's see if we can help you! Get your first paper with 15% OFF Learn More According to Mathieson and Wall (14), income from the tourism can assist the economy of the country to balance national balance of payment. Historically, tourism is known to have affected the balance of payments in two major ways. The effect can be within the country or internationally. This will help determine the foreign income which is then compared with the costs incurred to earn such revenues. Broadly, the effects of tourism can be divided into three: the primary, secondary effects and tertiary effects. Primary effects are direct and can be measured easily while the secondary effects indirect and not easy to measure. The primary effect deals with the actual use of foreign tourists in the country and consumption of the country citizens abroad. The effect happens when the international borders are crossed. Secondary effects are either direct, indirect or induced effects. Direct effects include imports, agents’ commissions and dividend payments. Indirect effects include exp enditure by the tourists while the induced secondary effects include expatriate labor remitted back to the country. Tertiary effects are the effects that are not directly initiated by the income from the tourism. These include the products that are exported back to the country as well as the investment opportunities that come up with tourism (Bhatia 16). Mathieson and Wall (20) explains that the expenditure by tourists and those of the citizen abroad are taken as travel balance and this is considered together with the tourism balance to determine the largest net effect on the balance of payment. A country balance of payment whether tourism or not plays an important role. It ensures the currency of the specific country maintain value as compared to other foreign currencies. If there is continued tourism imbalance of payments, this results to an existence of an imbalance in the supply of international currencies as compared to demands. Consequently, there will be a disparity between t he two currencies making the weakening of the host county currency. The same case will also apply if the demand of foreign currency is high and the supply is low, the local currency will be strengthened. The two scenarios can be of advantage or disadvantage to the country. A weakening currency of nay country will result to imports becoming more expensive while the exports become cheaper. Domestic price rise, that is, inflationary effects. A strong currency will make the domestic prices goes down to the advantage of the local people. The inflationary effects of the currency can be reduced by increasing the interest rates. However, these fluctuations will result to negative effects to the economy of the country and more specifically to the tourism sectors. These fluctuations will reduce the number of tourists visiting the country as well as those going abroad. Depreciation of the currency of a country increases the cost of foreign tourism. It also lowers the foreign currency price of the tourists coming to any specific country. One method that can be used to deal with the problem of balance of payments is through development of the tourism sector as an invisible export (Nowak and Sgro 12). However, it is dependent on the low requirement of the imports used in the tourism sector as well as the prospected economic development. According to Bhatia (10), there are different major components of tourism balance of payments. These include international tourism receipts in form of credits which include payments to national carriers, international fare credits, international tourism expenditure and international fare expenditures. The effect of tourism in the economy is divided into four categories: on income, employment, balance of payments as well as investment income. Another major impact of the tourism industry on the economy is the creation of job opportunity and the generation of foreign income. Income generated is a key factor in the national balance of payments. The multiplier effect on the economy is the factor that is used to determine the amount of benefit obtained from the tourism sector. This multiplier effects have an economic dimension as explained by Bhatia. Bhatia (7) states that the money paid by the tourists is used to cater for different costs they incur for instance goods and services they use and the salaries and wages of the staff. The recipient of the money will in the process use the money to cater for their financial needs. Through a continued flow of the funds, they stimulate different sectors of the economy (Rowe and Borein 31). In the process of transfers, leakages occur. Leakages can occur in three different methods: through remitting of the income to foreign parties, direct or indirect taxation by the government as well as savings by the workers outside the tourism industry. This in turn stimulates the balance of payments. The income from the tourism sector can be divided into smaller factors. This income has both dir ect and indirect economic benefits to the country. These incomes are used to pay for the wages of the staffs of the tourism related industry hence creating wealth. The money is in circulation but leakages occur. When such leakages occur the income is taxed by the government. This taxes acts as incomes to the country. As a result, tourism sector plays an important role in ensuring the economy of the country experience a surplus balance of payment which is healthy for the country (Mathieson and Wall 26). Bhatia, Sujata. International Tourism Management, New Delhi, India: Sterling Publishers Ltd, 2001. Print. Bhatia, Sujata. Tourism development. New Delhi, India: Sterling Publishers Ltd, 2002. Print. Holloway, John. The Business of Tourism, Essex: Pearson Education Limited, 1998.  Print. Mathieson Well and G. Wall. Tourism, Economic, Physical and Social Impacts, Essex:  Wesley Longman Limited, 1992. Print. Nowak, Sahli and P. Sgro. Tourism, Trade and Domestic Welfare: Pacific Econ omic Review. New Jersey: Wiley Blackwell, 2003. Print. Rowe, Anne and F. Borein. Travel and tourism. London: Cambridge University Press, 2002. Print.