Using System Dynamics to analyse the Economic Impact of
Tourism Multipliers

Abstract
The importance of tourism for economic development is widely recognised . This is reflected
in the great interest shown by governments by promoting foreign direct investment and
freeing both public and private sector projects. Most tourism studies concentrate on
analysing the economic and social effects of tourism. The impact of the multiplier has been
studied widely using traditional econometric techniques.
This paper focuses on analysing the economic impact of tourism revenue on the Egyptian
economy. The economic theory and the mathematical modelling involved in such scenarios is
discussed but the main thrust of the paper is the encapsulation of this situation by Causal
Loop Models .
A dynamic model, run in Powersim, is then described where important non-linear dynamical
movements and the significance of systems thinking in this framework are considered . This
model considers the dynamics of tourism in Egypt and its impact on GNP.
1. Introduction
The importance of tourism for an economy is independent of whether it is developed or
developing. . Inskeep showed that in 1989 tourism revenues world-wide were nearly 209
billion dollars growing at 9% yearly. This revenue then represented nearly 7% of total
international trade and 30% of total international income. Tourism played a major role in
modernising the Spanish economy. In the USA, tourism generated 5 million jobs and was
6.7% of GNP in the USA in 1989 (Inskeep, 1991).
It is not only income effects that make tourism sectors important. These sectors include
foreign investment, subsidies and taxation. Infrastructure and resources are considered the
most important feature for any country in a competitive world fighting to attract market
share. In developing and advanced countries, tourism is viewed as an important means to
boost levels of income and employment. There has been much research on tourism and
relationships with economic development. Thus Kraph argues that tourism has a crucial role
in developing countries. It helps to lower deficits in the Balance of Payments, increase levels
of economic growth and raise job opportunities (Pearce, 1992).

Kasse concentrated on the benefits and costs of tourism. He showed that through a certain
investment in the tourism sector, income could be produced that may be used in developing
different sectors of the economy. Van Doorn concludes that development theories should take
into consideration the direct and the indirect effect of tourism (Pearce, 1992).
Egypt is considered to have a reasonable infrastructure and adequate resources for tourism..
It has the advantage of a unique history and climate that has preserved some of the most
ancient artefacts in the world. It has a good geographical location situated between three
continents with a long coasts on the Mediterranean and Red Sea.. Egypt also has a stable
political and social system.
This paper focuses on analysing the economic impact of tourism sector revenues on the
Egyptian economy. It begins by reviewing some of the most important previous studies that
discuss models of tourism multipliers . It then examines a simple Keynesian model and
relates this to Egyptian data. The paper presents the results of a regression analysis that
considers relative effects on GNP, consumption, investment and import expenditures. Causal
and System Dynamic models are then introduced and compared with econometric results.
The policy implications are then discussed.
2 The Tourism Multiplier
Most studies on Tourism have concentrated on analysing the economic and social effects of
tourism specially by what is termed the multiplier effect. This term is a derivative of the
multiplier effect first introduced by Samuelson (Samuelson, 1960). It determines the benefit
to the economy for every unit of currency that is spent. It is noted that most of the
conversations about the effect of tourism on economic development concentrated on the
multiplied effect of tourism on the National economy.
2.1 Traditional Approaches:
Archer reflects on interrelationships between three kinds of expenditure:
1) Direct expenditure.
2) Indirect expenditure.
3) Stimulated expenditure.
Indirect expenditure and stimulated expenditure are called the secondary effects of the
multiplier and the sum of these are called the total effect of the multiplier (Archer, 1982).
Lundberg used the following formula to calculate multiplier effects (Lundberg, 1995).
MPS MPI
TPI TIM
+
− = 1 (1.1)
where:
TIM = The tourism multiplier
TPI = The marginal propensity to import for tourists
MPS = The marginal propensity to save
MPI = The marginal propensity to import for local residence
Using published data for the Bahamas Islands, Lundberg (Lundberg, ibid) estimated the
value of tourism multiplier as:
0.894
0.737
0.659
0.281 0.456
1 0.231 = = +
− TIM =
Ryan (Ryan, 1991) devised an alternative formula for tourism multipliers as follows:
BC
TIM A − = ×
1
1 (1.2)
where
A = The percentage of tourist expenditure on