Tourism Economics: Economic Systems and Tourism Development, Macro and Micro Perspectives, Tourism Demand and Supply and Their Determinants, Measuring and Forecasting Demand, Inflation, Recession, Savings and Investment, Exports and Imports, the Multiplier and Its Types, the Displacement Effect, the Costs and Benefits of Tourism, and Monetary Policy (Repo, Reverse Repo, SDF and CRR)

An economic system decides who owns resources and how production is coordinated. In a market (capitalist) economy private firms own and run tourism businesses and prices guide investment; in a command (socialist) economy the state plans and owns tourism, as in the Soviet Union's state travel agency; and in a mixed economy, India's model since independence, the state provides infrastructure, regulation and some enterprises while the private sector runs most of the business. The system's impact on tourism is direct: before 1991 India's state airlines, public-sector hotels and controls on foreign exchange and investment limited growth, while liberalisation opened aviation, hotels and foreign investment and shifted the state's role towards facilitation, infrastructure and promotion.

Macroeconomics studies the economy as a whole, and in tourism it asks about tourism's share of GDP and employment, its foreign exchange earnings and the balance of payments, its effect on inflation and regional income, and the effect on tourism of national variables such as income growth, exchange rates and interest rates. Microeconomics studies individual consumers, firms and markets: how a traveller chooses among destinations within a budget, how a hotel sets its price and output, what a tour's costs are, and how competitive a market is. Both are needed: a government needs the macro picture to justify policy, and a business the micro picture to survive.

Tourism demand is the quantity of travel people are willing and able to buy. Effective (actual) demand is the travel people actually undertake; suppressed demand is that of people who would travel but cannot, either potential demand (they will travel when circumstances, such as income, improve) or deferred demand (postponed by a problem on the supply side, such as a lack of flights or a safety scare); and some people have no demand at all. Its determinants are income (tourism is a normal and usually a luxury good, with income elasticity above one), the price of the trip including exchange rates, the prices of substitute destinations, paid leave and leisure time, population and age structure, education and tastes, marketing, and safety and political stability. Price elasticity of demand is the percentage change in quantity divided by the percentage change in price: if a 10 per cent fall in package prices raises bookings by 15 per cent, elasticity is 15 ÷ 10 = 1.5, and demand is elastic, so the price cut raises revenue.

Tourism supply is the stock of attractions, accommodation, transport, facilities and infrastructure offered to visitors. Its peculiarities are that it is fixed in location, inelastic in the short run (rooms and seats cannot be added quickly), lumpy (capacity comes in large, costly units such as a hotel or an airport), perishable and composite. Demand is measured by counting international arrivals and departures at the frontier, domestic visits through surveys and accommodation registers, tourist nights, receipts and expenditure (foreign exchange earnings, spending per visitor), travel propensity, and in the Tourism Satellite Account. It is forecast by qualitative methods, the Delphi technique (rounds of anonymous expert opinion converging on a consensus), executive judgement and scenario writing, used when data are scarce or change is sudden; by time-series methods, the naive forecast, moving averages, exponential smoothing and trend extrapolation, which project past patterns; and by causal or econometric methods, regression and gravity models, which relate demand to its determinants. A three-year moving average of arrivals of 1,20,000, 1,30,000 and 1,40,000 forecasts 1,30,000 for next year.

Inflation, a sustained rise in the general price level, affects tourism in two ways: at the destination it raises the prices of rooms, meals and transport, eroding price competitiveness unless the currency depreciates to compensate, and in the generating market it cuts the real income households have for discretionary spending such as holidays. Tourism can itself cause local inflation, in land and food prices at crowded destinations. A recession, a decline in economic activity, sharply reduces tourism demand because travel is discretionary and business travel budgets are cut first; consumers trade down to cheaper, shorter and domestic trips. Savings and investment matter because tourism is capital-intensive: hotels, airports, roads and attractions need long-term finance from domestic savings, public investment and foreign direct investment, and the rate of interest decides how much of it is viable.

In the balance of payments, the spending of foreign tourists in India is an export of services, earning foreign exchange, and the spending of Indian residents on travel abroad is an import of services; both are recorded under "travel" in the services part of the current account, and tourism receipts are therefore called invisible exports. International airfares paid to Indian carriers by foreigners are recorded separately, under transport. Because tourism earns foreign exchange without shipping goods, many developing countries have promoted it as an export industry; its net contribution, however, depends on the import content of the goods and services tourists consume, the leakage that the multiplier analysis measures.

Tourist spending creates more income than its own value because it is re-spent. The direct effect is the income of the businesses tourists pay; the indirect effect is the income of their suppliers as the businesses buy goods and services; and the induced effect is the spending of the wages and profits earned in the first two rounds. At each round part of the money leaks out, into savings, taxes and imports. The simple Keynesian multiplier is k = 1 ÷ (1 − MPC), where MPC is the marginal propensity to consume locally: with an MPC of 0.8 the multiplier is 1 ÷ 0.2 = 5. In an open economy with taxes it is better written in terms of leakages, k = 1 ÷ (MPS + MPT + MPM), the reciprocal of the marginal propensities to save, to pay tax and to import: with MPS 0.1, MPT 0.1 and MPM 0.3, the leakage is 0.5 and k = 2, so ₹100 crore of new tourist spending generates ₹200 crore of income. Small island economies, which import much of what tourists consume, have low multipliers; large diversified economies such as India's have higher ones.

The displacement effect is the reduction in other economic activity that tourism development causes, which must be subtracted from its gross benefit. A new resort may take farmland and fishing grounds; a new hotel may take guests from existing hotels rather than bring new visitors; tourism may draw labour and capital from other sectors; and public money spent on tourism infrastructure is not spent on schools or hospitals, its opportunity cost. The net economic benefit is the gross effect minus what is displaced. The economic benefits of tourism are foreign exchange, income, employment (much of it for women, the young and the less skilled), tax revenue, regional development and infrastructure; its economic costs are leakage, local inflation, opportunity and displacement costs, the public cost of infrastructure and services, seasonal and insecure jobs, and over-dependence on a volatile sector. Cost-benefit analysis sets these side by side to judge a project.

Monetary policy is the central bank's management of interest rates and the money supply to keep prices stable while supporting growth. In India it is conducted by the Reserve Bank of India; since the amendment of the RBI Act in 2016 a six-member Monetary Policy Committee sets the policy repo rate to meet an inflation target set by the government, first fixed at 4 per cent consumer price inflation within a band of 2 to 6 per cent. Its main instruments are defined below. For tourism the transmission is clear: a higher repo rate raises the cost of loans for hotel and airline investment and of consumer credit for travel, and tends to cool demand; a lower rate does the reverse. Current rates are announced at each policy review and should be read from the RBI rather than memorised.