Where Tourist Money Goes: Multipliers and Leakage

How tourist spending ripples through a local economy, and why much of it can leak away to foreign companies and imports.

When a tourist pays for a hotel room or a meal, where does the money end up? Economists trace this with two ideas: the multiplier, which measures how spending circulates locally, and leakage, which measures how much escapes.

The multiplier

Suppose a tourist spends 100 dollars at a family-run guesthouse. The owner uses part of it to pay a local cook, buy vegetables from a nearby farmer and repair the roof using a local builder. Those people in turn spend part of their income in local shops. Each round of spending creates more income. The total effect on the local economy can be larger than the original 100 dollars. This is the tourism multiplier.

Leakage

Not all tourist money stays local. Leakage happens when spending flows out of the local economy, for example:

Profits sent back to foreign-owned hotel chains or tour companies.
Imported food, drinks and furnishings bought by hotels.
Salaries paid to foreign managers.
Commissions to international booking websites.

Studies by the UN Environment Programme and others have estimated that in some developing countries, a large share of tourist spending leaks away, in some cases more than half.

Two ways to spend a holiday

A tourist books an all-inclusive package through an international company. The flight is on a foreign airline, the resort is foreign-owned, much of the food is imported, and the tourist rarely leaves the resort. Little money reaches local businesses. Another tourist stays in a locally owned guesthouse, eats at local restaurants and hires a local guide. Far more of their money stays in the community, even if they spend the same amount.

Reducing leakage

Governments and communities try to keep more tourist money local through:

Local sourcing: encouraging hotels to buy food, crafts and services from local suppliers.
Training so local people can fill management roles.
Supporting local ownership of guesthouses, restaurants and tour businesses.
Taxes on tourism that fund local services.

All-inclusive resorts

All-inclusive resorts, where meals, drinks and activities are included in the price, are often criticised for high leakage, because guests spend little outside. Supporters argue they still provide jobs and tax revenue, and that some resorts actively buy from local suppliers.

Thinking every tourist dollar benefits the destination equally

The same amount of tourist spending can have very different local effects depending on who owns the businesses and where they buy their supplies. Counting tourist arrivals or total spending does not show how much the local community actually gains.

Key takeaways

The tourism multiplier measures how tourist spending circulates through a local economy.
Leakage is spending that flows out through foreign ownership, imports and commissions.
In some developing countries, a large share of tourist spending can leak away.
Local sourcing, training and local ownership help keep more money in the community.