A Dynamic Model of Economic Growth in a Small Tourism Driven Economy

Chapter in the book, ADVANCES IN TOURISM ECONOMICS: IMPACT AYALYSIS, Álvaro Matias, Peter Nijkamp, Manuela Sarmento, eds., Physica-Verlag Heilderberg, 2009

25 Pages Posted: 9 Jun 2009 Last revised: 3 Apr 2014

See all articles by Stefan Franz Schubert

Stefan Franz Schubert

Free University of Bozen-Bolzano

Juan Gabriel Brida

Universidad de la República

Date Written: June 8, 2009

Abstract

The paper studies the dynamics of economic growth caused by an increase in the growth rate of tourism demand.

We develop a simple dynamic model of a small open economy, which is completely specialized in the production of tourism services (island economy model), populated by a large number of intertemporally optimizing agents, deriving utility from consuming an imported good. Tourism services are produced by means of a simple AK technology by using imported capital, its accumulation associated with adjustment costs. Moreover, the economy can lend or borrow at the international financial markets at the given world interest rate. Adjustments in the relative price of tourism services ensure market clearance for tourism services.

The long-run growth rate of the economy is tied to the growth rate in tourism demand. An increase in the latter increases thus the economy’s long-run balanced growth rate. In contrast to the standard one-good small open economy endogenous growth model, where the economy is always on its balanced growth path, we show that there are transitional dynamics after an increase in the growth rate of tourism demand. In particular, the short-run growth rate of output rises gradually towards its higher long-run level, and the market price of tourism increases during transition. Thus, an increase in the growth of tourism demand, say, caused by higher economic growth abroad, leads to a boom in the small open economy and increasing terms of trade. Adjustments of the relative price of tourism services (i. e. the real exchange rate) can therefore not protect the economy from demand disturbances.

Keywords: tourism demand, growth, economic dynamics

JEL Classification: F43

Suggested Citation

Schubert, Stefan Franz and Brida, Juan Gabriel, A Dynamic Model of Economic Growth in a Small Tourism Driven Economy (June 8, 2009). Chapter in the book, ADVANCES IN TOURISM ECONOMICS: IMPACT AYALYSIS, Álvaro Matias, Peter Nijkamp, Manuela Sarmento, eds., Physica-Verlag Heilderberg, 2009, Available at SSRN: https://ssrn.com/abstract=1416134

Stefan Franz Schubert (Contact Author)

Free University of Bozen-Bolzano ( email )

Via Sernesi 1
39100 Bozen-Bolzano (BZ)
Italy
+390471013495 (Phone)

Juan Gabriel Brida

Universidad de la República ( email )

Av. 18 de Julio
Montevideo, 1968
Uruguay

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