The Dynamic Effects of Subsidizing the Tourism Sector
AbstractThe paper studies the short run and long run effects of a production subsidy to the tourism sector of a small open economy, which can also be thought as a region within a country. We introduce a two-sector dynamic general equilibrium model where the tourism sector is considered to be labor-intensive and produces traded services. The other sector is capital-intensive and produces a nontraded good, which is also used for capital accumulation. Labor and capital can freely move between sectors. Economic decisions are made by forward-looking representative agents, which optimize their intertemporal welfare by choosing consumption of both the nontraded good and tourism services, the sectoral allocation of labor, and the rate of wealth accumulation. We discuss the short run, dynamic and long run effects of a production subsidy to the tourism sector. In the short run, the introduction of a subsidy to tourism production leads to a boom in that sector. As time passes, the economy-wide capital stock is decumulated, and production of tourism is falling. In the long run, compared to the situation before the subsidy was implemented, tourism production remains on a higher level, whereas output of the nontraded good drops.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 16755.
Date of creation: 2008
Date of revision:
Publication status: Published in Tourism Economics 1.14(2008): pp. 57-80
dynamic open economy two-sector model; tourism; subsidies; deindustrialization;
Find related papers by JEL classification:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism
- E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
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