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Explaining High Economic Growth in Small Tourism Countries with a Dynamic General Equilibrium Model

Author

Listed:
  • Carmen Álvarez-Albelo

    () (Grup de Recerca en Economia del Benestar (CREB), Department of Economic Analysis, University of La Laguna)

  • Raúl Hernández-Martín

    (Department of Applied Economics, University of La Laguna)

Abstract

This paper shows that tourism specialisation can help to explain the observed high growth rates of small countries. For this purpose, two models of growth and trade are constructed to represent the trade relations between two countries. One of the countries is large, rich, has an own source of sustained growth and produces a tradable capital good. The other is a small poor economy, which does not have an own engine of growth and produces tradable tourism services. The poor country exports tourism services to and imports capital goods from the rich economy. In one model tourism is a luxury good, while in the other the expenditure elasticity of tourism imports is unitary. Two main results are obtained. In the long run, the tourism country overcomes decreasing returns and permanently grows because its terms of trade continuously improve. Since the tourism sector is relatively less productive than the capital good sector, tourism services become relatively scarcer and hence more expensive than the capital good. Moreover, along the transition the growth rate of the tourism economy holds well above the one of the rich country for a long time. The growth rate differential between countries is particularly high when tourism is a luxury good. In this case, there is a faster increase in the tourism demand. As a result, investment of the small economy is boosted and its terms of trade highly improve.

Suggested Citation

  • Carmen Álvarez-Albelo & Raúl Hernández-Martín, 2007. "Explaining High Economic Growth in Small Tourism Countries with a Dynamic General Equilibrium Model," Working Papers XREAP2007-06, Xarxa de Referència en Economia Aplicada (XREAP), revised Jul 2007.
  • Handle: RePEc:xrp:wpaper:xreap2007-06
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    File URL: http://www.xreap.cat/RePEc/xrp/pdf/XREAP2007-06.pdf
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    File URL: http://www.xreap.cat/RePEc/xrp/pdf/XREAP2007-06.pdf
    File Function: Revised version, 2007
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    References listed on IDEAS

    as
    1. Carmen Dolores Álvarez-Albelo & Fernando Perera-Tallo, 2008. "The Transmission of Sustained Growth through the Terms of Trade in an Endogenous Growth Model," Review of Development Economics, Wiley Blackwell, vol. 12(2), pages 386-396, May.
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    Cited by:

    1. Anna Matas Prats & José Luís Raymond Bara & José Luís Raymond Bara, 2008. "Job accessibility and employment probability," Working Papers XREAP2008-05, Xarxa de Referència en Economia Aplicada (XREAP), revised May 2008.
    2. Matas, Anna & Raymond, José-Luis & Roig, José-Luis, 2009. "Car ownership and access to jobs in Spain," Transportation Research Part A: Policy and Practice, Elsevier, vol. 43(6), pages 607-617, July.
    3. Christian Durán Weitkamp & Mónica Martín Bofarull & Federico Pablo Martí, 2008. "Economic effects of road accessibility in the Pyrenees: user perspective," Working Papers XREAP2008-01, Xarxa de Referència en Economia Aplicada (XREAP), revised Jan 2008.
    4. Sultan, Muyed, 2008. "The Tertiary Sector Is Going to Dominate the World Economy; Should We Worry?," MPRA Paper 14681, University Library of Munich, Germany.

    More about this item

    Keywords

    High growth; Small tourism countries; Terms of trade; Luxury good; Dynamic general equilibrium.;

    JEL classification:

    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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