(2019) A Level H1 Econs Paper 1 CSQ Q1

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a.         Both growth in global GDP & travel & tourism sector were generally decreasing.

Growth in travel and tourism sector was always higher than the growth in global GDP.

There is an increase in growth for both global GDP & travel & tourism sector from 2013 to 2014.

b.         It is a normative statement because

1.     There are no stated criteria for assessment on the effectiveness

2.     There is limited data to make a conclusion

It was mentioned that tourist numbers recovered considerably after the shocks of 2011 and 2013 àwhich could suggest that whatever the government did could have been effective

As for the point that by 2016, 60% below the peak level, it could be linked to other demand / supply events independent of the government’s action, and therefore discussion of effectiveness may not be an appropriate discussion here

c.         Demand for tourism is likely price elastic (given the degree of necessity is low and there are many available substitutes) while supply of hotels is likely to be price inelastic (hotels take time to build).

            We should point out that hotels are a complement good in the production/consumption of tourism.

            An increase in productivity in the hotel industry à lower cost of production à increase in supply from SS0 to SS1 à fall in prices of hotels from P0 to P1

As hotels are a complement good in the production/consumption of tourism à a fall in prices of hotels à increases demand for tourism à increase from DD0 to DD1

An increase in advertising expenditure à change in tastes & preferences à increase demand for tourism à increase from DD0 to DD1

d.         A multiplier value of 2.8 of increased tourist expenditure in the UK means the impact of an increased in tourist expenditure will lead to an 2.8 times increase in real national income.

Multiplier value is derived by k = 1/ (1-mpc) or k = 1/mpw

To determine how reliable this estimate might be, we have to look at

1.     Are all tourism expenditures captured for this figure to be determined? (e.g. tourists tipping would unlikely be captured in this figure, spending on goods sold by street peddlers)

2.     If this estimate is a useful estimate given that the impact on tourist expenditure on different parts of UK would likely differ

e.         Price elasticity of demand measures the degree of responsiveness of a change in quantity demanded of a good to a change in price of the same good, ceteris paribus.

            A fall in value of the pound sterling will decrease the prices of UK hotels to foreign tourists.

UK hotel owners will first need to determine how price elastic the demand for their hotels would likely be

            Luxury hotels are likely to be price elastic (given the large % of income, low degree of necessity) à a fall in price will lead to a more than proportionate increase in quantity demanded à significant increase in total revenue

            Boutique hotels are also likely to be price elastic (though to a lesser extent) à a fall in price will lead to a more than proportionate increase in quantity demanded à significant increase in total revenue

            Budget hotels on the other hand, is likely to be price inelastic (small % of income) à fall in price may lead to less than proportionate increase in quantity demanded à decrease in total revenue

            However, PED values may not be easy to estimate unless hotel owners have been using software to track how hotel vacancies vary with given price changes.

f.          Impact of significant additional government expenditure on measures aimed to reduce the likelihood of terrorists incidents

1.     Increase G —> Increase AD —> increase real NY —> higher economic growth and lower unemployment

2.     If economy is operating at near full employment à increase GPL —> higher demand-pull inflation

3.     Tourists become more confident —> increase tourism —> increase (X-M) —> Increase AD —> increase real NY —> higher economic growth and lower unemployment

4.     Tourists become more confident —> increase tourism —> increase (X-M)—> improve current account —> improve BOP

5.     Increased investors confidence —> Increase I —> Increase AD —> increase real NY à higher economic growth and lower unemployment

6.     Increased investors confidence —> Increase I —> Increase AS —> higher potential growth

7.     Increased investors confidence —> Increase FDI —> improvement in capital & financial account

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