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

Carmen Álvarez-Albelo () and Raúl Hernández-Martín
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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

No XREAP2007-06, Working Papers from Xarxa de Referència en Economia Aplicada (XREAP)

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.

Keywords: High growth; Small tourism countries; Terms of trade; Luxury good; Dynamic general equilibrium. (search for similar items in EconPapers)
JEL-codes: F43 O33 O41 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2007-07, Revised 2007-07
New Economics Papers: this item is included in nep-dge, nep-int and nep-tur
References: Add references at CitEc
Citations: View citations in EconPapers (4)

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http://www.xreap.cat/RePEc/xrp/pdf/XREAP2007-06.pdf First version, 2007 (application/pdf)
http://www.xreap.cat/RePEc/xrp/pdf/XREAP2007-06.pdf Revised version, 2007 (application/pdf)

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