Tourism, Welfare and De-industrialization in a Small Open Economy

This paper investigates the effects of an expansion of tourism on welfare, output, and factor prices in the host country using a general equilibrium international trade model. In the absence of taxes, foreign ownership, and distortions, an increase in foreign visitors will increase welfare only if the price of nontradables increases. Factor mobility and foreign ownership tend to reduce the gains from tourism, while commodity taxes tend to increase them. Conditions under which an increase in tourism can lead to deindustrialization are also discussed.