A short-run model of a two-sector economy with tourism and unemployment

Abstract

The article develops a Keynesian style short-run model of a two-sector economy, comprising an industrial sector and a tourism sector. Industrial goods can be consumed, invested, exported, and imported. Tourism services produced in the tourism sector are consumed by foreigners and domestic residents. The two sectors are linked via consumption of domestic residents, which, in the Keynesian tradition, depends positively on disposable income, and via investment. An increase in sectoral production (industrial and tourism sector) stimulates consumption and investment expenditures. Output is completely demand determined, and resulting in unemployment in case of a lack of demand is Keynesian. Via the production function, changes in sectoral outputs translate into changes in unemployment. Focusing on the short run, prices are held constant. The article provides a graphical apparatus to analyze different types of sectoral demand shocks. We investigate an increase in foreigners’ demand for domestically produced tourism services (inbound tourism). Depending on the exchange rate regime or monetary policy, sectoral outputs and unemployment rates may move in tandem or in opposite directions. Our results support the popular view that tourism can reduce unemployment.