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The paper studies the dynamics of economic growth caused by an increase in the growth rate of tourismdemand.We develop a simple dynamic model of a small open economy, which is completely specialized in theproduction of tourism services island economy model, populated by a large number of intertemporallyoptimizing agents, deriving utility from consuming an imported good. Tourism services are produced bymeans of a simple AK technology by using imported capital, its accumulation associated with adjustmentcosts. Moreover, the economy can lend or borrow at the international financial markets at the given worldinterest rate. Adjustments in the relative price of tourism services ensure market clearance for tourismservices.The long-run growth rate of the economy is tied to the growth rate in tourism demand. An increasein the latter increases thus the economy’s long-run balanced growth rate. In contrast to the standardone-good small open economy endogenous growth model, where the economy is always on its balancedgrowth path, we show that there are transitional dynamics after an increase in the growth rate of tourismdemand. In particular, the short-run growth rate of output rises gradually towards its higher long-runlevel, and the market price of tourism increases during transition. Thus, an increase in the growth oftourism demand, say, caused by higher economic growth abroad, leads to a boom in the small openeconomy and increasing terms of trade. Adjustments of the relative price of tourism services i. e. thereal exchange rate can therefore not protect the economy from demand disturbances.

Item Type: MPRA Paper -

Original Title: A Dynamic Model of Economic Growth in a Small Tourism Driven Economy-

Language: English-

Keywords: tourism demand; growth; economic dynamics-

Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O41 - One, Two, and Multisector Growth ModelsF - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy MacroeconomicsR - Urban, Rural, Regional, Real Estate, and Transportation Economics > R1 - General Regional Economics > R11 - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes-

Author: Schubert, Stefan Franz

Source: https://mpra.ub.uni-muenchen.de/16737/

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