When a tourist visits a place of tourist importance in Kerala, there will always be a percolating effect on the local economy. It may, however, be noted that the multiplier effect by itself does not increase the velocity of tourist spending or the circulation of money, but it increases the amount of income generated by an increase in tourist expenditure.

The velocity of circulation or transfer of money cannot go on indefinitely because of ‘leakages’ which occur frequently. Such ‘leakages’ may consist of, for instance, due to imported foreign goods, interest on foreign investments, or savings which withdraw money from circulation, and any ‘leakages’ of these kinds will limit and reduce the ‘multiplier effect’. The Kerala tourism sector always had to deal with this ‘multiplier effect’.

A model can be developed based on the circular flow of money in the Kerala economy. It illustrates that the household’s savings, imported expenditures, purchases and sales tax levied are examples of withdrawal of money from the circular flow; whereas gross investments, export incomes and governmental purchases are additions to the circular flow of money. While expenditure on tourism abroad represents a ‘leakage’ from the national economy, expenditure by a foreign tourist in Kerala forms an invisible export and so represents an ‘injection’ into the economy.

The tourist multiplier effect is based, however, upon some unrealistic assumptions like constant ratios of prosperity that gives the financial ability to import and increase consumption of certain goods, taxation on high income etc which will add to the national income. In addition, the chain effects are measured only up to the first or second round of expenditure. The ME (Multiplier Effect) on tourist car agencies, owners of antique shops, tailors and other recipients is quite indeterminate. Nevertheless, a simple Keynesian model will explain the facts better.

The comparative study of the tourist multiplier values in different countries reveals that the ‘multiplier effect’ of tourism in respect of income generation is quite high in India. In recent years, therefore, the importance of tourism as a tool of economic development has been appreciated in our country and particularly in a state like Kerala.