User:Belea2008/Economy

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Source: http://www.box.net/shared/xufo0oetea

Basic principles applied in eRepublik economy

Economics as a science plays a vital role and creates backbone for other modules in eRepublik. It allows users to work, sell, buy and trade various goods, money or gold legally. Over the years there have been numerous changes to the economy module, however in its basic principles it remains the same - imperfect.

Economy of eRepublik has been based on several real life economics theories however none of them could be fully integrated into the game because of their complexity. Instead of creating fully balanced virtual economy according to textbooks, creators have decided to patch several flaws by simple rules of demand and supply without being aware of effects which it subsequently brings in the long run - instability, unpredictable fluctuations and crisis without presence of self balancing mechanisms.

If we try to analyze eRepublik's economy, we will find out there is perfect market - perfect market information - each player can compare market worldwide in few click; perfect competition - products do not differ, huge amount of competitors; ability to sell and buy without restrictions - there are over 60 countries where you can possibly sell; equal access to technology - there is no secret know how.

If we analyze it further we will find out that there is single refference currency - gold; that national output and GDP can be calculated, that there are big financial flows, there are government spendings, private investments and savings. This seems like a great starting point to implement some more advanced theories, however...

Some things are missing. Unlike in real life, in eRepublik there is no unemployment rate, no interest rate, virtually no money liquidity and no expected price level. These missing features are determining primitive economy of erepublik - models like IS-LM or AS-AD are useless to describe eRepublik although some basic principles can be applied.

DS model is part of microeconomics - which should be used on local level, not national neither global. Because this model is simple and describes behavior on local markets, people tend to fit perfectly into its description and act accordingly. Demand and supply are two major forces influencing amount of offered goods, ability to buy them and also price for which they will be sold. Price equilibrium is always a result of mutual agreement between players who sell and buy. As a rule of a thumb, the cheaper products are - the more you can buy. The more expansive you can sell, the more you want to sell. This basic principle applies to most cases, including goods market. This market - marketplace in game - is a daily meeting point between producers and consumers; thus it is the most visible indicator.

Monetary market is place where you can exchange national currencies and gold, post offers or buy offers, is a simulation of simple financial market - imperfect, only short run, limitless and very quickly changing according to expectations due to players without any financial education participating on it. Since salary is paid in national currency and gold is needed for extra features - many players like to exchange local currency into gold - while other players often need local currency to pay their employees or just to exchange their savings to buy products on local market - for local currency. This basic principle is however enhanced by presence of speculators who are trying to profit on spread rate between buy and sell rate with greater or lower success. As a fact, countries with higher population tend to have more stable exchange ratio and lower spread than smaller countries yet they tend to react faster to changes on other markets.

Jobmarket is a place where all the theories fail - there is no unemployment in erepublik - number of job offers is always higher than number of available employees - but basically this market - the jobmarket - has the biggest power to set price levels since it influences production costs and buying power at once. The need for employers is the main competition factor on this market and salary (in local currency) is their weapon. The lower they pay, the cheaper (or with more profit) they can sell their goods. However, the more they pay to employees, the more people can afford to buy and invest.

As a matter of a fact, to understand how balanced market is, we need to check jobmarket, monetary market and also marketplace (goods market) at once to fully understand real situation and be able to predict further development. This is the basic task for macroeconomics however we cannot use AD-AS model because some of its mechanics are not present in eRepublik.

Pre-crisis - 2009

In the v1 times of eRepublik there was almost amazing balance between all 3 markets and without further changes economy was doing great.

Monetary market - many currencies have been using gold standard - currency was fully exchangeable at any time and rate was stable. As countries were getting their babybooms number of players was increasing and each new citizen was given gold from admins - supply of gold was rising, gold was exchanged for currency and it was not rare, demand for it was relatively low. Only ways to spend large amounts of gold were creating a company, upgrading it, declaring war, engaging a region or tanking in a battle.

Situation on jobmarket was good as well, since each company needed to have ideal number of employees (10 or 20) in order to achieve competitive production costs, offers for each of 3 skills were

Factors influencing economy

Since economy has been balanced by simple demand - supply rules and everything could be calculated via formulas, economy was predictable and nobody was expecting changes, situation was good. However, this brittle balance could be easily destroyed by sudden changes - which were brought to the game as various experimental improvements. Here is list just of some with explanation of their impact.

Napoleon

First major change was introduction of strength training boosters - generally abbreviated as Napoleon. With ability to pay sum of gold players were able to get between 50 and 100% extra points for their training. Sudden impact was increased demand for gold (demand for currency did not change) and more importantly gold spent on this booster was taken out of game. Lowering amount of gold in game created short swings on monetary market however on the long run it had no major influence since other game mechanisms have created new equilibrium point. Bigger influence could be detected on jobmarket when salaries dropped imediatelly by roughly 30-50% and at the same time price of products remained almost unchanged. This altogether lowered income of citizens which had to buy expansive products for their salary and lowered their ability to buy gold - which was still at previously high rate. It was enough to limit demand for gold this way and there was no need to limit it trough monetary market changes - new balance has been found.

DoW, MPP rules, costs of attack

Government spending played important role in each economy and as a result each country needed gold to spend on various MPPs, Declarations of war or attacks. However, the only income of country is from taxes which means income in national currency. Each national bank was carefully maintaining gold/currency ratio in order to be able to trade off currency for gold which they needed at acceptable ratio. In order to achieve it they needed to control significant amount of currency which allowed them to maintain exchange ratio. However, having vast amounts of cash in bank vaults resulted in inflexible monetary market which did not follow real changes in economy - official exchange rate was often days behind actual changes in economy. This slowed down natural effects which could in short run change exchange ratio to balance economy in order to keep job market and marketplace without any changes at all. Basically, bad monetary politics of countries and their greed for gold were just further enhancing imperfect economy and forcing changes to happen elsewhere - in the most important markets - job market and goods market.

Raws overproduction

eRepublik is open end game which means there is no skill limit at all. Young players usually do not produce enough goods to cover their own demand due to their low skill, however as they skill up they will sooner or later cross the point where they produce more goods than they can actually need to buy. This breakeven point is crucial because beyond it overproduction begins. Suddenly there are more products created than can be bought and supply rises over demand. If we stick to basic Demand-Supply rules, it means that price equilibrium will move and price should be lowered allowing more goods to be bought. However, in case of eRepublik, this is not always the case. The most visible malfunction in this logic is raw materials market. Many citizens are producing raws and as their skill is rising they are producing more and more. Problem is that there are only few entities who can buy their products - other companies (generally described as manufacturing/construction companies). They however have limited resources and do not need to buy more materials just because it is cheap. Price is not the driving factor in their buying decision making process. As a result, number of overproduced raw materials was still multiplying and company managers were not able to sell raws - which resulted in income shortage and they had to close companies until stocks sell. This move however forced labor shifts and suddenly people left raws companies and employed themselves in better paying manufacturing or constructions companies. As a matter of a fact this has increased production of final goods and caused an overproduction even on this market since there was no demand for them either. Example - overproduction of wood/stone will lead to closing of quarries. Employers will move to house industry where they will use that overproduced stash of raw material however they will produce more houses than you need - in fact you need just 1 house and even if they are slightly cheaper because of competitive price politics, you will not buy it. Global results were lower salaries for employees since products were sold for less which has decreased also their buying tendencies which further increased overproduction. Monetary market remained stable as lower cash flows were achieved and less money has been traded. Overproduction cannot be canceled by any other means than by arrival of new players who can't produce enough goods for their own need. Baby booms are naturally balancing overproduction.

Variety of products (v2)

According to basic demand-supply rules, the more competitors there are on the market the more they will compete between each other by lowering products price which is in favor of the buyers. This is typical scenario which happens when overproduction occurs and this mechanism keeps prices low. However with introduction of Rising companies were able to produce customized products which has created niche markets and allowed them to set parameters of their products in such a manner it became one of its kind. If we take food for example which was delivering health and happiness, there were numerous producers offering just healthy food, some just happy food and vast majority was using various combinations of parameters. This has resulted in wide range of products and suddenly there was little or in some cases no competition at all. Sudden supply shortage and new market opportunities have lead to creation of new companies which have tried to fill in empty spaces and sell products on markets with low competition. However in several weeks situation has stabilized and competitive prices were achieved again but the new competitors - new companies - have remained creating further overproduction and mainly increasing demand for workforce which has resulted in fluctuations on jobmarket - in the beginning of v2 salaries were bigger since there was need for products (thus need for employees) however with new companies and new stocks on marketplace and increased overproduction salaries have dropped down significantly.

Cheated products

As a result of security flaws in the game some cheaters were able to create thousands of fake multi accounts and what is worse these accounts have created vast amounts of goods. A good example are q5 weapons which have been made overnight by bot army and afterwards sold for very low price. Many players used this opportunity and bought huge stocks which they used for the rest of v2 or tried to sell on blackmarket. Result was actually no demand for legally manufactured q5 weapons for period of 2 months which had negative impact on jobmarket since usually q5 companies used to offer best salaries and kept the income level high. This abuse of game engine has led to lower salaries but on the other hand it has helped monetary market since people spent currency to buy fake q5 weapons - and this currency was banned afterwards on the accounts of cheaters thus removed from monetary market. Total supply ratio of gold/currency was improved and stabilized monetary market on the long run.

Faster skilling (v2 + post v2)

Point when citizen starts producing more goods than he actually needs is determined by his skill. In v1 it took approximately half a year until it was reached however with changes in economy module which increased productivity of newborn babies to roughly half of productivity which 1 year old players had it was clearly leading to the inevitable - overproduction. Merging all the skills into one universal working skill has increased competition on jobmarket which increased salaries however this was not enough to compensate effects of overproduction. Ability to reach productivity similar to old players in a matter of few months has created

Ideal number of employees

One of worst impacts on economy had removal of optimal number of employees. In the past it was necessary to achieve exact number (10 or 20 in case of construction companies) employees in company because only then employees achieved their maximal productivity. Admins have removed this and productivity remained same in case there was less or not more than ideal number of employees - which means you don't have to employ 10 people to let them work with high efficiency - now it was possible to employ just 1 employee and productivity would not be impaired. Reason for this was probably lack of employees, competition on the jobmarket and fact that companies were simply producing too much and not everyone was able to run it profitably. Aftereffects were however terrible - suddenly there was no need to fight for employees and jobmarket became much less competitive. Salaries have lowered and one of major markets - job market - which was influencing income levels now became less significant than ever which made goods market and monetary market more important and allowed economy to change in more sudden and unpredictable ways.

Raws productivity - half

Decision to decrease raws productivity by 50% had been done since there was overproduction of raw materials (which naturally leads to overproduction of final products) and admins have decided to do this wise step in order to stop it. However, it has just delayed the point when once again total output of raws industry will rise to the point where overproduction will happen again - it is a hotfix, not a long term solution. Lowering productivity has surprisingly not lead to the rise of salaries in raws industry because of too much competition on jobmarket (single skill) however it led to increase of raws companies and employing more people in raws industry. This means that less people are working in final goods companies (manufacturing and constructions) which decreases supply of final goods which means lower total output. This wise step has stopped (delayed) overproduction of raw materials and also decreased total output of goods companies by decreasing a number of employees working there. There is one big negative effect - this has stopped the growth of economy and that has impaired monetary market (which is stable only if economy is prospering as a rule of a thumb).

Recent changes - work as manager

Ability to work in own companies for no salary and virtually producing goods from thin air at no costs is the biggest crime against economy ever. This change has allowed everyone to own a company (actually unlimited number of a such companies) and work there alone and create goods worth nothing. Selling these goods creates pure profit and since there are no costs, there is no minimal price for which they should be sold. Companies which employ people will always have production costs because of salary needed to pay employees - which means they cannot compete with "manager companies". Manager companies have profit which equals to income. Normal companies (with employees) have profit which equals income minus costs - thus employing people actually lowers your profit rate! This can be compensated by the fact that with higher number of employees even smaller marginal profit per employee can be in the end higher than Results of this feature are disastrous. On the marketplace (goods market) price levels are dropping down because there is no marginal costs limit per product - manager companies are never making a loss. Number of products offered is significantly higher than demand for them since now it is possible to create products out of thin air - in the past it was possible to necessary to have people to make them - and those people had need to buy them. Overproduction is inevitable. On the jobmarket situation is ever worse - salaries are on the historical minimum since there is no need for employees - employees are actually lowering profitability and decreasing overproduction. Number of companies is rising and any attempt to revert this work as manager feature will simply not solve anything because there will be huge amount of obsolete companies and huge amount of stock products which nobody will need to buy.

Plato's shopping spree

Several citizens have reported that their companies sold goods to mysterious "eRepublik" country - which was in fact Plato. It seems that Plato has printed fake currency and used ti to buy overproduction from marketplace several times. This may have temporarily and immediately decreased number of offered goods and return price level to original optimum however this meant increase of currency on company's accounts. As a matter of a fact, many of these companies do not need currency at all - they do not employ people thus they don't need currency for salaries - most of these companies are manager companies - where only general manager is working for free. In this case players have immediately tried to exchange currency for gold - and this has lead collapse of monetary market - the last piece which resisted new features. I dare to say this was inevitable and it would happen sooner or later because there was no need for currency - just demand for gold. Manager companies would simply sooner or later pump all the gold out of economy but Plato was able to ruin it overnight.

Human stupidity

eRepublik is a game where you can enjoy being entrepreneur, manager or director of a company. You can try to profit on monetary market using spread rates or cross ratios. You can influence the future of economy and even a single player can change balance of the system. These things are possible also in the real life but with a single difference - in real life people are cautious and usually need some knowledge before they do something. In eRepublik there is no need to understand basic principles or game mechanics in order to participate - which means higher risk rate and higher loss possibility. Economy is being formed by individuals who fail to see consequences of their actions and although it is great sandbox for all activities it becomes easily also the graveyard for many. Admins should bear this in mind before implementing any change - people do not think out of the box and even best intentions may result in catastrophe.

Future predictions

As of March 2011 situation is obviously not satisfactory and economy is in deep crisis. Admins are doing nothing and it seems that monetary market has found new equilibrium in most cases after recent Plato's shopping sprees at roughly 100currency per gold rate in most countries. Jobmarket remains obsolete and salaries are low due to virtually no need to employ people - thus no competition on jobmarket. Marketplace is being flooded by products created by manager companies from thin air which further ruins price levels and other producers. Stocks are rising and goods are not being used. Further overproduction will no longer lead to lowering of prices but instead of creation of buffer stocks for the future - manager companies do not need to sell all the products, they can instead save some stocks of own free goods for worse times - which means any future change in economy will have to cope with that and any effects of further changes will be decreased and softened by already prepared citizens who will be able to ignore them more or less in the short run.

Possible solutions

There are 4 complex solutions and each of them might fix economy partly - all of them would revert most of the harm and improve future development. It is crucial to think of consequences which might be useful for the game but not for game owners.

Increased daily food limit

There is option to use food for fighting - but not more than 300 wellness points can be obtained from food per day. This creates demand for cheap food but in most cases again, this is not enough and this demand has been quickly balanced by higher offer of food by new companies - which leads to lower prices due to higher competition which does not boost economy at all. If daily food limit was removed - or better to say increased to let's say 3000 wellness points <-- (that needs exact calculation depending on data which I don't have available) --> - it would result in need for currency - since food can be bought only for national currency. It would also decrease stocks of food and thus increase the price rapidly. Higher price would mean that producers would like to sell more which would result in increased demand for labor - thus rise of offers on jobmarket. As you can see, this simple solution improves 3 markets at once - marketplace by multiplying demand; monetary market by making currency useful again; jobmarket by increasing demand for employees in order to profit more than manager companies. This should globally boost the economy. Some people fear that tanks would stop buying gold in order to tank and they would use just food. This is false logic because everyone would be able to fight more for food - also tanks. If they want to make difference they will still want to deliver extra damage over the limit and thus they will need gold for that. Decreasing amount of food in stocks will mean higher price of food thus making gold tanking less overpriced if compared to just food fighting. Ability to deliver more damage without using gold will increase importance of military squads and tanks will make less difference than they do now - which might just lead to higher tanking in order to prevail.

Decreasing productivity by 50%

Decreasing productivity in the raws industry has lead to two effects - decreasing global overproduction trough decreasing raws overproduction and balancing labor balance across the industries. Problem is that new equilibrium has been reached and sooner or later new skilled up babies will arrive and take part in overproduction. This is major problem of eRepublik - it is economy of surplus and overproduction. There are no shortages or lack of goods. Changing this dramatically - by globally decreasing productivity formula in order to decrease total output - might lead to higher demand than supply. Higher demand creates higher price and this might stop overproduction for once and all. At this very moment there are huge stocks which would become suddenly valuable if overall productivity had dropped - which would be pretty elegant solution. Selling these stocks can cover sudden change and soften impact on economy creating enough time for managers to accommodate to this change. Balance would be restored by new babies and once again employing people would become important - which means higher salaries, higher buying power and higher aggregate demand which leads to higher output of economy - although in fact one might say that decreasing productivity would decrease it - effect can be totally different.

Babybooms

eRepublik is a social game where number of active citizens is determining economy in many ways - usually when number of players is rising also the economy is profiting and improving - and vice versa. Ability to attract new players to country means more labor force, increased demand for products and increased cash flow - these altogether are beneficial for economy on the long run although on short run it might bring some difficulties concerning lower ability to employ new citizens thus lower salaries - but in current situation when there are virtually more companies than players this would not be a major concern. One time babyboom is not beneficial on the long run however, it would just decrease time between reaching overproduction threshold - the key is to maintain steady population growth rate which will result in steady economy growth rate. I believe it is matter of marketing policy and strategy and it should be one of eRepublik admins tasks - to help babybooms.

Remove work as manager option

Ability to create goods out of thin air is destroying jobmarket, marketplace and subsequently also monetary market by creating local currencies obsolete same as employees. Many citizens have created numerous companies where they work daily in order to rise their skill and create goods for free on which they can profit easily. Removal of this feature might stop downfall of economy - not heal it, just stop ruining it. In order to heal it there is need to fix also monetary market - which can be done by offering full compensation for these companies in gold. Sudden increase of gold in economy would improve exchange rates of currencies/gold which would boost value of work - even without any change in salary, employees would earn more in terms of gold value. This effect of increasing wealth would lead to higher spending which means higher cash flow in the economy and speed up of changes - altogether with gold from sold companies and better salaries, people would be able to buy more goods - especially if manager companies would try to empty their stocks prior to selling company.

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