Reflection Of Economic Game Simulation Economics Essay
Write up your most significant observation for FIVE of the following. Use actual, real, and SPECIFIC examples for each point. Source your examples using a footnote please. You can find this template online. Type into it, change the font size if necessary. To submit it, please email it to me. Use proper naming conventions; call it reflection.
Illustrated in the game by: Italy, who were possibly I the worst position in the EU because they could not create any food or any oil ( the two most important resources because they are needed to survive) was able to stay competitive and have a lot of money because they had more infrastructure and were able to create the resources that the other members of the EU needed (brick for France and textiles for Germany) for cheaper than if they were to buy it from other countries. This meant that they were able to specialize on just those two resources and were able to obtain the resources they needed as a result.
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Connects to this concept in Economics: In the course we learned about specialization which is when a country that trades internationally sells goods that they can make more efficiently than the countries they trade with can. This leads to each of the countries specializing on only a few products, which means that the global economy as a whole is ran more efficiently.
Is just like this in real life: http://www.thehindubusinessline.com/businessline/blnus/10191510.htm The article talks about the exports of the United Arab Emirates. Not surprisingly, oil and other oil products (oil by-products and gas) are over 43% of the country'
Economic interdependence and convergence
Illustrated in the game by: Not one country had the ability to make all 6 of the resources in the game, and in order to get the resources that they were unable to create, they relied on other countries. (Italy needed oil and food from the other members of the EU, Britain needed Oil, Canada needed food, France needed brick, and Germany needed textiles). This means that every country relied on at least one other country to either survive or in order to further develop their economies. If it weren't for the EU, Britain (who had the worst GDP in the game) would have been able to sell their food to Italy (who were unable to make their own food), which would mean that their economy would become stronger faster than those of most of the other countries (convergence).
Connects to this concept in Economics: In the course, we learned about how world trade leads to specialization, which leads to interdependence, which leads to convergence. This means that trading with other countries will almost always mean that they become dependent on each other for the resources that are being traded, because they no longer need to create any of their own (usually because they cannot create it as efficiently).
Is just like this in real life: http://www.phnompenhpost.com/index.php/2010010430600/National-news/weighing-the-benefits.html The aforementioned article talks about how Cambodia and the other ASEAN have become dependent on China because it is their largest foreign investor, and largest international trading partner, and in the near future, China will rely on the ASEAN countries because they will need more agricultural imports.
Impact of exchange rates on trade
Illustrated in the game by: Canada had the strongest currency in the game, their currency, at one point was worth around 1.5 times as much as the euro. This meant that if Canada sold a resource to any of the EU countries for $20, the EU country would have to pay â‚¬30 for it, whereas if the same country sold a resource to Canada for â‚¬20, Canada would only have to pay $13 dollars for it. This meant that, because of the exchange rate, the Canadians would have to pay half as much for each resource than any other country would.
Connects to this concept in Economics: In the course, we learned about exchange rates and their impact on world trade. Exchange rates, just like the prices for nearly everything, are based on supply and demand. In the simulation, there was a high demand for the Canadian currency (because of the office tower rent being paid in $CDN) and a low supply (because the government did not regulate their money supply), forcing the value of their currency even higher.
Is just like this in real life: http://republic-news.org/archive/65-repub/65_potvin_currency.html The article, from 2003, talks about the decline in the value of the US dollar compared to the Canadian dollar and what its impact on the economy of Canada would be. It says that because the value of our currency is higher, companies in the US will be less likely to buy what we want to export because it is more expensive for them. This would have a large effect on the Canadian economy because of how much we export to the US.
Importance of infrastructure
Illustrated in the game by: At the start of the game, before the additional countries were introduced, Canada was unable to obtain any ore and minerals, as a result, the only thing they could build was infrastructure. As a result, when the new countries were introduced, and Canada was able to buy ore and minerals, Canada could buy at least two office towers for the price it coast other countries to build one.
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Connects to this concept in Economics: In class we learned that infrastructure is used at least four times in the sale of a product. This means that any improvement to infrastructure will greatly increase the speed at which the product is travelled, decreasing the cost of transportation and the fuel used, which leads to a much lower price for the product itself.
Is just like this in real life: http://www.business-standard.com/india/news/%5Cgood-road-infra-key-to-achieve-9-growth%5C/83514/on India is making it one of their goals to have a 9% growth of their GDP in 2011, and they are aware that infrastructure will be one of the most important components if this large amount of growth is possible.
Impact of inflation
Illustrated in the game by: In years 14 and 15, the EU experienced 5.8% and 4.3% nominal GDP growth respectively. Because of inflation, however, the real GDP actually declined in those years. Another effect that inflation had was that the euro declined in value, and it cost the members of the EU even more money if they wanted to purchase more resources from foreign countries.
Connects to this concept in Economics: In the course, we learned about the effect inflation had on a country's economy. Inflation occurs when the prices for all items increase, due to a decline in the value of a currency. In most cases, inflation occurs when the money supply increases, but if the increasing money supply is not put in check, a country might experience hyperinflation. Inflation is not always a bad thing, however, a steady, low rate of inflation is needed in order for a country's GDP to grow.
Is just like this in real life: http://news.bbc.co.uk/2/hi/business/8467305.stm The article talks about the biggest jump in month to month inflation change in the history of the UK. The year to year inflation rate in December was 2.9% if the CPI is used, and 1.9% if the RPI is used. This means that if the nominal GDP growth does not increase to offset this increase, the country's real GDP will decrease. The reason for this increase in inflation, however, is mainly because of abnormal events which means that in the medium term, the rate will decrease to a more manageable level.
Hand Written Reflection Log
Year 1: In year one, when we still didn't know the game, and what effects our policies would have on our GDP, we decided to only lower our tax rate to 14.5% from 15% because that would lower the amount of taxes the corporation would have to pay on each resource from â‚¬4 to â‚¬3. We also lowered our government spending from â‚¬150 to â‚¬145 because our tax income decreased.
Year 2: In year two, since we did not know very much about how the game worked, we thought it would be in our best interest if we left our policies the same because at the time, we were still experiencing real GDP growth, and did not want any adverse effects.
Year 3: After year one, we realized that we had a high rate of inflation, and so decided to increase the reserve ratio from 10% to 12.5% in order to decrease our inflation.
Year 4: We again thought that our policies would be good if we left them as they were.
Year 5: In year five, the EU's GDP experienced negative, and the governments of the three member countries realized that they couldn't just leave their policies the same from year to year because there will be adverse effects if they do not change their policies from year to year. We decided that we should decrease our overnight lending rate from 3% to 2.6%, and increased our government spending to â‚¬150, expansionary policies. This was also the first year that we built an office tower. We wanted to build our office towers as soon as possible so that we could gain as much rental income as possible.
Year 6: In Year 6 we decreased our tax rate to 13.5% so that our GDP would again grow.
Year 7: Our goal was to build office towers as fast as possible in order to maximize our rental income, which is why we again built ten more stories of our office tower. Also this year, we decreased our tax rates to 13% and lowered our overnight lending rate to 2.5% so that we could exit the recession.
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Year 8: In accordance with our office tower goals, we again built 20 more stories of office towers. We also lowered our overnight lending rate to 2.3% because we wanted to stay out of the recession we just exited.
Year 9: Year 9 was the first year that we built infrastructure, because we finally realized that infrastructure was one of the most important parts of your game because it can greatly decrease the price that we have to pay for resources. In this year, we built one communication and one road infrastructure. We also increased our government spending to â‚¬170 because we had a large budget surplus each year and an increased government spending would increase our country's GDP.
Year 10: In year 10 we decided that our country's policies were in a good position and that we should leave our policies where they were.
Year 11: Because of how much our prices dropped from the last time we built infrastructure, we thought it would be a good decision to build infrastructure again, so we built another road and another communication infrastructure.
Year 12: We decided that because of the growth our GDP experienced last time we increased our government spending, we would again increase our government spending, up to â‚¬180. We also built another 10 stories of office towers. The EU also increased its money supply to â‚¬950 from â‚¬900 because it was constricting the growth of our GDP.
Year 13: This was our largest year for building office towers yet, as we built thirty stories this turn alone. We also built another communication infrastructure and decreased our government spending to â‚¬170 and increased our money supply to â‚¬975.
Year 14: We increased our overnight lending rate to 2.5% in an effort to curb the EU's growing inflation.
Year 15: We decreased our government spending to â‚¬160 and increased our reserve ratio to 12.5%, again in an effort to keep our inflation down.
Year 16: Because it was the second-to-last year, we knew that we needed to increase our GDP quickly, so we decreased our tax rate to 10%.
Year 17: Year 17 is where we knew it was the last year, so we increased our government spending to â‚¬200 and decreased our tax rate to 9% and increased the overnight lending rate to 3%.
Analysis of Leading Indicators
The first graph I made was of the policies that are actually directly set by the government's policy makers. For the first eight years the policies set by the EU government were relatively constrictive. The restrictive policies were reflected in the EU's economic performance (its GDP growth and CPI change). The tax rate was high meaning that consumers had less income to spend. The reserve ratio was also high meaning that banks and lending institutions were less able to lend money, and this did not increase the EU's GDP. The EU government spending was low which meant there was less injections into the economy. After seeing the recent benefits from the decreasing the tax rates the EU in Year 9 started using more expansionary policies. They decreased the reserve ratio which meant banks were able to lend more money which would lead to a large growth in GDP as a result of the multiplier effect. The EU also increased their spending levels which meant there were more injections into the economy. In year 12 when inflation started to rise the EU again used contractionary policies to curtail rising inflation. They increased the reserve ration, cutting the amount of money the banks money can lend, which in turn decreased the amount of money in circulation and thus increasing the currency's value. The EU decreased government spending in an effort to decrease the inflationary trends.
This graph compares the two interest rates, Overnight Rate (the rate the Bank of Canada uses to loan charter banks money) and Prime Rate (the individual bank's lending rate). Both of the interest rates reflect what happens in the economy. Although the Overnight Rate is set by the government's policy makers it is in reflection to what is happening in the economy. The Prime Rate is more reflective of the market itself, because although it changes depending on the overnight lending rate it will vary depending in market fluctuation. The overnight lending rate decreased when the economy was entering a recession and increased when it exited a recession and inflation had increased. For the most part the prime rate lagged the GDP, when the GDP increased or decreased the prime rate followed a similar trend the following year.
GDP Growth & CPI
For most years the GDP & CPI followed the same trends, except when there was a drastic change in overall policy. There was much fluctuation in the GDP AND CPI over the 17 years, but this can be accredited to the fact that the government's policy makers are not economists. In years 10 and 17, the GDP had a high growth and there was very little inflation, this was a result the exspansionary policies set by the government. In year 10, the overnight lending rate was decreased to 2.3%, the reserve ratio was decreased to 10% and the government spending levels were increased to â‚¬170. The reason why this growth was not sustained is because the policies were not changed in year 11 to meet the position of the economy at that point in time. In year 17, the large amount of growth can mainly be attributed to a much larger rate of government spending and a much lower tax rate.
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