Lesson2

Name: ____________________________
Course: ____________________________
Instructor: __________________________

Date: _______

THE WORLD GAME OF ECONOMICS: LESSON 2
Focus on Measuring the Economy's Performance

NOTE: It is highly recommended that you read over this entire lesson before you begin.

Preliminary Discussion: During the 1930's, many people were complaining about the poor performance of the economy. How bad was it? It was difficult to precisely answer this question, because we had not developed methods and procedures to formulate an accounting of the overall performance of the economy.

To correct this oversight, the United States Department of Commerce commissioned the National Bureau of Economic Research in Washington, D.C. to develop a system of National Income Accounting. The team of experts which took on this task was led by Professor Simon Kuznets, who later won the Nobel Prize in Economics. The broadest measure of economic activity which the team developed was the Gross Domestic Product, otherwise known simply as the GDP. It measures the market value of goods and services produced (but not necessarily sold) over a given time period.

Labor force, employment, unemployment and consumer goods price data are now compiled by the Bureau of Labor Statistics. The unemployment rate is calculated as the number of unemployed workers expressed as a percentage of the labor force. The consumer price index (CPI) measures the cost of a market basket of goods and services that most urban consumers purchase most of the time. An increase in the cost of the market basket is indicative of inflation.

The GDP, the unemployment rate, and the CPI are key economic indicators of the economy's performance. These measurements are used by economic advisers to determine the appropriate economic policies.

The role of economic policy is to undertake steps to improve the country's overall economic performance and find that delicate, acceptable balance of conflicting goals. Generally, the goals are to achieve full employment, price stability, and economic growth without excessive pollution.

In The World Game of Economics you are the chief economic adviser to the leaders of the country of your choice. You are in charge of economic policy. The objective is to implement timely and appropriate economic polices to improve the overall economic performance of your country. Good luck and have fun!

1. Play The World Game of Economics to 100 points against two other countries that are either computer-managed (i.e., advised by Professor N. D. Cator) or Laissez Faire. Note: If you do not know how to play the game, then select "Tutorial" from the main menu first. If you already know how to play, then select "New Game."

You are the chief economic adviser to which country? _______________________.

SOMETIME AFTER THE 3RD YEAR AND BEFORE THE 10TH YEAR COMPLETE THIS EXERCISE:

2. Which year have you chosen to complete this exercise? __________.

3. On the template below, indicate where your economy and each of the other countries are currently positioned at the beginning of your turn before you click on the Economic Indicator. Use a colored felt pen to sketch flags or use abbreviations (eg. USA = United States). Note: If you know how to use "Print Screen" tools, then use that method and attach to this exercise Circle the current position of your country.

4. Look at the diagram below. In which direction is the Economic Indicator currently pointing at the beginning of your turn: (Circle One)

Direction: 1 2 3 4 5 6 7 8

5. Considering the layout of The World Game of Economics, if your economy were to move in the direction of the Economic Indicator (at the beginning of your turn), then Real Gross Domestic Product (GDP) would: [___increase] [___decrease] [___not change]. Cyclical Unemployment would: [___increase] [___decrease] [___not change]. Structural Unemployment would: [___increase] [___decrease] [___not change]. Inflation would: [___increase] [___decrease] [___not change].

6. Now Click on the Economic Indicator and the Current Event. Go to the Policy Board and select your economic policies. COMPLETE THE GAME. Print the final score and attach it to this exercise.

ANSWER QUESTIONS 7 - 11. (Circle the letter before the best single answer).

7. The GDP measures the market value of goods and services produced (but not necessarily sold) in a given period of time. Therefore:
(a) If market prices fall, the quantity of goods and services produced goes down.
(b) The GDP also measures happiness: The more stuff produced, the happier people are.
(c) If a good gets produced but not sold, then it doesn't get counted.
(d) If market prices rise, the measured (unadjusted for inflation) GDP goes up, even if the same amount of stuff is being produced.
(e) The GDP per capita will necessarily go up when the GDP increases.

8. Underground economic activity is both legal and illegal. In either case, it goes unreported. Therefore, if an economy has underground activity:
(a) The reported GDP overstates the level of economic activity.
(b) It's impossible to calculate the reported GDP.
(c) The reported GDP understates the level of economic activity.
(d) Most people are not reporting their economic activity.
(e) Economic policy advisers should not pay any attention to the reported GDP.

9. The unemployment rate measures the number of unemployed expressed as a percentage of the labor force. Therefore:
(a) If the labor force increases, the unemployment rate necessarily goes up.
(b) If the number of unemployed increases and the labor force remains constant, then the unemployment rate goes up.
(c) If older persons retire from the labor force, then the unemployment rate goes up.
(d) Everytime someone is born, the unemployment rate increases.
(e) Economic policy advisers should pay attention to the size of the labor force, but ignore the unemployment rate, itself.

10. The consumer price index (CPI) measures the cost of a typical market basket of goods and services which urban consumers purchase most of the time. Therefore:
(a) The CPI precisely measures the cost-of-living for everyone.
(b) The CPI does not measure the prices of goods and services which are purchased by consumers who earned their income in the underground economy.
(c) The CPI is more accurate and relevant the longer we keep track of it.
(d) If urban consumers change the composition of their market basket, the CPI necessarily understates changes in the cost-of-living.
(e) The CPI makes no attempt to measure the cost of all consumer goods and services, because the cost of collecting and processing the data would exceed the benefit.

11. If your economy was initially in the center of the playing area in The World Game of Economics, and the Economic Indicator moved you:
(a) diagonally toward Hyperinflation, then the CPI and the reported (unadjusted for inflation) GDP would both increase.
(b) diagonally toward Stagflation, then the CPI would increase, the real GDP (i.e., adjusted for inflation) would increase, and the unemployment rate would increase.
(c) diagonally toward Depression, then the CPI would decrease, the reported (unadjusted for inflation) GDP would not change, and the labor force would increase.
(d) diagonally toward Cybernation, then the CPI would decrease, and the unemployment rate would decrease.
(e) straight to the left, (between Stagflation and Depression), then the CPI, the unemployment rate, and the GDP would all decrease.

End of Lesson 2

Note: At the discretion of the instructor, you will receive _____ possible points for this exercise.

Instructor's Option: At the discretion of the instructor, you will receive ____ additional points if you win the game, or ____ additional points if you place second.

Winning Strategy Hints: Winning strategy involves anticipating the Economic Indicator, playing your policy options efficiently, coordinating your range of policies, and using trade policy to prevent one country from getting too far ahead. Consider your opponents’ options and try to anticipate their trade policies. Keep in mind that computer managed countries tend to use trade restrictions, tariffs, and currency devaluations when they have high unemployment. Be careful not to get caught having too many inappropriate and useless options. Discard policy gridlock and foreign policy conflict options as frequently as possible. [You don’t want to be trapped in a Depression like the United States in the 1930s or caught like Germany in Hyperinflation in the early 1920s]. Study the probabilities that are provided in the instructions. That will help you plan your strategy.