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by Atnaia. . 1,852 reads.

So You Want To Design Your Economy? (WIP)

So you want to design your economy in The Western Isles?
Awesome! The first thing you should know is that we go for realism, and I'm not talking about realism on the scale of the US or China, so pack up your multiple-trillion dollar economies. It's time to look at something a little more grounded.


Chibi Atnaia Says:
"We may be small, but
we are mighty...within reason..."
We are (at least in theory) small nations in the vein of Pacific Islands. Our soft cap for GDP per Capita (I'll get to that can of worms in a moment) is $30,000. Our soft cap for population is 30,000,000. In order to go past these points, you need permission from the Secretary of the Interior, and you better have a really good explanation that balances out the economy in line with everyone else. We do this so everyone is on a vaguely level playing field...it makes things more interesting. The hard caps are $40,000 and 40,000,000 respectively, but remember, you need permission and an explanation. A small population may have higher incomes, for example, to balance out their size, or a very poor populace may be massive in population size. More on that in a bit.


Let's get started with some basic explanations of terms:

GDP (nominal): Your nation's GDP is an indicator of your nation's efficiency expressed as a dollar value. It is made up of spending, investments, exports (minus imports), and a few other things. Really, it's not worth looking at that breakdown until you get into advanced NS economic design. I'll explain that in a different dispatch. The important thing to know is that this is the number we look at when we determine things like government budgets, military size, etc. You get this number by multiplying your population by your GDPpC.

GDPpC: GDP per capita. This number represents how much of your nation's GDP, on average, is owned by any given citizen. It is not the same as average income: you can have a very low income but a very high GDPpC if you are producing very efficiently (an efficient slave-state, for example). GDPpC DOES give you a vague indication of your populace's average wealth in general, however. There are various ways of determining this number. I'll explain them later.

Population: Do I really need to explain this one? :P

PPP: Purchasing Power Parity. Most people won't look at this until they get to advanced design, and with good reason. It's a bit confusing, but it basically represents how far your dollar goes in comparison to an average. I like the Big Mac Model of determining this: let's say the average cost for a burger is $1. In your nation, a burger costs $2. This means your dollar goes half as far as the average, essentially meaning your dollar is valued half as high and you need to spend more to get more. This ties to exchange rates to some extent. To be honest, determining this value is a crapshoot without a standard metric, and confuses most people.Tread in this direction only if you want to master Econ Fu.

Tax Rate and Government Budget: Your tax rate is representative of an average of all of your taxes conglomerated. This includes income tax, tariffs, sales taxes, et cetera. Most people will just apply a generalized percentage (say, around 15-45%), and then tax their GDP directly. If you want to get really fancy, you can determine a list of taxes and work it out from there. The number you get from applying that percentage to your GDP is (roughly) your government budget, if you don't factor in lending and bonds and stuff. Your government budget is how you begin to determine how much you spend on EVERYTHING, although the number most people care about is (sigh) their military budget. This number should be below 10% of your GDP (preferably below 5%, although that is a little skewed by the nature of NS roleplay), and around 5-15% of your government budget, although this is HEAVILY dependent on your style of economy.



Chibi Atnaia Says:
"It's all about determination...
and education...
but mostly determination!
Getting started is the hardest part.
Trust me, I know. Initially, this is all really intimidating: a lot of math, a lot of jargon. So let's dial it back to some bare boned. The most basic of basics.

You ready?

Choose any three industries to be your nation's tentpoles, the things that hold up the economy. Why three? Because there are, traditionally, three sectors of the economy, and seeing which three industries you choose informs which of these sectors is your main focus and, by extension, whether you are developing or developed nation.

For example, let's say I chose the following three industries: corn, rubber and fishing.

Corn and fishing are both what we call "primary industries", essentially raw materials output. Anything from agriculture to mining to quarrying to lumber. If it gives you an unprocessed, uncrafted raw resource, you have yourself a primary industry. Nations that focus on primary industries tend to be developing economies: raw resource production doesn't require a high education mostly, but does require a large menial workforce. The refining of these resources is also primary (although tends to be blended into secondary).

For example, rubber is a mixed primary/secondary industry. It requires gathering of raw resources in some cases (from rubber saps if you are doing natural rubber) and refining it is technically primary, but a lot of places will refine and produce materials like rubber and steel in the same factory (or at least in the same area). "Secondary industries" are your manufacturing and production jobs. Factory work, goods processing, etc. Developing and developed economies both tend to have a large amount of manufacturing, but with varying degrees of quality. Developing nations tend to have lower-paid, lower-skilled, lower-educated workers that are able to efficiently put out a lot of low quality goods on the cheap, while developed nations will have higher wages and skill, leading to higher quality but more expensive goods. What you manufacture will inform this.

So my example nation is a developing nation. What are we missing in our three industries?

A tertiary industry. Tertiary industries are your services: shipping, warehousing, sales, professional trades like lawyers and doctors, etc. Missing this tells me that I am almost certainly on the poorer side with my example nation, since people generally don't go into jobs that require high degrees of skill or education (luxuries of the well-to-do).

So what does this all mean? Well, from here, I can figure out a rough guess for my GDPpC. With a nation like this one, most people are likely producing fairly high volumes, but are not making much money or investing.We can say a GDPpC range of between $10,000 and $17,000 would make sense. Here, a lot of it is by feel. I recommend coming up with your GDPpC and comparing it to Linkthese charts. Find the nation that is closest to your GDPpC and think about what you picture that country being like in terms of wealth and quality of life. If it matches what you have in your head, you are on the right track.

Below is a basic structure for a good idea for how to define your GDPpC based on your major industries:

Style of Economy

Projected GDPpC Range

3 Low Value Primary

0-5000

2 Low Value Primary, 1 High Value Primary or Low Value Secondary

5000-10000

1 Low Value Primary, 2 High Value Primary or Low Value Secondary

10000-15000

2 High Value Primary or Low Value Secondary, 1 High Value Secondary or Low Value Tertiary

15000-20000

1 High Value Primary or Low Value Secondary, 2 High Value Secondary or Low Value Tertiary

20000-25000

2 High Value Secondary or Low Value Tertiary, 1 High Value Tertiary

25000-30000

1 High Value Secondary or Low Value Tertiary, 2 High Value Tertiary

30000-35000

3 High Value Tertiary

35000+

So why shouldn't you just load up on Tertiary Industries and rule the damn world with money? Because tertiary industries are naturally more unstable than secondary, which are more unstable than primary. When times are good, tertiary industries make all the money in the world: finance, real estate, sales. But they are naturally reliant on the manufactured products of the secondary industries (for products, for example), which are reliant on the primary industries. When times are bad, tertiary industries are the bubbles that pop and cause massive economic problems.A nation reliant on them will go into chaos if certain things go wrong. A nation reliant on primary industries like agriculture will still be able to eat, even if their finance sector collapses. Sure, things can cause primary industries to falter (droughts or resource consumption, as examples), but ultimately they rely less on predictions and guesswork than, say, investment banking. A banker still needs to buy food when he loses his job at the bank. If a farmer stops selling, at the worst he can eat his crops. Diversification of your economy is best for long term stability: a nice mix of resources, manufacturing and services.



Let's talk about the big black elephant in the room...

That's oil, you guttersnipe you.

A lot of people have this misguided belief that having large reserves of oil automatically makes you rich. This CAN be the case, but is usually only the case in nations that already have highly developed economies when oil is discovered or tapped. Why is this? It's because oil is a very, very easy industry for politically undeveloped nations to have turned into a goldmine for an elite while having no trickle down to the people. It happens CONSTANTLY. It may not be exactly a kleptocratic situation, more than likely its just endemic corruption, but it happens a lot, and is a big part of the reason for the ridiculous inequality you see between rulers in many developing, oil rich nations and their constituents.

Technically this is the case with any resource. You'd think that raw resource rich countries would be the richest in the world because everyone wants to buy from them to produce things, driving up demand and allowing them to charge higher prices. But this isn't really the case, because your frequently see an elite few lining their pockets off of the easy money of resource production. It requires very little investment in things like machinery and training, especially if you can piggyback it off of horrible human rights abuses.

Just a thing to keep in mind before using oil as a basis for being rich.



Hey! You've got a GDPpC! Good job!
This is a really good start.You know what you need next? A population. To be honest, I don't personally think there's any tried and true system to calculating this. Look at the size of your nation's physical geography and determine a rough number that would logically fit in that space. There are a few variables that can help you determine your population.

Urbanization is one of these variables. A small, highly urbanized nation will naturally have a higher population density than an equally sized, rural nation, and will also likely have an overall higher population. If your nation (or that city) is poor, these cities will be filled with densely packed slums. If it is rich, you'll see high-rises and skyscrapers instead.

Another thing to take into account is how much your nation can actually support, food-wise. People need to eat, and if your nation isn't producing a lot of its own food through agriculture, you'll have to import food, which will likely raise food prices and put a cap on population growth. The more people who need to be fed, the more the nation will need to import, the more companies can skew their prices. A nation with little agriculture will usually have a lower population than an equally wealthy nation with a lot of agriculture...that's nowhere near a hard-and-fast rule, just a vague outline you can follow when judging population size.

Ultimately, I say go with what feels right. the cap is 30,000,000, which gives you huge swing: do you want to be a city-state of 1 Million people? A small rural island of 3 Million? A massively urbanized nation with people crammed into every corner with a popualtion of 30,000,000? That's up to you.

Another way of going about it is to determine a density (say, 100people/sq. mile), and multiply your area by that number. This is a good way if you have a general idea of your urbanization in mind, but not a number for your population. An urbanized nation will have a higher density than a non-urbanized nation.


SLOW YOUR ROLL! One more thing to take into account...
There is one rule about population I follow. We have our caps so everyone exists in about the same wheelhouse of GDP: essentially, so that everything is fair. It goes against the spirit of fun if you both have a massive population and a huge GDP. While its not against the rules, it is just sort of dickish. I recommend that if you are a rich nation, limit your population a bit (that tends to be normal anyways), and if you are a poor nation, feel free to go a bit higher on the population side. This way, everyone's nominal GDPs wind up about the same. This isn't a rule or anything:if you want to be a small, poor nation, that's cool, and if you have a good explanation for a high population, rich nation, go for it. Just try to be fair to the other players. We're here to have fun, after all.


So with GDPpC and population, you can calculate your GDP. The formula is simple:

GDP = GDPpC x Population

Yeah, it's that simple.



Chibi Atnaia Says:
Hug the plushie, ignore the godmodders...
Hug the plushie, ignore the godmodders..."
"So my GDP is how much I get to spend? I HAVE BILLIONS! I WILL RULE THE WORLD!"
Uh...no. Sorry to say this, but things aren't as cut and dry as that. Firstly, as said above, your GDP is not the same as your government budget. In simplest terms, your GDP is how much your nation produces in a year presented as a dollar value, even if what it produces isn't sold to make money, or if those things are intangibles like services. Regardless, no government on the planet is going to have their GDP available to them as discretionary funds, because a lot of that number is tied up in either physical assets or expertise.

"So I can just make up a tax rate and apply that percentage to GDP, right? And that gives me spending?"
Still not quite accurate, but closer. A portion of your GDP is going to be tied up in "non-taxable assets": if your government pays to produce a road, let's say, that road is represented in GDP, but itself is sort of non-taxable infrastructure (in many cases). There's a lot of examples of this. In addition, certain kinds of investment that are calculated into GDP aren't taxable, and therefore can't be included in your tax rate. Having done some math, a rough average I've discovered is that about 80% of a nation's GDP can really be considered taxable. That's very rough, and very average, but it gives us a point to work from. SO:

Average amount of GDP that can be taxed = GDP x 0.80


So you know how much of your GDP is really available to be taxed...so what are your tax rates?
This can be a difficult question to answer, because it is really going to depend on your nation's specific values and style. It can, however, basically be broken into four "tiers" of tax structure: "communist", "socialist", "social democracy" and "capitalist".

Unfortunately, there is some disagreement about where to draw the lines in these ideologies, and even inside of each one there is significant stratification. The easiest way to start thinking about taxes is to do two things:

    1) Ask yourself which of the above ideologies you think you fit, and;

    2) Ask yourself what services and regulations your government offers.

There's a certain knee jerk tendency to go one of two ways (a psychological impulse we still hold from the Cold War). Either to claim some form of Libertarian No-Tax Wonderland, or to claim a Perfect Social Welfare State. Generally, you'll probably land somewhere in the middle when you actually get to thinking about it (unless you are deliberately building a nation built on extreme ideologies like Marxism, Anarchism, Extreme Libertarianism or something similar).

Unfortunately, I don't have an exact formula/system for this (well, I do, but it is far from the level of simplicity I want here). Instead, let's look at some averages and statistics from the real world to compare ourselves to.

    The United States: 30% | The United States is a bit odd to start with, but they are the point a lot of people are familiar with. Due to the state-based nature of the USA, there are a lot of taxes levied at the state level which change as soon as you cross state lines. Generally, though the effective tax rate is ~30% when you look at income tax, which is the easiest way to actually judge these things.

    Scandanavian-style Social Democracies: Average of ~50%-55% | This is sort of the far left end of capitalism, or the far right end of socialism. The tax rates fluctuate a bit, with Sweden sitting at nearly 60%, but an average of about 50% is normal. Still fairly high.

    Saudi Arabia: 20%(ish) | Saudi Arabia is a really interesting case study, because their tax rates are levied along religious and nationalist lines. Natives have to pay a Zakat (or religious-based tax) for certain things, while foreigners see almost no taxes, which inspires all those big national oil companies to omnonom up in there.

    Bahrain: uhhh...yes? | Bahrain has no personal income taxes, and no sales taxes, and makes most of their income on social insurance payments, trade and corporate taxes, and tariffs. They're a good example of a low tax place focused on trade.

    The Communist Republic of...anywhere...: No. But yes. But no. | Technically, Communists have no taxes, because they don't have personal ownership or incomes. The means of production and therefore it's output are owned by the state, so 100% of the "taxable" GDP is actually controlled by the government in one form another, but will also be distributed in more ways, and therefore doesn't actually give them that much more to spend. A good constant 'cost' for communist nations would be to multiply their population by the equivalent quality of live they would want; so if you want your people to have the quality of life equivalent to say an American multiply your population times 40,000 or so. What ever is left can be used for more normal government activities like defense and roads. You'll note that the remainder likely isn't very high, and that remainder is going to be used for all the other stuff. Lowering the quality of life of your people will give you an equivalent increase in money the government can spend on other things.

The TL;DR version is this: taxes can range from 0% (for an anarchic state with no central government at all) to 100% (for a communist state with a huge central government). It depends on the responsibilities and size of your central government. I recommend looking at a few nations that reflect your own and looking at their tax rates. The framework above can be used to give you a benchmark for various points on the spectrum.

"If there's no formula, how in the hell do I figure it out?" Well, by using these benchmarks, we can sort of determine the style of economy you have. If your effective tax rate sits between 25% and 35%, we can assume a Western-styled form of capitalism in some form or another. If you are breaking 50%, we can expect some style of socialism. If you are cresting 75%, you're probably communist. If you are below 20%, you are likely some form of tax haven or libertarian nation. This gives you an idea of what those numerical vagaries mean in context.


With your tax rate determined, we can now move on to the part of that that affects your nation: government budgets. So, we know your taxable GDP based on the formula up above (Average amount of GDP that can be taxed = GDP x 0.80). So, we take the result of that and multiply it by our tax rate to get our government budget:

Government Budget = Taxable GDP x Tax Rate

This number will likely look nice and big and give you the rumbly jumblies for all the wicked military stuff you can do, but again I ask you to hold your horses. Remember all of the stuff that a government has to be responsible for, based on your above ideology. At the very, very least, a government will cover the following:

  • Military

  • Administration Costs

  • Commerce

  • Treasury and Minting Costs

  • International Affairs (Including Foreign Aid and Foreign Relations)

MOST governments will also cover the following:

  • Infrastructure

  • Science

  • Energy and the Environment (Oversight and Regulation)

  • Basic Education

  • Healthcare Oversight and Regulation

  • Community Management

  • Social Policy

  • Law and Order

Depending on your preferences, your government may also cover:

  • Advance Education

  • Full Healthcare

  • Housing

  • Welfare

and a million other things besides. Now, a lot of these sectors can be rolled together into broader headings, but its still a lot of areas of concern and a lot that has to be paid for.

Ultimately, however, how you break that down will be based on your government's values (and, in a fair amount of cases, but certainly not all cases, your people's values).

For example, a basic breakdown of how I have things divided looks like this:

  • Military: 14.00%

  • Education: 11.00%

  • Administration: 4.50%

  • Commerce and Infrastructure: 16.00%

  • Treasury Expenditure: 3.00%

  • Healthcare Oversight: 10.00%

  • Investments: 14.00%

  • Intelligence, Law and Order: 15.00%

  • Social Policies, Propaganda and Environmental Regulation: 5.50%

  • Foreign Aid and Relations: 4.00%

  • Other Departments: 3.00%

Your budget by no means has to reflect these divisions, and the percentages you pay can vary greatly, but I feel like my budget gives a broad sweep of a standard government breakdown covering a good amount of various facets of important government functions.

Aside from that, its up to you to judge what your government finds important to invest in. However, the key thing to remember is that, no matter how much you cut down on what a government does, a bureaucracy like a government costs money just to function: you can cut everything except administration costs before you just cease to have a country.


A quick note on international trade, because it bothers me constantly. There's a misunderstanding amongst most people about how international trade works. They'll TG each other trade deals, saying "I want this, this and this from you in exchange for this this and this from me", add each other to dispatches saying they are getting those resources from the other person and assume they are done.

That's not how international trade works. Sorry, but trade goods are not Pokemon cards being swapped in a playground. Governments (most governments at least) don't have big warehouses of goods that they ship to one another.

Trade is a complex network of incentives and disincentives based on tariffs, taxes, quotas, opportunity costs and more. For example, let's say that Country A has companies that produce herring, and Country B desperately needs boatloads of herring for its booming herring-based food conglomeration, which employs a substantial portion of that country's people. The first question is how a herring-based food conglomeration managed to rise up in a country lacking their own herring, but lets ignore that for the moment.

So Country B has a vested interest in ensuring a good flow of herring into their nation. To do that, they have to incentivize Country A's companies to send them herring. So, how would they do that. The first thing they could do would be to decrease tariffs on incoming herring imports, which would decrease the cost for companies sending herring to them. That would be a multilateral solution, though, and could start bringing in herring from unwanted places, like an enemy nation or something, so what they could do instead is go to Country A's government and establish a specific trade deal that said that only companies from their nation got decreased tariffs. They could also increase quotas, allowing companies to ship them more herring without financial penalty, or they could subsidize their food conglomerate directly, giving them money to import herring if it comes from Country A's companies. Reversing any of these actions could have the opposite effect and decrease trade of that good (this is the basis of protectionism).

Every country is in some way doing this with every other country, even if they aren't trading. Sometimes a country has no control over their incentives and disincentives. Two countries with close physical proximity will usually trade a lot because there is a lower cost to shipping than for two countries far apart. This is a natural incentive. In order to slow or stop this trade, one or the other country would have to make that trade financially infeasible by increasing those costs to something that would disincline a profit.

Basically, what I'm saying is that instead of listing a bunch of resources coming and going from one nation to another, you should instead list nations you have FAVOURABLE trade relations with and a list of nations you have UNFAVOURABLE trade relations with, and then assume there's a two way flow for each favourable nation and decreased flow for unfavourable nations.

Another big thing to remember: just because your nation produces something does not mean you don't also import that thing. If Country A produces a lot of food, it doesn't mean that they don't also import food. After all, no nation will have the favourable conditions to produce the breadth of products that their people might demand. There's a reason Americans drive Hondas and Nissans on top of Fords and Chryslers.

"BUT ATNAIA!" you cry. "NOT EVERY REAL LIFE NATION TRADES WITH EVERY OTHER REAL LIFE NATION, EVEN IF THEY HAVE GOOD RELATIONS!" Quite astute, dear reader, but please keep your hypothetical voice down. The reason for this is plentiful, but the easiest way of putting it is a matter of natural disincentives. If Country A produces herring, but Country B ALSO produces herring, and they are far apart, they may have no reason to send herring to each other. Or maybe Country A has good relations with Country C, but Country C is a close trade partner with Country D, who is enemies with Country A, forming a disincentive to sending herring to Country C lest they begin feeding enemy troops. Or maybe Country C is just too small or too poor to form a viable market for companies from Country A to care enough to ship there. There's a million reasons why things like this might be the case. However, in our region, we are small, Pacific-style island nations. Not one of us is large enough to overlook anyone else, and we're also not big enough to completely cover every required resource. Our network of trade is likely to be highly integrated an highly complex. It's fine to say you don't trade with a few nations, but a completely self-sustained, trade-free economy is functionally impossible, and having very few trade partners is likewise just as difficult. It will cut down on a lot of your day-to-day workload to assume you are trading with allies, friendly nations or neutral nations, and have limited-to-no trade with unfriendly or hostile nations, without getting into the nitty-gritty of TGing every new nation to spring up and determining how your trade works.

Ultimately how you handle trade is up to you, but I highly recommend either letting your Roleplay and Stories dictate how trade functions, or to handle trade the way nations in real life do and discuss incentives, companies and laws as opposed to specific resources.

Atnaia

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