2. 1 SIER Game Goals: 1. Understand how various key economic concepts may be linked in a market oriented society; 2. Understand how difficult proper policy making may be.

3. 2 Steps Steps 1. Game format 2. Welfare: what makes voters happy? 3. The structure of the economy: consumers, firms and government (= teams) 4. What determines firm behaviour? What determines consumer behaviour? 5. Which tools of economic policy do the players have? 6. Examples: how do tools affect the economy and, as a result, welfare?

4. 3 1. Game Format A world with 4 independent countries A world with 4 independent countries Teams of 3 or 4 students form the governments Teams of 3 or 4 students form the governments In period 0, all countries are equal In period 0, all countries are equal The countries are economically linked. The countries are economically linked. Period 1: All governments submit policies for period 1 All governments submit policies for period 1 computer calculates impact on economies and on welfare levels = results for period 1 = starting levels of period 2. All governments submit policies for period 2, etc. All governments submit policies for period 2, etc. Final round = election time: Final round = election time: country with highest welfare level wins, provided that its welfare > 100.00 (starting level).

5. 4 2.Welfare: what makes voters happy? Welfare starts at 100.00 and goes up if: Welfare starts at 100.00 and goes up if: 1. More real private cons. of goods + services (each civil servant produces 1 service per period) 2. Unemployment < 3%  ideal: 0 3. Price changes are smaller than 1%  ideal: no inflation or deflation 4. Balance on government account < 1% of national income  ideal: no surplus, no deficit  ideal: no surplus, no deficit Note: balance government = tax revenue – government spending 5. Surplus on balance of internat. payments between 2 and 4  ideal: + 3 Note:here, surplus on balance of internat. payments = export – import. If no country pursues any policy If no country pursues any policy  welfare constant (100.00).

6. 5 3. The structure of the economy

7. 6 4. What determines firm behaviour? Assumptions: Firms act under perfect competition Firms act under perfect competition All firms in a country make identical products All firms in a country make identical products These products compete with foreign products These products compete with foreign products Firms hire labour and machines Firms hire labour and machines How much do they invest ? How much do they invest ? If net profits   1 period later: investments   2 periods later: - more operational machines - output  How many products do they supply? How many products do they supply? Depends on: - profit margin per product (price – labour costs) Note: labour costs = wage + social security tax - maximum output.  The supply curve. Note: when does it shift rightward?

8. 7 What determines consumer behaviour? Assumptions: Households do not save Households do not save Only households buy foreign products Only households buy foreign products (Government buys in home country, only) If net income rises by 1% If net income rises by 1%  consumers buy 1% more of each product. If the price of a product goes up by 2% If the price of a product goes up by 2%  consumers buy 3% less of this product and more of the other products.  The demand curve Note: when does this curve shift rightward?

9. 8 The market S 1 Hoeveelheid aanbod vraag Prijs excl. BTW 100 Geen Werkloosheid

10. 9 5. The tools of economic policy Instruments  economy changes  welfare changes. Available instruments: Value Added Tax (VAT) Value Added Tax (VAT) Income tax Income tax Profit tax Profit tax Social security tax Social security tax Import tariffs (  trade blocks) Import tariffs (  trade blocks) Government purchases Government purchases Number of civil servants Number of civil servants Wages paid by firms Wages paid by firms Wages of civil servants Wages of civil servants social benefit level social benefit level Devaluation Devaluation Which tools make demand curve shift? Which tools make supply curve shift?

11. 10 S’ S 1 Hoeveelheid aanbod vraag Prijs excl. BTW 6. How do tools affect the economy? 100 Geen werkloosheid Example 1: Government buys more. Impact on welfare? Impact on welfare?

12. 11 S’ S 1 Hoeveelheid aanbod vraag Prijs excl. BTW Example 2: higher private wages. Impact on welfare? Impact on welfare? 100 Geen Werkloosheid

13. 12 Questions?