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The Role of Governments in Gaming Economies

The Role of Governments in Gaming Economies

How blockchain gaming developers function as government entities in gaming economies

Gen Kai Lim and Lorenzo Martin
Aug 19, 2022

GDP, Government Expenditure, and Game Developers

A country’s economy is considered a marketplace because value is created and transferred within and out of these regional economies. The statistic that policy makers and investors look at to determine the value inside these economies is called Gross Domestic Product (GDP).

GDP is a metric that is used to measure all activities that contribute to the economic state of a country. Since trade and the manufacturing of goods take place within a country, GDP measures the total cash value of all the finished products and employment created within a country in a specific period. GDP data can thus estimate the size of economies and indicate growth of an economy when the GDP values of a country increases over time. 

Blockchain technology being integrated into gaming opens up a new branch of research that follows a similar principle. Blockchain gaming economies are also considered marketplaces since transactions occur within their NFT marketplaces with the production of goods and services within the economy such as the breeding of new in-game assets. As such, GDP can similarly be used to capture the economic value of the game by recording the value of trades and final products produced to compare against other gaming economies as well. 

GDP data are closely monitored by businesses, investors and governments since it can affect many of their decisions. Business owners might decide on the type of business strategies to execute depending on the amount of GDP growth in a country, investors can better form asset allocation of their capital based on the type of economies they want to invest in based on GDP data, and governments decide on the type of policies to implement based on the GDP data to promote growth or maintain inflation within a country (Fernando, 2022) 

One of the components of GDP is Government Expenditure (GE), which takes a look at how the governing body of the economy creates and spends their budget. In the blockchain gaming sense, the governing body can be the Decentralized Autonomous Organization (DAO), or the development team of the project. 

This article aims to understand how the factors of GE will affect an economy’s GDP as well as which factors affect future long term growth positively or negatively. It starts with a review of economic literature, before relating it to blockchain gaming. The article ends with some points to keep in mind for prospective investors in and developers of blockchain gaming economies.


According to Economic Literature

Before diving into the specific details of how variables or certain factors affect government expenditure which leads to an effect on the long term growth of an economy, it is important to understand what are some decisions that governments make that can affect its own expenditure and growth of an economy.  

There are two types of policies that governments focus on that affect the economy. The first type is called fiscal policy. It is used to adjust economic conditions to an optimal level by determining the amount of government expenditure to be spent on projects, and revenue by controlling taxes to influence demand and subsequently economic growth (Hayes, 2022). 

The amount of government expenditure can be affected by a variety of factors. Growth in government spending is usually accompanied by an increase in national income, known as Wagner’s law. A paper explored a modified version of this law, by incorporating other factors such as oil revenue, trade openness, public debt, oil price, population and inflation on GE using an autoregressive distributive lag model to determine the relationships between these factors and GE. The results find that all the listed factors have a positive and significant relationship with GE at at least the 10% significance level except for public debt, which has a negative and insignificant relationship. This may be attributed to the fact that increasing these factors increase government revenue, which translates to increased spending over time from a greater pool of funds available (Jibir and Aluthge, 2019).

Tax revenue controlled by government fiscal policies can come from different sources such as goods & services tax, corporate tax, personal income tax and more, and governments control the amount to be taxed from each source. This tax structure can determine the amount of government revenue that will be received from taxes for their expenditure (Gorton, 2022). 

Finding out the types of taxes that can affect government spending can affect the country’s associated long term potential growth. A study by (Gashi, Asllani and Boqolli, 2018) determined the effects of different tax types on the effect of government spending and its relation to economic growth. It found that most tax varieties have a positive and significant relationship to government spending and economic growth, except for personal tax and withheld tax which has a negative but insignificant relationship. These taxes were found to best affect GE and economic growth through smaller gradual tax rate changes should governments decide to implement other forms of taxes within the country.

Diversifying government revenue can help to stabilise GE overtime since having more sources of tax revenue ensures that the revenue collected will not fluctuate excessively should one form of tax collected be affected significantly. This ensures that there will be a more stable revenue flow with possibility of budget surpluses, forming a sufficient capital base for governments to tap on in the future should they wish to implement new policies (Caroll, 2009).

Identifying any changes in taxation can indicate its impact on economic growth and vice versa. This is because how well an economy is performing will also be tied into the amount of taxes that will be collected, while the amount of taxes collected may also affect how much the government can stimulate the economy (Poulson and Kaplan, 2008). When a country is able to generate sustainable tax revenue, this can then result in longer term economic growth.

Governments also determine the policies to be put in place for the country in the form of monetary policies. Monetary policy involves the controlling of money supply and interest rates to influence the exchange rates of their local currencies to drive export growth. This can help promote growth during economic slowdowns and modulate growth during economic booms (CFA Institute, 2022). 

As governments control the money supply and interest rates to affect the monetary policy in the country, countries which are open and have depreciated currency exchange rates will stimulate export growth. Furthermore, developing countries’ economic growth can be hindered since their exports experience large volatility when there is greater exchange rate volatility. Furthermore, trade liberalisation in these countries helps to preserve tax yield which will positively affect GDP in the long run (Jayachandran, 2013). 

Lastly, there are other factors that can influence the size and growth of an economy. These factors are usually controlled by the government’s discretion in terms of the goals they want to achieve for the country. This can include factors such as the openness of an economy, the frequency and extent of policy changes and more. Some governments impose more tariffs or restrictions on imports and exports, while other governments allow for free trade in their economies. Depending on the type of country, the extent of trade openness can affect the size and growth of the country’s economy (Keman, 2022). 

Governments control the policies in place for a country depending on the economic conditions of the country itself and the external factors that can affect the country. They adjust their policies to prevent either negative growth or excessive growth and try to maintain a more stable growth over time. Thus, there is bound to be policy volatility within a country, which was found to have an effect on long term economic growth as well. It was found that policy volatility has a negative relationship with economic growth, since governments may implement policies that may not be related to the state of the economy (Fatas and Mihov, 2011). 

Since these policies affect GDP to move towards the ideal state of the economies that the government aims to achieve, the consumption of citizens in the country will be affected by the government’s decision to either spend more or less based on the fiscal policies. Thus, having excessive policy volatility will also affect consumption volatility positively which translates to a more volatile long term growth (Herrera and Vincent, 2008).

What Else Did You Miss?

  • Applying Literature to Blockchain Gaming Economies

  • The Big Takeaway – Final Thoughts

  • Works Cited

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