Gross User Product of a virtual economy

Artist View of Pulsar Planet System by NASA/JPLIn the latest EVE Online Quarterly Economic Newsletter, published yesterday, there is a section that is based on my work done at the Helsinki Institute for Information Technology (HIIT). The section in question is the one called Gross User Product, and is the first outcome of the research cooperation between HIIT and CCP that was announced earlier this year.

Gross User Product, or GUP, is a concept upon which I arrived when transferring the concepts of the UN System of National Accounts (SNA) to a virtual economy. SNA is a standard guideline according to which national accounting is performed for real-world national economies. In the very short, SNA tells the statisticians how to measure the national accounting aggregates, such as GDP.

GDP, GUP – what’s the story here? That’s what I try to explain in this blog article.

In virtual economies, some kind of production of virtual goods (i.e. virtual items) and services usually takes place. Actually, I think a system in which production does not exist is not much of an economy, but it might be wise to leave that discussion to a later blog post. Now, if there is production – if the users can employ inputs to create outputs – it should be possible to form an aggregate measure of the production activities.

GDP is just this kind of a measure for a real-world economy. The system of national accounts is based on a set of basic observations that are, for the most part, rather directly applicable to a virtual economy as well. However, there are a some fundamental differences between a virtual economy, the EVE economy being the case here, and a real-world national economy. The most influential one is the lack of a foreign sector, and its replacement by a new sector. I’ll illustrate this by an example of final good production.

In a real-world national economy, a produced final good, if consisting purely of domestically produced intermediate goods, reflects the value additions through the whole production process. Then, it is sufficient to include only the market prices of final goods and voila: there you have the value added in the whole production process of final goods. But if some intermediate goods were purchased from the foreign sector, their value would have to be subtracted from the total value of final goods. After all, the value of the imported intermediate goods is present in the value of final goods, but that value does not correspond to a domestically generated income.

This, in the extremely short, is the reason for the “domestic” term in the middle of GDP. SNA examines a national economy vis-à-vis the rest of the world. In GDP, the interesting thing is the value of production taking place inside a national economy, domestically. The relevant borderline runs between the national economy and the foreign sector.

I argue that the relevant borderline in a virtual economy runs between the users and the “game” itself. I call all the entities representing the game collectively the Environment. When users produce something, for example by gathering raw materials, refining them into intermediate products, and finally producing a virtual final good, the value of the final good represent, by assumption, all value additions through the production process. The value of the final good also represents all received incomes of the participants of the production process.

But what if an intermediate good was purchased from the Environment (e.g. an NPC vendor)? Its value would be reflected in the value of the final good, but there would not be a corresponding income received by any user. Therefore, there is a leak out, just like in the case of imported intermediate goods in a real-world national economy in the example above. Treatment of such purchases should be similar also: subtract the value of all intermediate goods purchased from the Environment.

This is where the “user” in GUP comes from. The GUP measures production by the users, as opposed to creation of new goods by the Environment. In other words, it is a measure of the economic activity of the users of a virtual economy.

Periodical, such as monthly (not many virtual economies allow for yearly) measures of GUP can then be formed, allowing for comparisons such as between two points in time. Comparisons across virtual economies are probably like comparisons of apples and oranges. In some very limited context, it may make sense to compare growth rates.