Virtual World GDP: revisited

There emerged another debates on the size of the virtual economy in Terra Nova. Julian Dibbell, one of the writers, estimated the worldwide MMO GDP at $7.29 billion, by using a ratio of RMT (real money trades) amounts to the real-world GDP (not real GDP). The figure fell between GDPs of Benin ($7.49 billion) and Malta ($7.04 billion).

As usual, a flood of comments arrived to the post. Edward Castronova, an associate professor at Indiana Univ. and a host of the blog, basically supported Dibbell's idea and methodology. But several people opposed the argument. One argued that the virtual GDP was "inflated" due to the underground nature of RMT. Some others argued that the Dibbell's method was inconsistent with the GDP calculation of real-world economies because the estimate counted gross trade values rather than the value added.

These arguments in Terra Nova, however, seemed to stack up with a question, "What is GDP?"

I would like to address the issue from basic principles of economics.

GDP is "a measure of the amount of the economic production of a particular territory in financial capital terms during a specific time period" (Wikipedia). Economic activities in virtual worlds typically include: hunting monsters and collecting marketable items, refining swards, providing magic services to other avatars, and so on. The point is, what the GDP counts is the value of "domestic" activities. Many of such activities are not included in virtual GDP calculation. But it is fine. It is just the same as in the real-world economies. Only the activities accompanying monetary transactions are counted. Thus measuring virtual-world GDP by RMT underestimates the "true" size of the economic activities there, even considering the fact that RMT amounts is gross value rather than value added. I imagine that the majority of the economic activities in these virtual worlds are collecting items from monsters, which are basically agriculture.

And another point is that the value of the GDP should basically be denominated into the "local" currency of the virtual world. In case of EQ, it is platinum piece. However, the virtual-world GDP denominated into an in-game currency is difficult for us to understand its economic implication. It is the same as the situation in which I have no idea on GDP of Zimbabwe in Zimbabwe dollar. Thus we need exchange rates. A RMT is a trade between real and virtual economies. So we can use the "exchange rate" used in RMT to translate virtual world GDP into the real-world economic value. It is a economically legitimate approach.

In this sense, Dibbell's calculation of virtual-world GDP was not done in an "exact" way, but done by using RMT value as a proxy of economic activities in virtual worlds. The estimate, thus, should be inaccurate, but still is a "good" estimate. I do not agree with views in which in-game activities not for real money have zero-value. Do not mix up the real and virtual worlds; they are different. And the values in these worlds should be denominated into the respective monetary units. In this sense I think Castronova's approach in "Cyberian frontier" paper was legitimate. Exchange rates made virtual currencies "meaningful" to our real economy. We know that the virtual world values are important to us, so we pay real money for them.