Imagine an MMORPG economy where the currency is "Gold" and all other items (equipment, consumables, decorations etc) are referred to as "Goods". Keep the total amt of Gold constant and increasing the supply of Goods, we have deflation: the prices of Goods will fall since more are in circulation. Keep the total amt of Goods constant and increase the supply of Gold, we get the opposite: Inflation. Gold becomes less valuable and prices soar. Suppose we keep the rate of increase of total Goods the same as the rate of increase of total Gold, both being positive like 10% a month. Without any money sink to take Gold or Goods away from the MMORPG economy, what would happen to price? Would inflation and deflation cancel out? Or would the economy be flooded with BOTH Gold and Goods, making everything useless or easily within reach and thus the total collapse of the economy? @_@ [Edited by - Girsanov on March 15, 2008 7:58:10 AM]

It also depends how much demand there is.
If people are producing goods, but nobody actually wants to purchase the goods, then there will be deflation.

If you have a mixed economy though it can help balance out.

E.g. there is an over-supply of food, so the price of food deflates. Producers realise they could now be making more money by producing wood instead of food. Supply of food drops, so the price goes back up. Meanwhile, wood becomes over-supplied so the price of wood drops...

[EDIT]Disclaimer: I know nothing about economics, besides what I see on the news ;)

Most mmo economy's have a constantly increasing amount of money and goods in the system and simply rely new user that want the new items to control inflation.
The number of new user that join a game and old users that quit have a major impact on the game economy.

Quote:

Original post by Girsanov Suppose we keep the rate of increase of total Goods the same as the rate of increase of total Gold, both being positive like 10% a month. Without any money sink to take Gold or Goods away from the MMORPG economy, what would happen to price? Would inflation and deflation cancel out? Or would the economy be flooded with BOTH Gold and Goods, making everything useless or easily within reach and thus the total collapse of the economy?

Well yeah, there's no economy if people don't have to trade. Inflation, in terms of prices, may hit zero, but the worth of everything will drop, whether you hold it in assets or currency. Then trade will reduce because everybody has surplus to get rid of but nothing they need in return.

The factor you're missing from the equation is population - if population rises by 10%, that helps keep things in equilibrium. However, that alone won't suffice because wealth is not distributed evenly.

Quote:

Original post by Girsanov Imagine an MMORPG economy where the currency is "Gold" and all other items (equipment, consumables, decorations etc) are referred to as "Goods". Keep the total amt of Gold constant and increasing the supply of Goods, we have deflation: the prices of Goods will fall since more are in circulation. Keep the total amt of Goods constant and increase the supply of Gold, we get the opposite: Inflation. Gold becomes less valuable and prices soar. Suppose we keep the rate of increase of total Goods the same as the rate of increase of total Gold, both being positive like 10% a month. Without any money sink to take Gold or Goods away from the MMORPG economy, what would happen to price? Would inflation and deflation cancel out? Or would the economy be flooded with BOTH Gold and Goods, making everything useless or easily within reach and thus the total collapse of the economy? @_@

In simpler times Gold is only really another commodity (was more compact and easier to transport and didnt rot). If people can 'barter' (trade items) easily in the game, players will do that when you limit the gold availability. Gold itself often had no utility value, and was used for luxury items. Many people went their entire lives without seeing any or needing any.

The Gold system does help standardize exchange rates (becoming a sinmple metric, easing calculations) and dependance on bartering adds complexity (tedium for many players) which may detract from the rest of the game.