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July 13, 2014

Can You Guess The Winner of An Economic World Cup?

By Shaun Myandee for IG Singapore

The whole world is in the grip of World Cup fever, with millions watching some of the world’s finest sportsmen duel it out on the pitch for the success, glory and honour of their nations, all hoping to eventually be crowned as champions. There have been huge upsets, like the early exit of champions Spain, controversy in the form of Suarez’s bite on Chiellini and his subsequent ban by FIFA, and some scintillating, dramatic clashes like the knock-out stage opener between Brazil and Chile, and the knock-down grad-out battle of endurance between Belgium and USA. The drama has been captivating, but here at IG we’ve been unable to switch our financial analysis brains off and were left wondering what an “Economic World Cup” might look like. After all, we spend so much time looking at and analysing the data of various global economies, why not pit them against one another in a World Cup that will decide which country’s economy is the strongest.

We used the 2014 Index of Economic Freedom as a rough yardstick and a unified data source that makes the task of finding roughly comparable statistics much simpler than it would be otherwise. Obviously the data has its limitations, and there are a huge array of data points that are not included, but this is only a bit of fun, after all. Below you can see how the tournament panned out.


But how did we actually work all this out? Well we started with the group stages, of course. We had three “games”, in which all four teams competed simultaneously. The winner of each game gained 4 points, the second got 3 points, and so on. The “games” in which the countries’ economic prowess were assessed were in the categories of Macro economy, wellbeing, and economic freedom.

For the Macro economy match up, we looked at two main metrics, GDP per capita and GDP growth. By combining these metrics we get an image of both the size of the current economy, and its likely size in the future. That is to say, allowing for the possibility that a large economy that is contracting rapidly could be outranked by a slightly smaller economy that is growing rapidly.
Four our next match, that of Wellbeing, we took unemployment and inflation as measures of the general economic wellbeing for the average citizen of each country. After all, if you can’t get a job, and prices of key goods are soaring, you are likely to not have a very good standard of living. As a rather rough approximation, we simply combined the two metrics, with the logic that a high value of either one would be bad, and would skew the score in the right direction.

Our last match used the data provided by Heritage, in the Index of Economic Freedom, to rate the economic freedom of each nation. The scores used by Heritage are percentages, and represent the degree to which a nation is free in terms of several aspects, such as freedom from corruption, fiscal, monetary and trade freedom, and the level of government spending.

So much for the group stages. With those completed, we simply fed the winners and runners up into the structure of the knockout stages (Winner of Group A plays runner up of Group B, and so on) and repeated our analysis between each pair of countries. We tweaked it slightly, as points would no longer make sense. Instead we treated each category of stats (Macro economy, Wellbeing and Economic Freedom) as goal scoring opportunities, where each team had a chance to get a goal in each of our three categories. Best of three won the game overall.

But this felt a little too simple for our liking. After all, the World Cup is, as we already mentioned, full of amazing drama, with upsets and surprises left right and centre. And in the real World Cup, the “best” team doesn’t always necessarily win, just ask Spain! So to introduce a slight element of unpredictability to our knockout stages, we added in a calculation of “form”. Put simply, the ratings for each category were multiplied by a random number between 0 and 1 to better reflect the impact of form and fitness on each game. This meant a country with a great set of macroeconomic stats could still not get a goal for that category if they were unfortunate. This randomness also threw up a couple of draws, which had to be settled by a penalty shootout, simulated by a simple comparison between the first 5 scores in the “economic freedom” section.

The results of this idle number crunching were interesting, to say the least. In the round of 16, Belgium pulled off an upset against the economic superpower that is the USA and South Korea also dumped Germany out at the same stage. Japan scraped through the Quarter finals on penalties, while Australia edged out England in the same way. The eventual winners, Switzerland, cruised to the final against Australia with relative ease.

So our “Economic World Cup” was eventually won by Switzerland, with Australia runners up, and Japan vanquishing South Korea in the 3rd place playoff. Now that our World Cup is done, we just have to wait and see how the real World Cup pans out!

Courtesy Shaun Myandee for IG Singapore (EconMatters author archive here)
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