PART ONE: GOLD
Gold is defined, according to Oxford University Press as a yellow precious metal, the chemical element of atomic number 79, used in jewellery and decoration and to guarantee the value of currencies.
To understand economic importance of gold we have to look the economic concept of SCARCITY, SUPPLY and DEMAND as it affects the gold market. Scarcity occurs when supply cannot keep up with demand for a limited resource or good. As a result of this trend, different economic decisions must be made to proficiently allocate resources.
Scarcity can occur due to natural occurrences or man-made. It can happen when businesses or individuals reduce amount to supply, so as prop up demand and increase prices. Or when fear in the market leads to panic point at which demand will out stripe supply. This kind of trends tend to affect the gold, hence its supply and demand in the world market. With scarcity comes a choice.
Choices entails that we must tailor our needs to meet our demand and subsequently supply. Though not feasible as our demand for good are insatiable and supply can be limited. And when supply is limited prices tend to go up and the numbers of people who can afford the good tend to go down. The same principle can be applied to different countries. The wants of many world economies cannot be satisfied by the available resources.
In order to sustain the various economies from diminishing most countries use gold as a means to supplement or support their various currencies, hence its supply and demand limitation. It should be noted that gold, unlike other commodities, have many uses which in effect has a bearing on it availability. The variety of demand and supply of gold has made it one of the world most consistent commodities in the world market; its usage is also varied as it goes outside of decoration and wealth. All over the world, gold has emotional, cultural and financial value, which supports demand across generations. Gold is made into ornaments and used to manage risk in financial establishments and protect the wealth of nations; it is found in mobile phones, and pioneering medical equipment. These various uses for the commodity mean that across different sectors in the world of business the gold market have risen in status at different points in world economic setting. This level of stability, in nature of the gold trade, is such that there is a continuous yarning for the commodity. (World Gold Council. 2015).
“At the end of 2014, there were 183,600 tonnes of stocks in existence above ground. If every single ounce of this gold were placed next to each other, the resulting cube of pure gold would only measure 21 metres in any direction”.
Though there is scarcity of gold, the demand for it is as varied as its uses. The largest producer of gold, in terms region, is Asia with China accounting for about 15 percent. Asia as a whole produces 22 per cent of the total newly-mined gold. Central and South America produces around 17 per cent of the total, with North America supplying around 15 per cent. Around 20 per cent of production comes from Africa and 14 per cent from the former Soviet Union, where new findings and new operations offer prospects for economic growth and development. Recycling accounts for around one third of the total supply of gold. Some of the world largest producers of gold are always investing in new technologies in order to reduce cost and boost profit, and continue to invest in new technologies, “so as to support the ongoing demand for gold, but ensuring that it is done in a responsible way”. (World Gold Council. 2015).
Gold can be an exasperating asset to own for the fact that the valuation of the commodity is not easy to arrive at, not knowing the direction the price is heading to can be very distracting to some investors. In best marketplaces, there are lots basics, markets intelligences, signals, and statistics that can be used to get close to the valuation of the commodity. Gold is different because today it doesn’t have that applied purpose in trade or in the everyday needs of humans. Yet all of this does not mean that gold is a chaotic, impulsive, and naturally highly capricious asset. Instead, it just means that gold operates by a different set of factors and principles and knowing what these are and what kind of impact they have is key to answering the ever-present question of “are gold prices going up or down?”. To understand where the price is heading one has to look at what factors has effect on gold and how economic data assist it price flow. (GoldResources.net. 2013).
Factors affecting Gold Demand and Supply
- Inflation prospect: where there is inflation the value of currencies tends to fall which leads to investors (governments, companies and individuals) preferring to save their wealth in physical assets such as gold.
- Supply and Demand: the price of gold could be altered by the change in supply. For example, if there was a sudden rise in manufacture of gold, the price is expected to tumble. However, the supply of gold is relatively stable. The instabilities in price tend to happen due to changes in demand (Tejvan Pettinger. 2011). On other hand the demand for gold for use in goods such as jewellery (e.g. an income increase in major gold consuming nations could lead to increase in demand for gold subsequently increase in price and supply),
- Speculation, just like any other commodity gold is not immune to speculation as a volatile good it can be overvalued which can lead in fall in price as with the case gold burst of the 1980s.
- The state of world economies also have an influence on the demand and supply of gold in world market. When there is a global recession, most businesses and governments tend to put their trust on gold trading. Investment, most investors prefer their portfolio in gold as the value remain the same even during periods of high inflation to store wealth, in turn this preference can lead to change in price of gold. Gold is known to perform well during global economic crisis.
- The strength of major currencies in the world has a strong influence on the price of gold. Investors tend to divest their currencies in favour of gold if there is fluctuation in the price of the dollar. This singular behaviour tend to prop up the price of gold and also when there is a rise in the value of this major currencies the demand for gold falls. (Rajivi Sharma. 2011)
- For currency use by central banks: each government uses gold to prop up their currencies during times of currency depreciation or inflation by using it to buy up the cash shortages.
- Major conflict in world can have an impact on the price, demand and supply of gold as investors would prefer it to the conventional currency as a means of trade due to the fact that it can boost confidence.
In a report in the Telegraph of 12th November 2015’ World Gold Council has stipulated that major economies like China, India and Russia have continued to be at the forefront for gold purchase; while Russia is leading the way with its Central Bank stockpiling its gold reserve while China fuelled gold buying spree for the commodity when it did an unprecedented thing of devaluing its currency as “investors sought to shelter themselves from further market volatility”. (Szu Ping Chan. 2015)
In recent years, the increase in the manufacture and demand for mobile phones has seen the increase in demand for gold in the technological sector; this in turn has helped in the increase in supply of gold in world market as well increase in mining. Gold has gone beyond currency and jewellery. It is also worthy to note that gold has no substitute and as such its value and cost are constant. With recent speculation of US Federal Reserve set to increase interest rate the demand for gold is set to increase and may not supply level.
The customary supply and demand system stipulate two notions: as supply rises, the selling value of a product falls. As demand increases, the price which it can be procured increases. And if Supply is more than Demand then there will be pressure for the price of good to change. Equilibrium (equilibrium price or equilibrium quantity) is reached where Supply and Demand meet. This could be applied to gold. As figure 1 below shows.
Figure 1
The above shows the equilibrium of gold. The vertical line is price; the horizontal line is quantity in the charts. Where the two curves meet is the equilibrium price as dictated by the market force, at this point there is no pressure on the market for the price to either go up or down, thus the market is stable. (Jim Willie. 2006)2.
It should be noted that equilibrium is not a permanent point, but the point of equilibrium is determine by the change in mood and market environments alteration and it never stays still for any long period of time; even though equilibrium point is the point at which investors would like the market to be.
• “The effects on price and quantity can be ambiguous.”
• “In this case the equilibrium price increases, and the equilibrium quantity increases.”
Figure 2
Figure 2 shows change in supply and demand of gold as it is affected by changes in prices and other factors. Its shows that when there is change in price there is a change in both supply and demand a new equilibrium is reached and the opposite is the achieved when there is price fall or there is fall in supply. One should bear in mind that a shift in demand also has effect on the equilibrium. (Cleary, M, 2015).
As with all international commodities, the scarcity, supply and demand of gold are subject to market forces which are dependent on market speculation. When such assumption occurs the market tend to go into frenzy as business and governments will make panic buying. These responses do have effect on prices as it causes artificial scarcity and subsequently rise in demand and fall in supply.
PART TWO: CARS
Negative externalities arise when manufacturing or consumption unintentionally imposes extra prices on third parties or when costs that result from one transactions impact other groups or third parties negatively. The resultant effect can cause damage to the environment, noise, congestion and pollution etc. To understand the effect on society, monetary value is used to measure the cost and benefit and what impact the negative externality could have. (Tutor2u. 2015)
The impact of manufacturing and using cars in our society varies depending on what spectrum we look at it from. Cars are useful in our daily life as it conveys people and goods from point A to point B, but with this comes other negative impact on our society.
- Pollutions: cars have been used to transport people, goods and services from one place to another. though the economic impact is large cars has been accused of contributing to air pollution due to its gas emission which has led to calls from certain section of the populations for various taxes and government regulation to be introduced so as to limit its contribution to air pollution and climate change. Noise: is one of the negative externalities resulting from cars on our roads as a result of constant sounds it makes while on the move as well as the blaring of horns for motorists.
- Accidents: with loss of lives on our roads there have been some calls for some sort of measures to be put in place to tackle the menaces of accident caused on cars whole some people blame the drivers. But in general there have been calls for some introduction of speed restrictions on major roads.
- Congestion: cars has been blamed for gridlock on roads hence the call for some restriction on some part of our major cities and town. some countries have went as far as introducing NEGATIVE AND POSITTIVE plate number road usage as well as introduce some kind of charge for driving through some part of our cities like London (introduced in 17/02/2003). This has also led to introduction of route specially made for cyclists, with more emphasis for pedestrians.
Journeys times inflict external cost on other things like congestion; pollution (air, noise); accidents. Beyond Journey times, delays and high fuel prices contribute towards the private costs for car journeys due to congestion.
The more car that are produced or sold the more likelihood that more roads has to be build which can either have a negative or positive impact on the environment. And thus might result in visual intrusion and blight the scenery. Landscapes are changed when trees are cut down and lands altered. It is feared that altering the landscape for road construction has led to flooding in some regions of Britain.
Peaking causes traffic congestion. At certain times of, more especially in the morning rush and evening rush hours more cars join a road grid already operating at full capability, so journey times increase as there congestion on the roads during this peak period; tempers tend to flare up coupled with some level of stress.
Additionally, travellers are also affected; and as with any externality, economists attempt to place a monetary value on negative spill-over effects including: as the spill over effect is measured in cost to businesses.
Other costs e.g. higher fuel costs, with traffic gridlocks on our roads cars tend to stay on roads longer than expected hence adding to extra cost of fuel as drivers and commuters spend more time on traffic jams; has a spill effect on those who pays for commuting. This also have effects on business because the manpower cannot get to work on time. It is estimated that the negative cost of congestion on British economy runs into billions of pounds annually.
Market failure also contributes to level of car usage in our societies. It is such that some dealers and manufactures falsify information that can impact our purchase mentality and or use of cars. This selective information distribution is done solely to help car market make as much profit as possible. This trend has been successful because the general public would make decision based on a positive feedback they get from manufacturers and dealers. The existence of disproportionate information results in an over allocation of resources towards the market for cars. (Jason Welker. 2011).
One the case in question is the recent controversy involving Volkswagen. To control and monitor the extent of negative externalities government has to introduce certain rules to heavily impact on the car manufacturing and usage in our roads, some of the rules are popular with the public while some are not. Information or lack of it can impact on market failures as it binds buyers and users of the product, the end users will rely on information being put out by manufacturers/ or suppliers.
In the case of Volkswagen, the buyers who believe in environmental safety would tend not to buy their products if they were told of false emission result they put out to the public, this has led to the car giant posting a third-quarter operating loss of £2.5bn. (Paul Gallagher, 2015).
The entire auto industry is now under examination, as are watchdogs, whose testing measures proved so easy a game to manipulate and whose intricate dealings with governments and auto manufacturers may not serve the interest of the public. (Lucy P Marcus. 2015).
This negative publicity has wedged on the auto industries as trust from both government and the public has diminished, though little impact has been made on sales of cars. The claims by car makers are now subject to scrutiny and proper verification something they were not used to before.
With the introduction of congestion charge in London and other restriction on our roads, the government has been able to tackle at least two different issues with one solution. It is estimated that air pollution has gone done in areas with congestion charge in effects as well as adding extra revenue into government coffers. In other to make it easier to cross through city centre bicycles lanes and more buses were introduced. All this has led to increase in revenue generation.
Tax increase on motor vehicles is another way the government can control the use of cars by the public. Any rise in price of cars will lead to decrease in demand and purchase of cars which in turn will lead to increase in use of public transportation like buses, trains etc. another proposal being contemplated is the introduction of “Greenhouse Tax”.
With recent advances in technologies and people’s interests in cleaner air there has been a surge in car manufacturers investing more on low carbon emission cars and electric care as well as driverless cars. Virtually all car manufacturers have invested on this trend.
If this is to be then government has to introduce regulations to govern the use of such vehicles. New laws have to be implemented or current ones upgraded and updated, which will turn act as a beacon for the general populace to follow. Some sort of incentives could be introduced to encourage motorists to switch to non-carbon emitting cars. (Nicole Arce. (2015).
Another alternative is to tax car industries, or tax the construction of roads to prevent pollution and flooding from occurring. By taxing car and road manufacturing companies a, the production of these goods and service will be lowered, which will lead to increase in price. The extent of tax would depend largely on the type of vehicles being produced as cars have various usages and importance. With the tax imposition on car industry, there is the likelihood of less cars being produced, thereby reducing the amount of pollution, and get all those involved to accept full costs of extra taxes on cars. The money raised from the taxes can be used in building flooding defences in areas where construction of roads and bridges have facilitated the rise of flooding, this approach can lead to less natural land to be destroyed in favour of roads construction.