Economics Report: Gold Prices, Car Externalities, and Market Forces

This report delves into the economic factors influencing gold prices and the negative externalities associated with personal car usage. It begins by outlining the key determinants of gold prices, including supply and demand dynamics, the value of the US dollar, gold production levels, global crises, central bank instability, inflation, and interest rates. The report then explores the concept of negative externalities, specifically focusing on the impact of personal car use. It defines externalities, differentiates between positive and negative externalities, and discusses the social costs associated with car usage, such as pollution and congestion. The report highlights how market failures can arise when external costs are not considered. The analysis covers the supply and demand of gold, including its diverse uses, and it offers insights into how government policies and global events influence the market. The report aims to provide a comprehensive understanding of the economic principles at play in these areas. The report concludes by reinforcing the significance of market forces and externalities in shaping economic outcomes.

Supply and Demand

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Factors determining prices of Gold........................................................................................3
TASK 2............................................................................................................................................7
Negative externalities arises due to personal use of car.........................................................7
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
In an economy, authority to determine the prices of goods and services does not lie under
the hands of central bank or government body. Market forces like demand and supply of goods
and services in the process of setting equilibrium decides prices. Willingness and ability to buy
goods is referred as the demand of goods and quantity provided by the producers in market is
termed as the supply of goods. Underlying current demand and supply exists in every economy.
Value of every visible and invisible item of the balance of payment is determined by this force.
Present report throws light on two related concepts. It elucidates the factors that are affecting
prices of Gold. Gold is considered as a sign of status due to its cultural and economic
significance. Domain of its uses has been increased to a large extent such as earlier its use was
limited as a medium for transaction and exchange but today, it is used for varied purposes such
as a store of value, as a basis of investment, in medical treatments and equipment and other
areas. Hence, due to its multidimensional use, there are many factors that have a significant
impact on determining its price (Cachon and Terwiesch, 2009). Further, in the present report,
negative externalities raised by the use of personal car are discussed and ways adopted by
Government to accommodate its negative impact is explained.
TASK 1
Factors determining prices of Gold
Gold is used as the standard of value for all currencies in the world. High degree of utility
with diverse uses makes its price vulnerable with the influence of several factors. Fluctuating
figures of economy and volatile market condition leads to frequent change in prices. The key
factors that are affecting the prices of gold are elucidated as below: Demand and supply: Demand and supply has been the key determinants of price of this
prestigious metal (Hay, Knechel and Wong, 2006). Diverse uses of Gold and its supply
sources are listed as below:
Demand
1. Jewelry: Gold is considered as an epitome of the status and beauty. Stretching back to the
mists of time, Gold has been used for the ornamental use. China, India and US are among
the largest consumers of Gold in the form of Adornment and Jewelry. In response, to
satiate the needs of consumers, innovative and extraordinary products are designed.
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Significant share of demand of Gold in the form of jewelry has the considerable impact
on the prices of Gold (Asif and Muneer, 2007).
2. Medical Equipment and treatments: Gold has been used as the catalyst to improve the
quality of treatment to provide good health. It is used in medical equipment as stents.
Advancement of technology has made the use of Gold nano particles for varied purposes
such as in faster diagnosis, for precise targeting of drug in human body and as a medium
to capture power of light.
3. As a store of value: Gold is considered as the source of safety, people tend to keep the
considerable amount of stock as the store of value.
4. Investment: Unique feature of Gold of acting as the medium for the capital protection and
risk management increases the demand of Gold significantly. At the time of financial
stress, it helps in stabilizing returns. It helps in protecting portfolio at the time of
downside risk without affecting the long term returns. It accounts for one third of the total
Global demand.
5. Technological advancements: Due to high resistance and thermal conductivity, gold is
used in the research and development. Use of gold's nano particles for different purposes
imparts the impact on prices of Gold (Erikson and et.al., 2007).
Supply
1. Mining and Extracting: To fulfill the global demand of Gold, it is procured through
mining and extraction.
2. Recycling: One third of the gold supply is done in the form of recycled Gold. Value of US dollar: It is accepted as the standard currency in world as it has the direct
relation with prices of Gold. It is widely used for international transactions and stored as
the main currency. There is inverse relationship between prices of Gold and the value of
US dollar. Strengthening of US dollar gives opportunity to the people for buying Gold
due to softening in its prices. On the contrary, when US dollar weakens, people deviate
from investments in Gold and try to keep the quantum of currency with them in
expectation of better returns (Linck, Netter and Yang, 2009). Gold Production: Escalating demand of Gold is fulfilled by either the production or the
recycled Gold in market. Only about 2,500 metric ton Gold is produced yearly to satiate
the need of consumers for varied purposes. Further, recycled Gold accounts 30% of the
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total supply. Variation in production and recycling of Gold leads to fluctuations in prices.
Changes in government or international organization's policies with respect to the
extraction or mining of Gold such as for the environmental reasons or some other related
directly influence the price of Gold (Groth and et.al., 2007). Global Crisis: Gold has been the central point of International economic activities. It is
viewed as the safe heaven for storage of value. People tend to buy more gold when there
is instability in the market conditions on international and national platform. In the
volatile market condition and geopolitical tumult, Gold is regarded as the source of
safety. When there is the downturn in economic situation, prices of Gold get increased
and similarly, when there is favorable economic situation for people, the gold’s value
gets softened and the prices become low. Central Bank Instability: Central banks of countries keep their currency in the form of
Gold, paper currency and in the form of securities and equities. There is shift in the
tendency of central banks for keeping the currency. They intend to keep assets in the
form of gold rather in other mediums (Burkhard and et.al., 2012). In response of this,
central banks are adopting certain measures such as buying and selling of currencies,
transaction of government securities and assets and other related. Movement of
currencies in implementation of these methods brings fluctuations in the prices of Gold.
Along with this, to stabilize the economic situation at the time of financial crisis or book,
central bank makes changes in the stock of assets in the form of Gold which trickles
down the changes in the value of Gold. Inflation: Inflation refers to continuous rise in the price of goods and services in an
economy. It is measured in terms of consumer price index, purchasing power index and
wholesale price index (Simpson, Carruthers and Vannucci, 2007). When there is rise in
the prices that is increment in the inflation rate, it also brings fluctuation in the prices of
Gold. But these fluctuations are temporary in nature due to long term stability of value of
Gold and it attracts people's demand in the midst of fluctuating and volatile market
conditions which further bring changes in the prices of Gold. Prices of Gold shifts in the
direction where prices of basket of goods is moving. When prices increases, Gold's value
also spikes high and at the time of reduction in inflation rate, prices of Gold also lowers
down.
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 Interest Rates: Interest rates are the key indicators which decide prices of Gold. Prices of
Gold fluctuate with the availability of capital in economy. For instance, when interest
rates are high, availability of capital is low. Due to high demand, there is scarcity of
capital in the market (Cohen, Diether and Malloy, 2007). With high expectation for
greater returns, people tend to invest more in paper currency rather than Gold.
Consequently, prices of Gold get reduced. On the other hand, when interest rates get
reduced, people's tendency to invest in gold increases.
 Global Crisis: International economic system is dynamic and volatile in nature. It
changes frequently with the variation in macro and micro economic figures. Such
fluctuations trickle down to the economy of country. The ability of country's economy to
adjust with the changes decides the prices of economy. In general context, gold is the
entity with stable long term value but crisis or boom situation occurred in the country
brings temporary fluctuations. In response of this, people's tendency to buy and sell gold
changes. When there is recession and down turn in country, people lose confidence in
finance markets and due to low expected returns, they invest in Gold. The demand of
Gold by investors increases (Puri, Rocholl and Steffen, 2011). It is processed in two
ways, that is, direct demand and indirect demand. Direct demand of Gold refers to the
purchasing of bars and coins whereas indirect demand is fulfilled through exchange
traded funds and similar products.
Considering the above factors it can be inferred that the there are many factors that affect the
prices of Gold. The major factors that imparts significant impact are the market forces that is the
demand of consumers for varied purposes and the supply through which the demand is fulfilled
in the form of supply. Further, with the above analysis it can be stated that the interaction of
demand and supply reflects the changes and fluctuations in prices of Gold (Folland, Goodman
and Stano, 2007).
TASK 2
Negative externalities arises due to personal use of car
Externalities refers to impact on third party by production of any goods or services. There
are fundamentally two types of externalities exist; Positive and Negative.
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Positive externality: When there is positive impact on third party with use of any goods or
services or by their production, it is referred as positive externality. Examples of positive
externalities are use of public goods and non property resources that are non excludable in
nature. In use of these resources benefits are accrued to other parties as well (Rosegrant, 2008).
Similarly, there are negative externalities as well.
Negative Externality: When with use and production of any goods and services, there is negative
impact on third which is unrelated to process of production and uses. use imparts damage and
harmful impact on unrelated entity. Examples of negative externalities are cost paid by citizens
in form of ill health by emission of harmful chemicals by industries, inconvenience faced by
people due to large volume and noise pollution, occurrence of damage due to heavy use of
vehicles and transport in city and other related.
Negative externalities caused due to its increasing intensity is becoming important
concept in economics. Many economists have given different theories for its prices and relevant
measurement (Farmer and et.al., 2006). Negative externality is measured in terms of social cos
and social benefits. Social cost refers to addition of private cost and external cost. When
producer does not keep external cost into consideration it leads to market failure and raise
problem of negative externality. According to economists, negative externalities is referred to
situation when cost is paid by third party instead of producer and this condition arises when
producer miscalculates and excludes external costs.
There are many points related top negative externalities raised due to use and production
of goods and services.
 Negative externality raise due to market failure occurrence.
 Negative externalities are spill over effects that arise from production and consumption of
goods and services and no appropriation is made in relevance with that.
 It is situation of market failure when in price mechanisms components such as social
costs and social benefits are not taken into account (Luchansky and Monks, 2009). Negative externalities lead to situation when social benefits is lees that private benefits.
In given scenario, negative externalities raised from use of personal car is to be discussed.
Negative externality raised from use of transport and travel is key concern of economist to be
analyzed. Many theories and concepts are prepared to solve problems of negative externality
raised by increased use. Increased harmful effects and damage by use of vehicles is reason of
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concern. Various methods have been adopted to evaluate and rectify problem and issue.
Assessment of negative externality is done in following manner.
Impacts of increased personal use of car in explained in following aspects:
 Economic: increased use of personal car has significant impact on economic scenario of
country.
1. Prices: with increased demand in quantity of cars, prices get hiked in considerable
manner. As supply can not be made as per demand of consumers, producers increase
prices to fulfill demands and balance equilibrium. This further affects satisfaction level of
consumers by impacting consumer surplus (Chen and Fan, 2012).
2. Financing and investment criteria: To fulfill demands of consumers and to increase
quantum of production, there is requirement of respective amount of finances.
Availability of limited number of financial directors and other factors leads to increase in
extra cost incurred by producers. Extra cost incurred by producers is transferred to
consumers in form of increased prices.
3. Deficits in balance of payments: increment in use of personal car leads to higher imports
in country. When imports of high rate vehicles increases in country, it leads to escalation
of deficits in balance of payments. It impacts both current account and capital account of
country. This induces lowering of macro economic figures that leads to decreased
economic growth (Huang, Bor and Peng, 2011).
 Environmental: The negative externality raised by the personal use of car is due to the
significant negative impact on the environment. It further leads to the damage in various
aspects such as the infrastructure, health, financial resources and many other related.
1. It increases the pollution of the city in the considerable manner. In the recent survey it
was found that the major factor that accounts to the increase in the pollution in the city is
the increased use of vehicles. It leads to the damage of air quality which is not sustainable
for the healthy living.
2. The emission of the harmful gases such as CO2 and other green house gases by the
vehicles leads to the damage of ozone layer which functions for the protection the earth
from harmful radiation of sun (Rios, McConnell and Brue, 2013). Infrastructure: The increment in the use of personal car leads to the damage of
infrastructure of the country that is decreasing the quality of the road.
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 Other effects: Apart from the above impacts, the personal use of car has also other
negative impacts.
1. When the number of personal use of car increases the intensity of traffic in the significant
manner that leads to the damage of road infrastructure.
2. In the limited number of roads, when the traffic increases with the increased use of
vehicles people are more prone to accidents (Bauen and et.al., 2010). The data in country
like India shows that there are the highest number of accidents in the country, there are
cities with the high figures of vehicles running on roads and high degree of pollution. All
this statistical figures shows that all these problems revolve around the increased use of
personal car.
3. Increment in number of vehicles and traffic leads to damage in health.
4. It leads to increase in social disruption.
5. With increased amount of automobiles in the city, there is the significant amount of
resource depletion. The optimum use of the raw materials gets disturbed.
To accommodate the negative impact of increased personal use of car many steps have
been adopted by the government of the country and other legislative bodies. Economic measures: The most effectual method adopted by the government to limit the
use of personal car is my inducing the economic measures. It includes the imposition of
two types of taxes direct tax and indirect tax (Varbanov and Klemeš, 2011). Direct tax
has the impact on consumer directly such as carbon taxation and related whereas indirect
tax is the burden on producer which either bear by consumer of shifted to the consumer
such as the increment in production taxes. Further, the government also charge producers
and consumers in the form of congestion pricing, traffic tax, toll tax and other related. At
the same time, government limits the entry by specifying the quantum of imports and by
imposing tariffs and custom duties at the time of entry. This measure functions
effectively in reducing the use of personal cars (Huang, He and Cen, 2007).
 Planning: To root out the cause of negative externality of personal use of car,
Government adopt systematic and planned way with the use of these steps:
1. Identifying rationale for plan
2. Specification of objectives
3. Complete appraisal
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4. Monitoring and evaluating the plan's relevance
5. Results Direct methods: By adopting direct methods such as rationing of road spacing that is by
specifying approximate use of road per individual plays vital role in limiting the use of
vehicles (Formica, 2004).
 Regulation and rules: Government adopts legal methods to limit use of personal vehicles
by imposing certain regulations and laws.
For automobile companies there are rules with respect to manufacturing such as the prescribed
and specific fuel efficiency, various taxes and duties on it.
For consumers there are rules adopted in some countries such as entry restriction of high fuel
consuming vehicles before a certain time duration.
 Other measures: Government with the help of certain mediums promotes use of car
pooling. Various methods are adopted to increase awareness among the people about the
ill effects (Christopher, Peck and Towill, 2006).
CONCLUSION
From above study it has been articulated there key factors that affect the prices of Gold
are demand and supply interaction, Gold production and central bank strategies to stabilize
economy. In second part negative externality raised by personal use of car is discussed and many
methods adopted by Government are elucidated. It is inferred that with the personal use of car
damages occur in various dimensions such as impacting the pricing structure of automobiles,
imparting harmful impacts on environment and damaging the infrastructure of country such as
roads. Apart5 from this it leads to the serious damage to the health of countrymen due to
increased pollution and on large scale it leads to global warming, ozone depletion, acid rain. To
accommodate the negative impacts, government imposes different taxes and adopts various
methods to increase awareness about its ill effects.
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