China's+gold+demand+boosts+prices+by+WW

TITLE OF EXTRACT:
China's gold demand boosts prices

SOURCE:
Shanghai Daily: Business http://www.shanghaidaily.com/nsp/Business/2012/04/12/Chinas%2Bgold%2Bdemand%2Bboosts%2Bprices/

DATE EXTRACT WAS WRITTEN:
12/4/2012

DATE CURRENT EVENT WAS WRITTEN:
12/4/2012

EXPLANATION OF THE ECONOMIC THEORY RELATED TO THE ARTICLE:
The economic theories behind this article include: law of demand, cost of factors of production and income elasticity of demand. The law of demand states that when quantity demanded rises, price goes down. This is not true in this situation; China's high demand for gold raises prices instead of lowering them. This may be because of gold's relative income elasticity of demand, discussed below. Gold is a resource that the jewelry industry needs as part of its "land" factor of production (the other three being labour, capital and management); when any one of the costs of the factors of production rise, then the costs of production rises, theoretically causing the supply curve to the left because producers are less willing to produce things that are expensive to produce. This lowers the quantity bought and sold of jewelry while also driving the price up. This situation is true for most producers of jewelry in the world ("Most markets have seen a severe downturn in jewelry production on the soaring cost of gold, which rose 23 percent last year") except for China. Gold is an superior good, meaning that it is a good that people buy more of when their incomes are higher. China has seen rapid economic growth in recent years, and relative economic security will boost consumers' enthusiasm for superior goods such as jewelry.

VOCABULARY TERMS AND DEFINITIONS:

 * **law of demand:** when quantity demanded goes up, price goes down
 * **factors of production:** land, labour, capital, management
 * **demand:** the willingness and ability of consumers to consume a quantity of a good or service at a given price in a given time period
 * **income elasticity of demand:** how much quantity demanded changes when income of consumer changes
 * **superior goods:** goods that, when the consumers' income rises, the demand of the good rises

EVALUATION:
I think that China's behaviour is counterintuitive and very confusing - according to the law of demand, as prices rise, quantity demanded should fall. Therefore, I was bemused as to why China continued to buy gold and produce jewelry at a rapidly accelerating rate, when gold prices were rising ever higher. Evidently, a lot of countries may think so as well, since consumption of gold by other countries has dropped because of the rising prices. However, when we look at China's economic stability relative to other countries, people in China are getting richer and love to show it, and so goods like jewelry and gold are seen as good investments. Therefore, even though these transactions may seem like illogical decisions, this could be a good strategic decision on China's part; gold prices are rising dramatically, preventing other countries from purchasing gold while China continues to buy more and more. Gold is a good investment as it can later be sold or pawned off for cash, though prices may have fallen by then, causing losses.