If Gold Prices Are The Same Everywhere, Then Why Arn't House Prices Essay

If Gold Prices Are The Same Everywhere, Then Why Arn't House Prices - Essay Example Using the basic economic supply and demand curve, it is easier for us to examine how prices and available supply affects the existing market behavior. To enable us to understand the major factor that make the prices of gold remains the same over time but not the housing prices, the history of the global trading system will first be tackled. Using the theories of microeconomics, significant changes within the domestic markets that contributes to the changes in the market value of houses will be thoroughly discussed. Between the years 1879 to 1934, trading of goods between two countries occurred using of the gold standard which enabled traders to pay goods and services in exchange with the quantity of gold (McConnell & Brue, 2004: p. 478). Since the value of gold remains the same in each country, there was officially a fixed exchange rate all over the world. Eventually, the use of fixed exchange rate resulted to a negative international demand shock since the prices goods from one country to another remains the same (Eichengreen, 1996). The global economic depression that happened back in 1930s changes the concept of having fixed exchange rate. (McConnell & Brue, 2004: p. 479) In order to promote free competition within the domestic and global trading markets, some nations have considered making the cost of exportation cheaper by devaluating their currency against the real value of gold. As part of strengthening the adjustable-peg system which was introduced under the Bretton Woods System1, each country agreed to accept gold and the US dollar as the benchmark for international reserves since the US was able to accumulate the biggest supply of gold as compared with other countries (McConnell & Brue, 2004: p. 480). As a result, the agreed equivalent of gold in terms of the US dollar is US$35 per ounce (Bougrine & Seccareccia, 2004). Aiming to avoid economic bias