[pacopasa]

Professor Herbener,

In an economy that uses gold for money what are the factors that determine what % is used for money and what % is used for industrial use such as jewelry?

If a new gold mine is found and could possible add 10% to the stock of money, are there factors that determine what % goes into the money stock and what % goes to jewelry?

[jmherbener]

Any good that has value as a means in different lines of use will be allocated across the different uses so that its marginal value is the same in each line of use. Iron ore, e.g., is allocated across its use in steel production and iron fences so that the price of iron is the same in those two lines of use. If it were allocated as an input in steel and commanded a higher price than it fetched if sold into iron fencing, then iron producers would shift their supply to steel manufacturers. They would continue this reallocation until the price was the same in the two lines of use.

So, if a new gold mine adds 10% to the stock of gold, then the new stock of gold will be allocated into gold coins and jewelry so that the market exchange value of an ounce of gold is the same in gold coins as it is in jewelry. We can only know in retrospect what the percentages are in the two uses. But the factor that determines the percentages is the relative demands in the two uses.

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