Ok, I was thinking over this--why are prices in the wizarding world so damn high? Leaving aside the issue that many things could be obtained by magic, even for those that aren't, those prices just don't seem to fit.
The Gringott's goblins appear to have a monopoly in the money supply of the UK, acting like the WW's central bank. However, the money they issue is essentially a metal standard, and not even regular metal, but only that which has been processed by them first. This should mean that the monetary base is ridiculously small to begin with. Not only that, but the only bank in the whole country, again Gringott's, appears to function as a full reserve bank, where they derive their profit from charging for the deposit of currency instead of from lending depositor's money. This means that they don't have a multiplicator mechanism, which further reduces the money supply. This is in the supply side.
When we turn to the demand side, we face other problems. While I don't see the product changing much, given the relatively stagnant nature of wizard society, I bet velocity is pretty damn low--not only is economic activity not very active, but any product can be simply obtained through the wave of a wand; in addition, most of the money supply is resting in pureblood vaults.
I'm unsure where interest rates would stand normally, but they should be somewhat high given the scarcity of money. I don't know if that should be enough to counter the low velocity, but it probably should, given that I don't foresee demand for loans as being that high.
So, why aren't the prices much lower than they are, in comparison to average wages?

 

Let me link the viewers of this thread to this article that deals with Money in the Wizarding World.

Some relevant extracts:

[SIZE=+1]salaries:[/SIZE] Hit-Witch or Hit-Wizard for the Magical Law Enforcement Squad (new hire's starting salary, together with a Ministry of Magic broomstick and one's own regular bed at St. Mungo's) (DP)
.....700 Galleons per month
Assistant Manager at Flourish & Blotts Wizarding Bookstore (DP)
.....42 Galleons per month
Dragon Feeder at Gringotts (DP)
.....7 Galleons per week


Now for some relevant prices, so we can discern the purchasing power of Wizards:

• A Wand costs 7 Galleons;
• A Newspaper costs 5 Knuts or 7 Knuts, since JKR regularly forgets things.

We can see a serious difference between types of jobs. An Auror, who presumable earns more than a Hit-Wizard, since all the fuss is about Aurors and not Hit-Wizards probably earns more than 1,000 Galleons a month, starting salary.

To me a wand seems to cheap, for an object that lasts a lifetime. 7 Galleons is something even a Dragon Feeder could afford without difficulty.

The problem comes from JKR being rubbish with numbers. The system does not make sense at all. However, suspending disbelief, for a proper, working Wizarding economy, we have to make some assumptions:

1. Nothing can be created by magic; (Some argue against this, pointing out Dumbledore conjuring armchairs and McGonagall sandwhiches. I consider that to be merely a form of Apparition, from which they are brought out from storage. If that were not the case, the Weasleys would be even more incompetent, as they shouldn't be poor. Since they are dirt poor, we know magic can't create things. Sure, magic can help, but it can't create matter out of magic.)
2. There is more than one country out there. Presumably, since most of the raw materials come from Magical Beasts, and they are most lilkely extinct in Europe due to Muggle interference, most raw materials are imported from wild places: Africa, South America, Asia etc. That brings up interesting ideas, such as Wizarding Colonies.

Now, what would a wizard have to spend money on:

1. Food, which we don't know the price of, sadly.
2. Housing, which we don't know the price of, sadly.
3. Wand (7 galleons, once in a lifetime, or more if you break it -read idiot Ron-)
4. Clothes (no idea, but probably far more than the Weasleys can afford)

The Purebloods holding large amounts of Galleons is possible, but I think their fortunes are more in Property, such as Large Manors, Magical Items, Stocks in Wizarding Guilds, etc.

Now, I must say I am not very good at Economics, but just from a wand perspective it seems prices are not as high as they should be.

From an outsider perspective, the explanation is simple: JKR is an idiot with consistency and numbers (alternate floor plan, prices, salary etc.) and the whole system is flawed.

EDIT:

I just remembered something. The Weasley village won 700 Galleons in a Daily Prophet draw, which the imbeciles that they are used for a holiday in Egypt. Their idiocy cast aside, if 700 Galleons is the sum a Hit-Wizard earns per month, and it is also the cost of a holiday for a family of seven at least a month, we can say that prices are again too small.

However, I have to study now (for Economics, ironically) so I will leave you with my thoughts and good wishing.

 

Eh...I was under the impression that prices were rather cheap. You can buy a unicorn horn for 7 galleons. Considering how rare and reclusive unicorns are, as well as how killing them is a rather Dark act, I would have expected the price to be much greater. Other Potions ingredients are pretty cheap too - and entire "scoop" of bettle eyes for 5 Knuts.

Similarly, wands are only 7 galleons. A galleon is roughly 5 pounds, so that's £35 for the most important item a wizard will ever buy, which will last him entire life.

Disagree. We see new products all the time: new brooms, the WWW items, etc. The wizarding world develops new breakthroughs in magic at a healthy rate, if the fact that there are weekly magazines on the various disciplines is any indicator. In addition, economic activity seems to be pretty high, relative to population size. A village of ~3000 people that had as many shops as Diagon Alley does would be doing pretty well for itself.

I'd say that this is countered by the fact that the population is ridiculously small (any bank multiplier would be tiny anyway, since I can't imagine much lending taking place in a population of 3000) and the fact that the Goblins can effectively just print new money when they get their hands on more gold (from the curse breakers).

Anyway, the whole system doesn't work, because as far as we can see, there's no lending in the wizarding world, nor any interest gained from saving. Nor are there government securities, gilts or bills. So using an economic analysis that depends on these things is rather faulty.



This diagram shows the traditional basic way that the money markets work. You have supply of money (Sm), demand for money (L) and where they are in equilibrium is the interest rate, which is effectively the price of money.

The Money Supply would be, as you say, extremely low due to lack of lending - just cash and deposits in banks. However, whenever the Goblins "print" off new galleons the money supply will increase, and with a population the size of 3000 this may be enough.

The Demand for Money would just be determined by L1 and L2 (the transactions motive and the precautionary motive) as I can't see much speculation occurring in the wizarding world. As such the slope of the curve would be rather steeper than is traditional.

However, though we have demand and supply, the system doesn't work because, as far as we can see, there's no such thing as interest rates in the wizarding world. There is no price of money. The system collapses. There will be no monetary policy, no financial markets.

So using the ideas of money supply and demand to explain prices is a bit flawed, though you still have the equation MV = PY. But again, this doesn't tell us much, as M - as I said earlier - being low may not be as much as problem as you say, and we have no idea what V and Y are in the wizarding world. Or for that matter, information on P - we've only seen a handful of products, and their prices have varied.

TL;DR: Not enough information, and where we do have information it's inconclusive.

Not true. We know that you can create pretty much anything out of nothing (conjuring) because Hermione in DH said that food was one of the 5 things that you can't create out of nothing (exception to Gamp's Law of Elemental Transfiguration).

However, JKR has said that conjured items don't usually last for more than a few hours, and that there are laws on what you can and can't transfigure.

 

Actually, Taure, you are right on the prices. For some reason, I had misremembered the price level and thought the general price level was very high compared with average wages.
I do wonder, since Galleons are worth only around 7 euros, and I'm pretty sure they weigh at least half an ounce, why aren't there some people making a fortune on arbitrage.


Anyway, I gave my reasons for why I think velocity is pretty low, and when it comes to product, it's true that there seems to be some degree of magical advancement, but since spell development probably doesn't have any patent like process, this wouldn't spill over into the Wizard GDP, as it were. And anyway, despite that progress, there doesn't seem to be or have been any development powering engine like the Industrial revolution was in real life, to power true development. GDP was pretty much constant before it, as you know. The wizarding world would almost be Malthus' wet dream.
Would the Goblins really print money all that often, though, consider that, as you said, probably not much lending takes place?

 

There is a widespread assumption that Galleons are made from pure gold. JKR has described them as gold, but this may have been referring to colour rather than metal. Indeed, considering the softness of pure gold, I find it likely that the coins are an alloy of some kind - either than or they have hardening spells on them. Either way, there are probably laws or spells stopping wizards selling Galleons to Muggles. If there is indeed a hardening spell on the gold, then it's possible that Galleons can't be melted down, which would stop them being sold to Muggles as pure gold.

Good point. Though I'd say that the money they "print" would be the only money they have to put towards lending, as they can't lend in the way that Muggle banks do, since their customer's deposits just stay in the vaults at 100% liquidity.

And it's true that spells themselves can't be charged for, but charmed objects and so forth, created using the new spells, can be.

 

Reasonably pure gold was used as muggle money for many centuries, so I don't see why it wouldn't be able to be used as wizard money. As for a spell that wouldn't allow galleons to be sold to muggles, Hermione's parents were able to get them, and so are squibs--as for laws, well, laws can be broken.

I do wonder if most of the few lending that goes on is done by the gobblins or by wizard moneylenders instead. Fred and George didn't even consider borrowing money to fund their jokeshop, and thus had to resort to Potter Venture Capital.

But are those that much of a necessity when you can do spells? I'd say they are more luxury goods, of the kind that were not uncommon in the 'Malthusian ages'...

 

I was meaning a spell on the gold (like the suggested hardening spell) which would prevent it getting melted down for gold, and thus it would be useless to Muggles, and so wizards would have no reason to sell it to them.

I'd say that that pretty much all wizarding items are luxury goods. The wand is the only real magical necessity. All other necessities (food, clothes, housing) aren't really magical in nature, though magic is probably used in production.

 

Haven't you ever heard of a scam? I'm pretty damned sure that some wizards would have no qualms about scamming muggles, hell they scam each other daily.

 

If a wizard was going to scam a Muggle, he'd just show them a piece of paper and tell them it was Gold, like Dumbledore showed the Matron of the Orphanage a piece of paper and she thought it was his official papers or whatever. Most likely the Confundus charm. Or they could just stun them and take the money from the cash register. Or use the Imperius. Or legilimency to get pin numbers etc. Or an unlocking charm on an ATM. Or any of the many ways magic could be used to take advantage of the Muggle world.

There'd be no reason to bring any real gold into the situation.

 

The issue with faking money is ludicrous. What is to stop a muggle from printing money? Laws, and the difficulty in getting it right, since there are various ways of protecting notes.

What is to stop a Wizard from taking advantage of the money system, either through creating his own galleons or melting them down for the gold value?

Well, the answer again, is laws and difficulty of the task.

The laws part is presumable, but surely true. The difficulty can range a great deal. The Galleon could not be pure gold for example and its actual gold value much less. The Galleon could have a version of an unbreakable charm, preventing the rupture of inter molecular bonds. Hell it could even dissipate if you try to melt it.

 

People, you are looking for gold in a pile of shit. Rowling simply failed to things like these through. When she wrote the books, she probably just pulled the costs out of the air. "How much should a wand cost? Hell with it, 7 galleons. It is such a magical number, right?" Or something similar. This is only another of uncountable number of plotholes that plague the Harry Potter world. I just wonder how good would Harry Potter books have been if they were written by an intelligent writer...

P.S. Sorry for bad english.

 

Expanding upon, and in some cases correcting, my previous posts (regarding prices), I've now gone through this properly and come to some interesting conclusions.

Firstly, there is little to no lending in the wizarding world. People deposit their money in Gringotts bank, and the money is kept by the bank at 100% liquidity (cash). This means no lending. It also means no interest on savings. There are also no government securities, gilts or bonds.

Since there is a 100% liquidity ratio in place (the banks keep 100% of all deposits as liquid assets), the bank multiplier will be 1 (1/L) - i.e. no bank multiplier.

For those who don’t know, the bank multiplier is the value of the multiplier effect brought about by the fact that when you make a deposit in a bank, a proportion of this is lent, and this lent money is spent and saved, which then is lent again in a cycle.

This is going to seriously cramp money supply. It also means that the money supply curve will be vertical, as there is no link to interest rates through borrowing and saving. Money supply will also be rather fixed, as the only new money will come from new money being printed. We have no idea how often they do this - presumably at the rate at which they find gold.

On the demand side, demand for money will be lower than normal, as there is no speculation in the wizarding world. As such, money demand will be comprised just of the transactions motive and precautionary motive, L1 and L2, leading to a steeper demand curve than is normal.

So far, so good. There are differences between the Muggle and wizarding systems, but it still seems to work.

Until we consider putting the system together.

The price of money is where supply of money and demand for money coincide - where the money market is in equilibrium, as shown by this diagram:



However, we can see easily why the system doesn't work: the price of money is the interest rate, but in the magical economy there is no lending or saving, and thus no interest rate. Money has no price. It just is. This brings a whole slew of problems.

Firstly, there will be no monetary policy. In the Muggle world, the government (or central bank) controls the interest rate, and thus the price of money, through dictating the Liquidity ratio that banks must maintain – the percentage of deposits they must keep as liquid assets. By doing this, they can keep the banks either short of liquidity, or in excess liquidity, which the banks have to correct by selling gilts or buying bills to/from the central bank. The repo rate (for gilts) and the discount rate (for bills) then influences the interest rates that the commercial banks themselves set.

However, since the bank maintains 100% liquidity anyway, this cannot happen. There is no interest rate, thus there is no way to control inflation (fiscal policy fails miserably at this, which is why most nations use monetary policy to control inflation these days). So prices will be unregulated. So the price level will be quite high, and inflation will be rampant. This seems to go against the prices we see in canon, but we don’t actually see that many prices, and Harry is rich anyway so he probably isn’t the best person for judging the value of things.

In addition, without lending we will end up with a fixed money supply. As velocity of circulation is generally assumed to be constant, this means that nominal GDP will be constant, since:

MV = GDP

Taking the quantity theory of money into account, we can then analyse the effect this will have.

MV = PY

M = Money Supply
V = Velocity of circulation
P = Price level
Y = Real National Income

Since M and V are fixed, this means that the total of P*Y is also fixed, which means that nominal GDP is fixed.

However, since we have already said that price level is likely rising rapidly as there is no control of inflation, then Y will have to be falling to compensate for this, in order for P*Y to maintain a static total. Which means that the real national income of the wizarding world is falling.

The money supply may rise at a very slow rate as more money is printed, but this is unlikely to be enough to counteract the rising price level.

Of course, someone appears to have forgotten to have told JKR this, because none of this occurs in canon. JKR doesn’t care about economics, she was aiming for literary effect. But this is what it should be

 

Taure, if you apply the quantity theory of money, holding the money supply constant, the only way inflation could be rampant was if there was a demand for products that consistently outpaced growth in product. If we get the Fischer equation MV = PY, we can simplify it to M = PY/V. Since inflation is a monetary phenomenon, and since the money supply is constant, prices can only vary as a function of Y. If there is economic growth, prices will actually tend to diminish, since growth in product won't accompany growth in the money supply. This is similar to what happened in real life during the last decades of the 19th century in the United States, where great technological advancements drove GDP to grow much faster than the money supply which was constrained by the gold standard, leading to a period known as the great deflation. Since we can't arrive at real monetary effects through the monetary side, we can't know whether the WW's economy is growing or not, at least if we're not resorting to the Keynesian model, but if we do that, we might as well ask a gipsy fortuneteller and we'd get better answers.

 

Inflation can be caused by a lower supply of goods. Or by high rates of growth of the money supply(galleons in this case). Presumably, money supply will continue to grow as fast as the goblins can acquire gold, or the metal required. Nevertheless, in order to compete with other nations. I am sure the government or even the goblins would regulate the money supply.

Despite the fact that banks do not give out any loans in the wizarding world, interest rates can still exist. Interest is a fee paid on borrowed capital. Money can be borrowed from an individual or from companies. I assume in the wizarding world money can be borrowed from guilds, or even from pureblood families. Thus, while banks fail to give out loans, other individuals or guilds may do so instead.

More than likely, the ministry of magic gives out loans to different investors. Which would explain how purebloods managed to stay in power. As the pureblood-controlled ministry would only give out money to pureblood individuals. The money would eventually have to be paid back, thus starting the interest rates.

The stock market could also exist in this world. Though I would find it unlikely due to the limited population. Loans could be acquired from a guild in order to start a company. In return for the loans, the investor may offer a share of the stock to the guilds. The stock market could then be regulated by the ministry.

Thus, while banks may fail to give out loans, other individuals, businesses, and the government will do so instead. In order to compensate for this, and acquire a share of the profit.

 

True enough. I've edited my post to put the bit that's wrong in red.

So, there won't be inflation despite lack of monetary control.

I still say that the economy will be almost completely static though, as a result of the almost-fixed money supply. Which seems to go with the books, since very little changes in 7 years there.

Speculation. We have no proof of such a thing, so can't assume it. If we could assume something without proof, we could assume a hell of a lot of things into existence.

 

This is an interesting idea that I've been thinking about for awhile.

There must be some kind of enforcement and laws to prevent wizards from taking advantage of muggles. Aside from your examples, there are literally hundreds of ways wizards could profit from muggles without violating the Statute of Secrecy. So what's stopping everybody from profiting off muggles? Why were so many wizards living in utter poverty in HBP and DH when they could simply confound a muggle into providing for them (or something along those lines)?

I'm guessing magic is monitored much more closely in dense muggle areas, and if someone was using a lot of magic to pull off scams on muggles, the ministry would eventually find out about it. The problem with this is that the Ministry itself is located in the heart of London, and wizards come and go, and use a lot of magic in the general area, so I don't know if that's what they do.

Maybe there's some kind of deterrent to scamming muggles. Perhaps a lengthy Azkaban sentence.

This is a rather interesting subject.

 

Well, as for scamming Muggles, we do know from canon that more 'serious' crimes against Muggles were (until Voldemort took over) investigated and the perpetrators punished...Willy Widdershins should have been rotting in Azkaban, for his 'Muggle baiting', but for some unknown reason (Delores thought was good for something) he was not. So, yes, there are likely laws against it and the deterrent of prison if caught. Most wizards will not (since they are really sheeple) even think about going against the "LAW" to do something like scam for money. And most of those that wouldn't have any problem with breaking the law probably are too damn proud to stoop to fleecing Muggles. There are those few, like Dung, who probably do a small amount of it but are too fucking stupid to do more and make it a career.

Now that brings up the question of why hasn't there been a Muggleborn doing it?

Probably because of the laws and said Muggleborn getting caught quickly. Because even if it wasn't the actual policy before Voldemort took over, there was a bias against the Muggleborns, so there would probably be no easy way out if a Muggleborn did get caught. Azkaban, with Dementors, looks like a pretty good deterrent to all but the dumbest or most hardened criminals.

Also this idea that the Weasleys are dirt poor is a bit over blown. Granted, they are not anywhere nearly as wealthy as the Malfoys, but they are nowhere near the level of poverty of the Gaunts. The Guants were so poor because of the overbearing, stiff necked pride of Marvolo. The Weasleys definitely have enough money for the basics and Molly is probably being overly cautious when buying school supplies. Those who come from large families tend to have a 'use and reuse' mentality. They also tend to spend as little as possible on 'new' when there are trunks and boxes full of 'hand me downs' waiting to be used. Good evidence for this is that Molly behaved the same way in the later books as she did in the first ones...when there were only two children living at home and Arthur had 'moved up in the world'.

All we really know about the Weasley financial situation comes from Ron and Harry's veiwpoint. Ron's can be discounted as being heavily biased...he is the youngest of six boys, so, of course he has it worst with the hand me downs. Harry's glimpse into the Weasley vault was just that...a glimpse. He had no way of knowing if that was the normal state of things, if pay day was the day before the trip or the day after (or even a couple of weeks later).

Also, there is a combination of laws and 'rules' of magic that prohibit the conjuration of goods. I know many of you don't really like DH and some haven't even read it, but it does lay out the ground rules of conjuration. Food can't be conjured from nothing. Gold is 'protected'...whether or not it can be conjured is a matter that isn't fully discussed (the replicating charms in the LeStrange vault seem to indicate that it can). Or it can be like the leprechaun gold and vanish after a while. But using conjured gold would be like passing counterfeit bills.

We also know that most conjurations are not permanent, so using conjuration for things like furniture and clothing are "Bad Ideas". But why not just transfigure cheap crap into fancy stuff? That would be an area for skill and personality have precedence. I suppose if you were really good at transfiguration and you didn't think anything was wrong with it, like I imagine Slughorn thought, you would do it...otherwise, you'd make do with what you had.

There are a couple of things that I think need to happen, though, for either conjuration or transfiguration, to create an item that is anything other than a 'mock up'. The person casting the spell needs to 'know' the item. He has to understand how it works, how it is made and be able to combine all of that with the mental picture he has of how he wants it to look. Then he has to have enough skill/power to pull it off.

 

Wait...I'm wondering if I was wrong when I said I was above.

But that's exactly what I had said: gross domestic product (GDP) was fixed, and thus due to prices rising the real value of income falls. If there is static physical product, one would expect demand to exceed the limited supply, leading to inflation.

 

Well, you didn't say the inflation was due to increased demand, but to lack of interest rates to control it. Besides, with a relatively stagnant population, there is no reason demand would grow like that.

 

GDP changes constantly. You cannot assume that it is fixed. The wizarding Britain could be in economic surplus or recession. Demand will only exceed the supply if prices dropped, or more galleons are "printed". Inflation will rise, because companies will have to raise prices in order to compensate for the rise in income.

The real value of income will however stay the same. It will not drop since more money is being printed. The real value of income will only change when the demand outstrips the supply. Which will not happen directly because of inflation, as companies are raising their prices to compensate. Prices will only rise when the supply goes down(only if prices go down, causing demand to increase), or when the nominal value of income rises.

Inflation can be taken to the extreme through hyperinflation. Which will cause severe problems. As prices get out of control while the currency value continues to decrease. Which limits the ability for people to save money. As the money a family could have saved a couple weeks ago will be worth hardly anything today.

Nevertheless, in order to combat inflation I am sure the government would regulate the money supply. Not only to reduce inflation, but to compete with other nations.

Really, if the money supply was regulated, then despite the fact that no loans are issued, prices and income should stay the same. However due to the high value loans are worth to the growth of the economy. It can be healthily assumed Taure that other resources such as the government or different companies, would hand out loans to different investors, instead of Gringotts.

In fact, the ministry could have imposed this measure itself. Purposefully limiting the power of the goblins, similar to how they limit their ability to use wands, and other things. This would explain why Gringotts cannot issue loans to investors, and why it only acts as a storage center for money.