The commodity money definition refers to money in the form of a commodity that has intrinsic value. This element of intrinsic value is commodity money's primary characteristic. This kind of money was first used during ancient days when trade, exchange, and economic activity, in general, were not very advanced compared to today. Commodity money can be any good that is tradeable. This good has to comply with a set of standards. For example, it has to be in wide demand, durable, portable, and easy to store. In the past, any commodity that did not comply with these standards was not accepted as commodity money.
What is Money in Economics?
Money is an asset that people use to purchase goods and services. Money forms a fundamental part of any economy. Together with goods and services, it is the backbone of trade. The concept of money speaks to the significant evolution of economic exchange. Prior to the inception of money, bartering was the prime means of exchange. It is defined by the exchange of one good or service for another good or service. Fundamentally, this captured the true value of the trade since a jar of milk could be considered equal to a dozen eggs. However, the system had a selection of profound flaws in that it accommodated a very limited variety of trades. When products like bread and cows had to be exchanged, it became hard to calculate the trade, making it unpractical. The concept of money solved this problem and consequently expanded the trade industry tremendously.
The value of money is exclusively found in the utility that people attribute to it. This utility is predominantly defined by a community or society's consensus that a certain commodity can be used as a means of exchange. Unless everyone agrees to accept the commodity as payment, that commodity will not survive as money in the system, which makes the study of modern fiat money interesting. Since the US dollar (the world's reserve currency) is not backed by gold anymore, it essentially has no intrinsic value, which calls for a different approach to be taken when studying money as a commodity that holds value. The question has to be examined as to why people attribute value to modern fiat money while it holds no value in itself. Considering a variety of economic theories, the answer to this lies in the system as a whole. Fiat money does not have value because it can be used to create jewelry like gold can. Instead, it has value because the system as a whole is built on it. There is a demand for it since everyone agrees that it can be used as a means of exchange. Beyond this, the federal government plays a big role in maintaining this structure through taxes. United States citizens cannot pay their taxes in anything other than dollars. They cannot pay taxes with cows, sheep, or financial assets like stocks or derivatives. They have to pay taxes in dollars, which essentially creates a demand for dollars. This demand is what fundamentally drives the value of money like the dollar.
Although modern fiat money solely relies on value attribution from a system and does not hold any intrinsic value in itself, a large part of the world's tertiary sector is built on it. The international foreign exchange market is the biggest financial market in the world. The amount of money that is exchanged on it on a daily basis amounts to over $6 trillion, which is a bizarre fact considering that the asset upon which the entire market is built is intrinsically worth nothing. Moreover, this system has evolved to the point where derivatives and other investment instruments have been constructed on the commodity of money. These highly evolved assets make up what is called the money market. The money market is the space where investors deal in short-term debt-based instruments that are all founded on fiat money. These extensively evolved industries have been the proponents of the large majority of history's biggest economic collapses. Historical market crashes like the Great Depression, Black Monday, the Dot-com Bubble, and the 2008 Financial Crisis draw a lot of causes from the world's financial markets. However, the highly sophisticated and rigid nature of these markets suggests that the concepts of supply and demand are growing increasingly important in comparison to the idea of intrinsic value.
What Gives Commodity Money its Value?
Commodity money's value is found in the intrinsic value of commodities. The fact that commodities can be used to produce products of value and not just as means of exchange is what makes commodity money valuable which is defined as intrinsic value. Its importance extends to a wide range of economic subjects. Financial investors and speculators commonly use intrinsic value as a metric to determine the quality of a potential investment.
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Lesson Summary
What is money value and commodity value? ›
Commodity value of money refers to value of the commodity (like metal) that the money is made of. Thus, if coins are made of gold or silver (as was the practice in old days), commodity value of money refers to the market value of the gold or silver contained in the coin.
What is a commodity and give 5 examples? ›
Some traditional examples of commodities include grains, gold, beef, oil, and natural gas. More recently, the definition has expanded to include financial products, such as foreign currencies and indexes.
What gives commodity money its value? ›
Commodity money has some intrinsic value due to the content of precious metal it is made up of or backed by, but debasem*nt or increases in precious metal supply can cause inflation. Fiat money is backed only by the faith of the government and its ability to levy taxes.
What is an example of commodity money quizlet? ›
A good that is used as a medium of exchange but also has intrinsic worth because it has other uses. Gold or silver coins are commodity money.
What is commodity money and examples? ›
Commodity money has been used throughout history as a medium of economic exchange. Commodity money is money that has intrinsic value, meaning that it has value even if it is not used as money. Examples of commodity money include precious metals, foodstuffs, and even cigarettes.
What is an example of a commodity value? ›
Example. If an acre of land can yield a net of 100 dollars loss by lying fallow, 50 dollars gain by being planted with corn, and 100 dollars gain by being planted with wheat, then that acre's commodity value is 100 dollars; the farmer is assumed to put his land to best use.
What is commodity in simple words? ›
a substance or product that can be traded, bought, or sold: The country's most valuable commodities include tin and diamonds.
Which of the following are is an example of commodity money? ›
Examples of commodity money are gold and silver coins. Gold coins were valuable because they could be used in exchange for other goods or services, but also because the gold itself was valued and had other uses.
What is a commodity that is important in your everyday life? ›
Commodities are the basic goods that make up everyday life. They can include metals such as copper, gold and silver; energy sources such as crude oil and natural gas; agricultural commodities such as wheat and coffee; and livestock and meat products such as pork and cattle.
In modern times, commodity money has mostly been replaced by paper money and digital transactions. However, there are still some instances where commodity money is used.
What is the most common form of commodity money? ›
The most common form of commodity money was dried indian corn, which was used to purchase the item depicted above and described below.
What is one problem with commodity money? ›
One of the major problems with commodity money was quality. Individuals tended to use or sell their best products while their poorest products would be offered as commodity money. Additionally, even good quality commodities would deteriorate if retained too long.
What is an example of commodity funds? ›
Commodity funds invest in raw materials or primary agricultural products, known as commodities. These funds invest in precious metals, such as gold and silver, energy resources, such as oil and natural gas, and agricultural goods, such as wheat.
What is an example of a cash commodity? ›
A cash commodity refers to physical goods like aluminium, cotton, gold, silver, zinc, and other tangible goods which are delivered to a trader or company most commonly after exercising derivatives like options and futures contracts. Cash commodities are also known as actuals.
Are dollar bills an example of commodity money? ›
Key Takeaways. Fiat money is a government-issued currency that is not backed by a commodity such as gold. Fiat money gives central banks greater control over the economy because they can control how much money is printed. Most modern paper currencies, such as the U.S. dollar, are fiat currencies.
What is the meaning of commodity value? ›
Commodity valuation is the process of deriving the intrinsic value of a commodity under optimal market conditions. In a perfectly competitive free market, the price of a commodity reflects the intrinsic value of that good.
What is the difference between a commodity and a currency? ›
Commodities trade involves goods like cocoa, coffee, and products that can be mined like oil and gold. On the other hand, forex —or foreign exchange — is a global market that trades in currencies like rupees, euros, dollars, and yen.
What is the difference between commodity and money market? ›
Money market and commodity market are two important segments of the financial market. The money market is a platform for short-term borrowing and lending of funds, while the commodity market is a platform for buying and selling commodities such as gold, silver, crude oil, and agricultural products.
What is the difference between money value and real value? ›
In economics, the nominal value of something is its current price; the real value of something, however, is its relative price over time. Both can be used to talk about the value of not only money, but also your wages, share prices and other things that have financial value.
