What is an advantage of commodity money? | Homework.Study.com (2024)

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What is an advantage of commodity money? | Homework.Study.com? ›

Answer and Explanation:

The benefits of using commodity money are numerous. It has intrinsic value, protects against inflation, provides stability, and is a store of value. These benefits make it a preferred choice for many, and it is still being used today in various forms.

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.

Key Takeaways

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.

The disadvantages of commodity money are that it is not portable, durable, or divisible.

The benefits of commodity market investments include lower volatility, hedging against inflation or geopolitical events, diversification, etc. And, the disadvantages of commodity market trading include high leverage, excessive volatility, higher dependence on macroeconomic factors, etc.

While commodity money has some advantages over fiat money, such as protection against inflation, it also has some disadvantages, such as the difficulty of transporting and storing physical commodities.

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.

Thus, smoothing volatility in a portfolio. Inflation protection. Being inputs for production, regularly when inflation goes up, the price of commodities follows the same trend, so some commodities, such as gold, are also used as a store of value. Supporting economic growth.

Firstly, the commodity is vulnerable to devaluation as the commodity itself perishes. Next, because quality can not be guaranteed between one sample and another, some commodity money may have lower quality than others. Finally, because some commodities take time to grow or multiply, these economies may grow slower.

What are the advantages of commodity swaps? ›

A commodity swap is typically used to protect against price fluctuations in the market concerning a commodity, such as livestock and oil. A commodity swap will allow the producers of a product as well as buyers to lock in a fixed price for a given commodity.