Commodity

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In economics, a commodity is an economic good or service that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. [1] [2] [3]

Contents

The price of a commodity good is typically determined as a function of its market as a whole: well-established physical commodities have actively traded spot and derivative markets. The wide availability of commodities typically leads to smaller profit margins and diminishes the importance of factors (such as brand name) other than price.

Most commodities are raw materials, basic resources, agricultural, or mining products, such as iron ore, sugar, or grains like rice and wheat. Commodities can also be mass-produced unspecialized products such as chemicals and computer memory.

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Coffee Beans Photographed in Macro.jpg
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Yerba mate (left), coffee bean (middle) and tea (right), all used for caffeinated infusions, are commodity cash crops.

Etymology

The word commodity came into use in English in the 15th century, from the French commodité , "amenity, convenience". Going further back, the French word derives from the Latin commoditas , meaning "suitability, convenience, advantage". The Latin word commodus (from which English gets other words including commodious and accommodate) meant variously "appropriate", "proper measure, time, or condition", and "advantage, benefit".

Description

Characteristics

In economics, the term commodity is used specifically for economic goods or services that have full or partial but substantial fungibility; that is, the market treats their instances as equivalent or nearly so with no regard to who produced them. [4] Karl Marx described this property as follows: "From the taste of wheat, it is not possible to tell who produced it, a Russian serf, a French peasant or an English capitalist." [5] Petroleum and copper are examples of commodity goods: [6] their supply and demand are a part of one universal market.

Non-commodity items such as stereo systems have many aspects of product differentiation, such as the brand, the user interface and the perceived quality. The demand for one type of stereo may be much larger than demand for another.

The price of a commodity good is typically determined as a function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets.

Hard and soft commodities

Soft commodities are goods that are grown, such as wheat, or rice.

Hard commodities are mined. Examples include gold ,silver, helium, and oil.

Energy commodities include electricity, gas, coal and oil. Electricity has the particular characteristic that it is usually uneconomical to store, and must therefore be consumed as soon as it is processed.

Commoditization

Commoditization occurs as a goods or services market loses differentiation across its supply base, often by the diffusion of the intellectual capital necessary to acquire or produce it efficiently. As such, goods that formerly carried premium margins for market participants have become commodities, such as generic pharmaceuticals and DRAM chips. An article in The New York Times cites multivitamin supplements as an example of commoditization; a 50 mg tablet of calcium is of equal value to a consumer no matter what company produces and markets it, and as such, multivitamins are now sold in bulk and are available at any supermarket with little brand differentiation. [7] Following this trend, nanomaterials are emerging from carrying premium profit margins for market participants to a status of commodification. [8]

There is a spectrum of commoditization, rather than a binary distinction of "commodity versus differentiable product". Few products have complete undifferentiability and hence fungibility; even electricity can be differentiated in the market based on its method of generation (e.g., fossil fuel, wind, solar), in markets where energy choice lets a buyer opt (and pay more) for renewable methods if desired. Many products' degree of commoditization depends on the buyer's mentality and means. For example, milk, eggs, and notebook paper are not differentiated by many customers; for them, the product is fungible and lowest price is the main decisive factor in the purchasing choice. Other customers take into consideration other factors besides price, such as environmental sustainability and animal welfare. To these customers, distinctions such as "organic versus not" or "cage free versus not" count toward differentiating brands of milk or eggs, and percentage of recycled content or Forest Stewardship Council certification count toward differentiating brands of notebook paper.

Global commodities trading company

This is a list of companies trading globally in commodities, descending by size as of October 28, 2011. [9]

  1. Vitol
  2. Glencore International AG
  3. Trafigura
  4. Cargill
  5. Salam Investment
  6. Archer Daniels Midland
  7. Gunvor (company)
  8. Mercuria Energy Group
  9. Noble Group
  10. Louis Dreyfus Group
  11. Bunge Limited
  12. Wilmar International
  13. Olam International

Commodity trade

In the original and simplified sense, commodities were things of value, of uniform quality, that were produced in large quantities by many different producers; the items from each different producer were considered equivalent. On a commodity exchange, it is the underlying standard stated in the contract that defines the commodity, not any quality inherent in a specific producer's product.

Commodities exchanges include:

Markets for trading commodities can be very efficient, particularly if the division into pools matches demand segments. These markets will quickly respond to changes in supply and demand to find an equilibrium price and quantity. In addition, investors can gain passive exposure to the commodity markets through a commodity price index.

In order to diversify their investments and mitigate the risks associated with inflationary debasement of currencies, pension funds and sovereign wealth funds allocate capital to non-listed assets such as a commodities and commodity-related infrastructure. [10]

Inventory data

The inventory of commodities, with low inventories typically leading to more volatile future prices and increasing the risk of a "stockout" (inventory exhaustion). According to economist theorists, companies receive a convenience yield by holding inventories of certain commodities. Data on inventories of commodities are not available from one common source, although data is available from various sources. Inventory data on 31 commodities was used in a 2006 study on the relationship between inventories and commodity futures risk premiums. [11]

Commodification of labor

In classical political economy and especially in Karl Marx's critique of political economy, a commodity is an object or a good or service ("product" or "activity" [12] ) produced by human labour. [13] Objects are external to man. [14] However, some objects attain "use value" to persons in this world, when they are found to be "necessary, useful or pleasant in life," [15] "Use value" makes an object "an object of human wants," [16] or is "a means of subsistence in the widest sense". [17]

As society developed, people found that they could trade goods and services for other goods and services. At this stage, these goods and services became "commodities". Commodities are defined as objects which are offered for sale or are "exchanged in a market". [18] In the marketplace, where commodities are sold, "use value" is not helpful in facilitating the sale of commodities. Accordingly, in addition to having use value, commodities must have an "exchange value"—a value that could be expressed in the market. [19]

Prior to Marx, many economists debated as to what elements made up exchange value. Adam Smith maintained that exchange value was made up of rent, profit, labour and the costs of wear and tear on the instruments of husbandry. [20] David Ricardo, a follower of Adam Smith, modified Smith's approach on this point by alleging that labour alone is the content of the exchange value of any good or service. [21] While maintaining that all exchange value in commodities was derived directly from the hands of the people that made the commodity, Ricardo noted that only part of the exchange value of the commodity was paid to the worker who made the commodity. The other part of the value of this particular commodity was labour that was not paid to the worker—unpaid labour. This unpaid labour was retained by the owner of the means of production. In capitalist society, the capitalist owns the means of production and therefore the unpaid labour is retained by the capitalist as rent or as profit. The means of production means the site where the commodity is made, the raw products that are used in the production and the instruments or machines that are used for the production of the commodity.

However, not all commodities are reproducible nor were all commodities originally intended to be sold in the market. These priced goods are also treated as commodities, e.g. human labour-power, works of art and natural resources ("earth itself is an instrument of labour"), [22] even though they may not be produced specifically for the market, or be non-reproducible goods.

Marx's analysis of the commodity is intended to help solve the problem of what establishes the economic value of goods, using the labor theory of value. This problem was extensively debated by Adam Smith, David Ricardo [23] and Karl Rodbertus-Jagetzow among others.

All three of the above-mentioned economists rejected the theory that labour composed 100% of the exchange value of any commodity. In varying degrees, these economists turned to supply and demand to establish the price of commodities. Marx held that the "price" and the "value" of a commodity were not synonymous. Price of any commodity would vary according to the imbalance of supply to demand at any one period of time. The "value" of the same commodity would be consistent and would reflect the amount of labour value used to produce that commodity.

Prior to Marx, economists noted that the problem with using the "quantity of labour" to establish the value of commodities was that the time spent by an unskilled worker would be longer than the time spent on the same commodity by a skilled worker. Thus, under this analysis, the commodity produced by an unskilled worker would be more valuable than the same commodity produced by the skilled worker. Marx pointed out, however, that in society at large, an average amount of time that was necessary to produce the commodity would arise. This average time necessary to produce the commodity Marx called the "socially necessary labour time" [24] Socially necessary labour time was the proper basis on which to base the "exchange value" of a given commodity. However, this distinction is completely rejected in modern economic theory, the issues over different categories of "value" held by classical theorists has been completely abandoned in modern treatments of economics and thus the issue is not of any importance in non-classical theories besides in fringe heterodox schools of thought.[ citation needed ]

See also

Notes

  1. "Learn What Commodities Are in These Examples!".
  2. "Commodity definition". Merriam-Webster . Retrieved 30 July 2018.
  3. T., H. (3 January 2017). "What makes something a commodity?". The Economist. Retrieved 22 January 2020.
  4. "Learn What Commodities Are in These Examples!".
  5. Karl Marx, "A Contribution to the Critique of Political Economy" contained in the Collected Works of Karl Marx and Frederick Engels: Volume 29, p. 270.
  6. O'Sullivan, Arthur; Steven M. Sheffrin (2004). Economics: Principles in action. Pearson / Prentice Hall. ISBN   0-13-063085-3.
  7. Natasha Singer; Peter Lattman (15 March 2013). "Workout Supplement Challenged". The New York Times. Retrieved 17 March 2013.
  8. C. McGovern, ″Commoditization of nanomaterials″. Nanotechnology Perceptions6 (2010) 155–178.
  9. "Corrected: Commodity Traders: The trillion dollar club". Reuters . Oct 28, 2011. Retrieved 2008-06-12.
  10. M. Nicolas Firzli & Vincent Bazi (2011). "Infrastructure Investments in an Age of Austerity : The Pension and Sovereign Funds Perspective". Revue Analyse Financière, volume 41. . Archived from the original on 17 September 2011. Retrieved 30 July 2011.
  11. Gorton, GB; et al. (2007). "The Fundamentals of Commodity Futures Returns". SSRN   996930 .
  12. Karl Marx, "Outlines of the Critique of Political Economy" contained in the Collected Works of Karl Marx and Frederick Engels: Volume 28, 80.
  13. Karl Marx, Capital, Volume I (International Publishers: New York, 1967) p. 38 and "Capital" as contained in the Collected Works of Karl Marx and Frederick Engels: Volume 35 (International Publishers: New York, 1996) p. 48.
  14. Karl Marx, Capital, Volume I , p. 87 and "Capital" as contained in the Collected Works of Karl Marx and Frederick Engels: Volume 35, p. 97.
  15. Aristotle, Politica (Oxford, 1966) p. 1257.
  16. Karl Marx, "Capital in General: The Commodity" contained in the Collected works of Karl Marx and Frederick Engels: Volume 29 (International Publishers: New York, 1987) p. 269.
  17. Karl Marx, "Capital in General: The Commodity" contained in the Collected Works of Karl Marx and Frederick Engels: Volume 29, p. 269.
  18. Karl Marx, Capital: Volume I p. 36 and "Capital" as contained in the Collected Works of Karl Marx and Frederick Engels: Volume 35, p. 46.
  19. Adam Smith, Wealth of Nations (Pelican Books: London, 1970) p. 131 and David Ricardo, Principles of Political Economy and Taxation (Pelican Books: 1971, London) p. 55.
  20. Adam Smith, Wealth of Nations (Pelican Books: London, 1970) p. 153.
  21. David Ricardo, Principles of Political Economy and Taxation (Pelican Books: London, 1971) pp. 56-58.
  22. Karl Marx, Capital: Volume I, p. 179 and "Capital" as contained in the Collected Works of Karl Marx and Frederick Engels: Volume 35, p. 189.
  23. David Ricardo, Principles of Political Economy and Taxation (Pelican Books, London, 1971) pp. 56-58.
  24. Karl Marx, Capital: Volume I, p. 39 and "Capital" as contained in the Collected Works of Karl Marx and Frederick Engels: Volume 35, p. 49.

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Exchange value attribute of a commodity

In political economy and especially Marxian economics, exchange value refers to one of four major attributes of a commodity, i.e., an item or service produced for, and sold on the market. The other three aspects are use value, economic value, and price. Thus, a commodity has:

Labour power key concept used by Karl Marx in his critique of capitalist political economy

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Simple commodity production

Simple commodity production is a term coined by Frederick Engels to describe productive activities under the conditions of what Marx had called the "simple exchange" of commodities, where independent producers trade their own products. The use of the word "simple" does not refer to the nature of the producers or of their production, but to the relatively simple and straightforward exchange processes involved.

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Prices of production

Prices of production is a concept in Karl Marx's critique of political economy, defined as "cost-price + average profit". A production price can be thought of as a type of supply price for products; it refers to the price levels at which newly produced goods and services would have to be sold by the producers, in order to reach a normal, average profit rate on the capital invested to produce the products.

Productive and unproductive labour are concepts that were used in classical political economy mainly in the 18th and 19th centuries, which survive today to some extent in modern management discussions, economic sociology and Marxist or Marxian economic analysis. The concepts strongly influenced the construction of national accounts in the Soviet Union and other Soviet-type societies.

Abstract labour and concrete labour

Abstract labour and concrete labour refer to a distinction made by Karl Marx in his critique of political economy. It refers to the difference between human labour in general as economically valuable worktime, and human labour as a particular activity that has a specific useful effect.

Differential and absolute ground rent

Differential ground rent and absolute ground rent are concepts used by Karl Marx in the third volume of Das Kapital to explain how the capitalist mode of production would operate in agricultural production, under the condition where most agricultural land was owned by a social class of land-owners who obtained rent income from those who farmed the land. The farm work could be done by the landowner himself, the tenant of the landowner, or by hired farm workers. Rent as an economic category is regarded by Marx as one form of surplus value just like net interest income, net production taxes and industrial profits.

Commodity (Marxism) in Marxism, good or service produced by human labour and offered as a product for general sale on the market

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The value-form or form of value is a concept in Karl Marx's critique of political economy, Marxism, the Frankfurt School and post-Marxism. It refers to the social form of a tradeable thing as a symbol of value, which contrasts with its physical features, as an object which can satisfy some human need or serves a useful purpose. The physical appearance of a commodity is directly observable, but the meaning of its social form is not.

Socially necessary labour time

Socially necessary labour time in Marx's critique of political economy is what regulates the exchange value of commodities in trade and consequently constrains producers in their attempt to economise on labour. It does not 'guide' them, as it can only be determined after the event and is thus inaccessible to forward planning.

"Surplus value" is a translation of the German word "Mehrwert", which simply means value added, and is cognate to English "more worth". Surplus-value is the difference between the amount raised through a sale of a product and the amount it cost to the owner of that product to manufacture it: i.e. the amount raised through sale of the product minus the cost of the materials, plant and labour power. It is a central concept in Karl Marx's critique of political economy. Conventionally, value-added is equal to the sum of gross wage income and gross profit income. However, Marx uses the term Mehrwert to describe the yield, profit or return on production capital invested, i.e. the amount of the increase in the value of capital. Hence, Marx's use of Mehrwert has always been translated as "surplus value", distinguishing it from "value-added". According to Marx's theory, surplus value is equal to the new value created by workers in excess of their own labor-cost, which is appropriated by the capitalist as profit when products are sold.

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Criticism of value-form

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