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]

Economics Social science that analyzes the production, distribution, and consumption of goods and services

Economics is the social science that studies the production, distribution, and consumption of goods and services.

Goods tangible and intangible thing, except labor tied services, that satisfies human wants and provides utility

In economics, goods are materials that satisfy human wants and provide utility, for example, to a consumer making a purchase of a satisfying product. A common distinction is made between goods that are tangible property, and services, which are non-physical. A good may be a consumable item that is useful to people but scarce in relation to its demand, so that human effort is required to obtain it. In contrast, free goods, such as air, are naturally in abundant supply and need no conscious effort to obtain them. Personal goods are things such as televisions, living room furniture, wallets, cellular telephones, almost anything owned or used on a daily basis that is not food related. Commercial goods are construed as any tangible product that is manufactured and then made available for supply to be used in an industry of commerce. Commercial goods could be tractors, commercial vehicles, mobile structures, airplanes and even roofing materials. Commercial and personal goods as categories are very broad and cover almost everything a person sees from the time they wake up in their home, on their commute to work to their arrival at the workplace.

Service (economics) intangible offering inseparable from its creators labor, which brings utility value to their client

In economics, a service is a transaction in which no physical goods are transferred from the seller to the buyer. The benefits of such a service are held to be demonstrated by the buyer's willingness to make the exchange. Public services are those that society as a whole pays for. Using resources, skill, ingenuity, and experience, service providers benefit service consumers. Service is intangible in nature.

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.

Spot market

The spot market or cash market is a public financial market in which financial instruments or commodities are traded for immediate delivery. It contrasts with a futures market, in which delivery is due at a later date. In a spot market, settlement normally happens in T+2 working days, i.e., delivery of cash and commodity must be done after two working days of the trade date. A spot market can be through an exchange or over-the-counter (OTC). Spot markets can operate wherever the infrastructure exists to conduct the transaction.

Derivative (finance) financial instrument whose value is based on one or more underlying assets

In finance, a derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the "underlying". Derivatives can be used for a number of purposes, including insuring against price movements (hedging), increasing exposure to price movements for speculation or getting access to otherwise hard-to-trade assets or markets. Some of the more common derivatives include forwards, futures, options, swaps, and variations of these such as synthetic collateralized debt obligations and credit default swaps. Most derivatives are traded over-the-counter (off-exchange) or on an exchange such as the New York Stock Exchange, while most insurance contracts have developed into a separate industry. In the United States, after the financial crisis of 2007–2009, there has been increased pressure to move derivatives to trade on exchanges. Derivatives are one of the three main categories of financial instruments, the other two being stocks and debt. The oldest example of a derivative in history, attested to by Aristotle, is thought to be a contract transaction of olives, entered into by ancient Greek philosopher Thales, who made a profit in the exchange. Bucket shops, outlawed a century ago, are a more recent historical example.

Profit margin, net margin, net profit margin or net profit ratio is a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue.

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.

Raw material basic material from

A raw material, also known as a feedstock, unprocessed material, or primary commodity, is a basic material that is used to produce goods, finished products, energy, or intermediate materials which are feedstock for future finished products. As feedstock, the term connotes these materials are bottleneck assets and are highly important with regard to producing other products. An example of this is crude oil, which is a raw material and a feedstock used in the production of industrial chemicals, fuels, plastics, and pharmaceutical goods; lumber is a raw material used to produce a variety of products including all types of furniture. The term "raw material" denotes materials in minimally processed or unprocessed in states; e.g., raw latex, crude oil, cotton, coal, raw biomass, iron ore, air, logs, or water i.e. "any product of agriculture, forestry, fishing and any other mineral that is in its natural form or which has undergone the transformation required to prepare it for internationally marketing in substantial volumes."

Agriculture Cultivation of plants and animals to provide useful products

Agriculture is the science and art of cultivating plants and livestock. Agriculture was the key development in the rise of sedentary human civilization, whereby farming of domesticated species created food surpluses that enabled people to live in cities. The history of agriculture began thousands of years ago. After gathering wild grains beginning at least 105,000 years ago, nascent farmers began to plant them around 11,500 years ago. Pigs, sheep and cattle were domesticated over 10,000 years ago. Plants were independently cultivated in at least 11 regions of the world. Industrial agriculture based on large-scale monoculture in the twentieth century came to dominate agricultural output, though about 2 billion people still depended on subsistence agriculture into the twenty-first.

Mining The extraction of valuable minerals or other geological materials from the earth

Mining is the extraction of valuable minerals or other geological materials from the earth, usually from an ore body, lode, vein, seam, reef or placer deposit. These deposits form a mineralized package that is of economic interest to the miner.

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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. [3] 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." [4] Petroleum and copper are examples of commodity goods: [5] their supply and demand are a part of one universal market.

In economics, fungibility is the property of a good or a commodity whose individual units are essentially interchangeable, and each of its parts is indistinguishable from another part.

Wheat Cereal grain

Wheat is a grass widely cultivated for its seed, a cereal grain which is a worldwide staple food. The many species of wheat together make up the genus Triticum; the most widely grown is common wheat.

Serfdom in Russia Russian serfs were agrarian peasants legally bound to the land owned by nobility and who were deprived of rights and forced to provide free labor.

The term "serf", in the sense of an unfree peasant of the Russian Empire, is the usual translation of krepostnoi krestyanin which meant an unfree person who, unlike a slave, could be sold only with the land he or she was "attached" to. Historic legal documents of the epoch, such as Russkaya Pravda, distinguished several degrees of feudal dependency of peasants.

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.

Brand identifies a good or service

A brand is a name, term, design, symbol or any other feature that identifies one seller's good or service as distinct from those of other sellers. Brands are used in business, marketing, and advertising. Name brands are sometimes distinguished from generic or store brands.

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, 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. [6] Following this trend, nanomaterials are emerging from carrying premium profit margins for market participants to a status of commodification. [7]

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. [8]

  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. [9]

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. [10]

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" [11] ) produced by human labour. [12] Objects are external to man. [13] However, some objects attain "use value" to persons in this world, when they are found to be "necessary, useful or pleasant in life," [14] "Use value" makes an object "an object of human wants," [15] or is "a means of subsistence in the widest sense". [16]

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". [17] 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. [18]

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. [19] 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. [20] 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"), [21] 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 [22] 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" [23] 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. "Learn What Commodities Are in These Examples!".
  4. 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.
  5. O'Sullivan, Arthur; Steven M. Sheffrin (2004). Economics: Principles in action. Pearson / Prentice Hall. ISBN   0-13-063085-3.
  6. Natasha Singer; Peter Lattman (15 March 2013). "Workout Supplement Challenged". The New York Times. Retrieved 17 March 2013.
  7. C. McGovern, ″Commoditization of nanomaterials″. Nanotechnology Perceptions6 (2010) 155–178.
  8. "Corrected: Commodity Traders: The trillion dollar club". Reuters . Oct 28, 2011. Retrieved 2008-06-12.
  9. 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.
  10. Gorton GB et al. (2008). The Fundamentals of Commodity Futures Returns. Yale ICF Working Paper No. 07-08.
  11. Karl Marx, "Outlines of the Critique of Political Economy" contained in the Collected Works of Karl Marx and Frederick Engels: Volume 28, 80.
  12. 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.
  13. 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.
  14. Aristotle, Politica (Oxford, 1966) p. 1257.
  15. 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.
  16. Karl Marx, "Capital in General: The Commodity" contained in the Collected Works of Karl Marx and Frederick Engels: Volume 29, p. 269.
  17. 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.
  18. 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.
  19. Adam Smith, Wealth of Nations (Pelican Books: London, 1970) p. 153.
  20. David Ricardo, Principles of Political Economy and Taxation (Pelican Books: London, 1971) pp. 56-58.
  21. 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.
  22. David Ricardo, Principles of Political Economy and Taxation (Pelican Books, London, 1971) pp. 56-58.
  23. 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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Commodity fetishism

In Karl Marx's critique of political economy, commodity fetishism is the perception of the social relationships involved in production not as relationships among people, but as economic relationships among the money and commodities exchanged in market trade. As such, commodity fetishism transforms the subjective, abstract aspects of economic value into objective, real things that people believe have intrinsic value.

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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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Commodity (Marxism)

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Criticisms of the labor theory of value affect the historical concept of labor theory of value (LTV) which spans classical economics, liberal economics, Marxian economics, neo-Marxian economics, and anarchist economics. As an economic theory of value LTV is central to Marxist social-political-economic theory and later gave birth to the ideologically motivated concepts of exploitation of labour and surplus value. LTV criticisms therefore often appear in the context of economic criticism, not only for the microeconomic theory of Marx, but also for Marxism, according to which the working class was exploited under capitalism.

Socially necessary labour time

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Surplus value is a central concept in Karl Marx's critique of political economy. "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. 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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