Commodity Economy: Definition & Concept

Instructor: Christopher Sailus

Chris has an M.A. in history and taught university and high school history.

In this lesson we discuss commodities and commodity economies. Based on globally accepted prices for similar goods, decisions within these specialized economies can have worldwide effects.

Non-Specific Shopping

Most of us never care to seek out exactly where the produce at our grocery store comes from, just so long as we have the produce. After all, a man's wife never tells him, 'Go pick up some broccoli and potatoes, but only if the broccoli is American and the potatoes are from Ireland.' As long as he comes back with broccoli and potatoes, she could not care less.

That's because items like mass produce are considered commodities. This means that where the crop is harvested makes no difference to the commodity economy; all like items are bought and sold as if they have come from the same place. Indeed, anything can be a commodity: currencies, minerals like gold or oil, crops, even spices like turmeric or allspice.

Commodities today are often publicly traded on worldwide markets. That's why, for instance, you hear newscasters and pundits talk about the 'price of oil.' What they are referring to is the publicly-traded standard price, on the commodity economy, of one barrel of oil. Whether that oil comes from Texas or Saudi Arabia makes no difference to the investors who trade billions of barrels of oil on the worldwide, commodity markets.

To better understand commodities and the economies on which they function, let's take a look at a few examples of commodities and how they can influence local economies.

Commodity Economies and Local Impact

Basic supply and demand are often the driving force behind many of the world's key commodities. For example, if everyone in the United States stopped drinking beer today, the price on the commodity economy for barley - a key ingredient in beer brewing - would plummet, as there would no longer be any demand, and supplies would still be relatively high.

Not only are commodities affected by supply and demand, but the prices the markets are willing to pay for commodities can often affect the supply itself. One of the most important commodities in today's world is oil. Most of us old enough to remember the 1980s and 1990s have seen the price of oil skyrocket from under $20 per barrel of oil, to well over $100 per barrel today! This increased price has meant that oil (which was previously considered too expensive to produce for various reasons - it was located too deep in the ground or in too remote an area, it was locked inside hard rock forms, etc.) is now being drilled and produced today. Formations like the Bakken oil shale in the Dakotas and Alberta are being drilled today because the change in oil price on the commodity economy has made the higher costs of producing that oil worth paying.

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