Commodity value
Encyclopedia
In the field of economics
, the commodity
value of a good is its free market
intrinsic value
under optimal use conditions. In a free market, the commodity value of a good will be reflected by its price. For 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.
coins such as modern day quarters
have a low commodity value. This is of particular historical relevance when analyzed in light of Gresham's Law
.
backed debt
has a commodity value equal to the price of the collateral
; a loan backed by a house has a commodity value equal to the free market price of the house. Non-collateralized debt, on the other hand, does not have a commodity value; it is valuable only insofar as it is repaid.
. Whereas fiat currencies can devalue, often catastrophically
, currencies with considerable commodity value are known to better maintain their value; a government can print as many fiat bills as it wants with relative ease, the same is not true of mining precious metals. This leads some investors to purchase goods and debts with high commodity value, which are inherently safer than those with low, or no commodity value, minimizing risk by sacrificing potential return.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, the commodity
Commodity
In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....
value of a good is its free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
intrinsic value
Intrinsic value
Intrinsic value can refer to:*Intrinsic value , of an option or stock.*Intrinsic value , of a coin.*Intrinsic value , in ethics and philosophy.*Intrinsic value , in philosophy....
under optimal use conditions. In a free market, the commodity value of a good will be reflected by its price. For 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.
Currency
Commodity value is of particular significance in the study of currency. For example, the commodity value of a coin is the value of the metal of which it is made. Gold and silver coins have a high commodity value, whereas fiatFiat money
Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning "let it be done", as such money is established by government decree. Where fiat money is used as currency, the term fiat currency is used.Fiat money originated in 11th...
coins such as modern day quarters
Quarter (United States coin)
A quarter dollar, commonly shortened to quarter, is a coin worth ¼ of a United States dollar, or 25 cents. The quarter has been produced since 1796. The choice of 25¢ as a denomination, as opposed to 20¢ which is more common in other parts of the world, originated with the practice of dividing...
have a low commodity value. This is of particular historical relevance when analyzed in light of Gresham's Law
Gresham's Law
Gresham's law is an economic principle that states: "When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation." It is commonly...
.
Debt
AssetAsset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
backed debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
has a commodity value equal to the price of the collateral
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
; a loan backed by a house has a commodity value equal to the free market price of the house. Non-collateralized debt, on the other hand, does not have a commodity value; it is valuable only insofar as it is repaid.
Investment
Commodity value is an important consideration in hedging against inflationInflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
. Whereas fiat currencies can devalue, often catastrophically
Hyperinflation
In economics, hyperinflation is inflation that is very high or out of control. While the real values of the specific economic items generally stay the same in terms of relatively stable foreign currencies, in hyperinflationary conditions the general price level within a specific economy increases...
, currencies with considerable commodity value are known to better maintain their value; a government can print as many fiat bills as it wants with relative ease, the same is not true of mining precious metals. This leads some investors to purchase goods and debts with high commodity value, which are inherently safer than those with low, or no commodity value, minimizing risk by sacrificing potential return.