What is a Commodity?

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DEFINITION:

Commodities are raw materials grown or mined –- They serve as the building blocks for all other products.

Understanding commodities

A commodity is a raw material that is either consumed directly or used to produce finished goods. Soft commodities include agricultural products such as corn or wheat, while hard commodities include oil, gas, and minerals such as copper and gold. Commodities are the foundation of the global economy and are often traded on commodity exchanges. All commodities have intrinsic value (i.e., they are worth something in their own right) and are interchangeable (one unit of a commodity is considered equivalent to another). In many early societies, commodities served as currency or were exchanged directly for other materials.

EXAMPLE

People have been trading commodities for centuries. Historical evidence suggests that rice was one of the first commodities to be traded in futures contracts. As early as 17th century Japan, people apparently bought and sold large quantities of rice to hedge against poor crop yields. Some archaeologists believe that this practise goes back much further – possibly as far as 6,000 years ago. Rice has been an important commodity throughout human history, and agricultural commodities remain crucial in the modern world.

Takeaway

Commodities are like ingredients in a recipe…

The food that comes out of the oven is the final product. But you can’t just make cookies from scratch. You need eggs, flour, milk, sugar, and all the other things combined to make something delicious. The economy works the same way. It takes copper, oil, steel, iron, and all the other things (collectively called raw materials) that become value-added products.

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