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October 21, 2017 

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RECESSIONARY GAP: The difference between the equilibrium real production achieved in the short-run aggregate market and full-employment real production the occurs when short-run equilibrium real production is less than full-employment real production. A recessionary gap, also termed a contractionary gap, is associated with a business-cycle contraction. This is one of two alternative output gaps that can occur when short-run production differs from full employment. The other is an inflationary gap.

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COMMODITY MONEY:

A medium of exchange (money) that has both value in use and value in exchange. Commodity money is first and foremost a commodity that provides users with satisfaction of their wants and needs. However, it also has the secondary function of acting as a medium of exchange for the economy. In the march toward economic complexity, commodity money emerged from barter exchanges, but then ultimately gave way to modern fiat money.
The first types of commodity money were typically goods that provided satisfaction of basic physiological needs, such as food and clothing. Because such commodities were widely demanded for their value in use, they evolved into commodity money and in so doing acquired the value in exchange dimension, too. People were willing to accept these commodities as payment, even though they did not personally have a need for them, because they knew they could trade them for other goods. While many commodities were used as commodity money over the centuries, those that best fit the durability, divisibility, transportability, and noncounterfeitability characteristics of money, became most widely used.

Two Values

The two types of value that characterize commodity money (and differentiates it from fiat money) are value in use and value in exchange.
  • Value in Use: This means that the satisfaction of wants and needs is provided by the direct consumption of goods and services. Acquiring value from the use of goods and services is really the ultimate goal of economic activity. It is the final step in the production, allocation, and consumption activities that are undertaken to address the fundamental problem of scarcity.

  • Value in Exchange: This means that an item, especially money, can be traded for other goods and services that can then be used to satisfy wants and needs. Value in exchange means that value, that is satisfaction, is obtained indirectly through the acquisition of something else. For an item to have value in exchange it need NOT have value in use.
Commodity money has both value in use (the commodity part) and value in exchange (the money part). In contrast, fiat money has value in exchange, but little or no value in use.

From Commodity to Money

To illustrate the emergence and functioning of commodity money, consider the operation of a nice little barter economy. Within this economy, Duncan Thurly makes my hamster hats (not hats from hamsters but hats for hamsters) and Kevin Kopplemeyer makes knickers. Duncan and Kevin can then engage in a trade of their commodities. And when they do, both are happy--more or less. Both certainly get more goods than possible under self-sufficiency, but barter has limitations. These barter traders are bound to use a lot of resources searching out trades. This occurs because barter needs double coincidence of wants. If Duncan does not need knickers or Kevin has no desire to acquire hamster hats, then there is no trade.

As such, this simple barter economy is bound to gravitate toward commodity money, to use commodities like grains or animal skins, which are generally desired by everyone, as the medium of exchange. Rather than spending the better part the day trying to trade hamster hats for knickers, Duncan can make a trade for a generally desired product, like corn. Because knicker tailors are bound to get hungry, the odds of achieving a double coincidence of wants in a knicker-corn trade are better than a knicker-hamster hat trade.

Others are likely to follow Duncan's lead, trading their knickers, candles, wagon wheels, and other goods for corn because they realize that everyone else is also likely to accept corn in payment. And in so doing, these folks develope commodity money. The commodity, corn, is also the medium of exchange, money.

From Use to Exchange

The value in exchange of commodity money is largely dependent on its value in use. If everyone generates the same satisfaction from two pounds of corn as a pair of knickers and a dozen hamster hats, then the exchange value of a pair of knickers or a dozen hamster hats is two pounds of corn. In other words, the price of a pair of knickers or a dozen hamster hats is two pounds of corn.

Should the value in use of commodity money change, then so too does the value in exchange. If a drought wipes out half of the corn crop, then the limited supply makes the value in use greater. People might now receive the same satisfaction from ONE pound of corn as from a pair of knickers or a dozen hamster hats. As such, the value in exchange also increases. ONE pound of corn can be exchanged for a pair of knickers or a dozen hamster hats.

The connection between value in use and value in exchange can play havoc for an economy using commodity money. A change in value in use--the market price--brought on by disruptions of the market, can affect value in exchange and thus disrupt with the critical role that the commodity money plays as a medium of exchange. The California gold rush of 1849, for example, increased the supply of gold, reduced the commodity price of gold, and reduced the exchange value of gold as commodity money. In other words, price inflation ran rampant.

Some Better than Others

But just because a commodity is widely demanded for its value in used, does not necessarily make it the BEST commodity to function as money. A commodity functions as money if it fits the four characteristics of money--durable, divisible, transportable, and difficult to counterfeit. Corn, for example, fits the characteristics quite well. But other commodities are likely to be even better. This is where metal commodities come into play. When early civilizations sought out commodity money, metals such as gold, silver, copper, and nickel surfaced to the top of the list because they tended to be the most durable, divisible, transportable, and difficult to counterfeit commodities around.

The most important characteristic of metals is durability. As basic elements, metals do not wear out, do not decompose, do not break down, and usually do not get eaten by hungry hamster-hat makers. Metals also rate high in the divisibility category, and as alchemists discovered when trying to transform lead into gold, metals are also difficult to counterfeit. Transportability, however, is one drawback for metals. Transporting enough gold to buy a horse might actually require a horse to do the transporting.

Metals were so well suited as commodity money that they were used by civilized human beings for centuries. In fact, metals were used as money for such a long time that some people erroneously think that metals and ONLY metals are TRUE money.

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Recommended Citation:

COMMODITY MONEY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2017. [Accessed: October 21, 2017].


Check Out These Related Terms...

     | fiat money | value in use | value in exchange | medium of exchange | barter | barter economy | M1 | currency |


Or For A Little Background...

     | money | money functions | money characteristics | specialization | market | satisfaction | exchange | production | efficiency |


And For Further Study...

     | fractional-reserve banking | banking | money creation | monetary policy | Federal Reserve System | money supply | money supply, aggregate demand determinant | monetary economics | Keynesian economics | aggregate market analysis | business cycles |


Related Websites (Will Open in New Window)...

     | Federal Reserve System | Federal Reserve Education | U.S. Department of the Treasury |


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