This assignment includes four parts. At first on term commodity will be defined. Second part provides some reasons why commodity price could increase. Next part talks about impact and consequences. And the last part provide some solutions how the problem with commodities could be solved.
Commodity it is a physical substance, such as food, grains, and metals, which is interchangeable with another product of the same type, and which investors buy or sell, usually through futures contracts. The price of the commodity is subject to supply and demand. Risk is actually the reason exchange trading of the basic agricultural products began. More generally, a product which trades on a commodity exchange; this would also include foreign currencies and financial instruments and indexes. (http://www.investorwords.com/975/commodity.html)
Commodities form the carcass of economies and account for the bulk of the export earnings for many countries. Especially the Least Developed countries are heavily depending on commodities. (http://www.common-fund.org/?pag=19#)
Reasons why commodity is rise
At the beginning of 2008 the rise of commodities such oil, gold, corn and industrial metal have been inverse to the panic on the other markets. Looking for the reasons why commodities behave like this arguments could be broken into supply and demand. Historically, demand for commodities will overlap levels of economic activity. But this relationship was completely broken down. And commodity surge excite with an economic slowdown at the same time. There are two demand-based explanations for this. The first centers on demand from outside OECD. The huge and growing demand for raw materials from the emerging world has pushed commodities forward at the same time the USA economic goes slowdown. The second source of demand could be called the investment demand. The introduction of exchange-traded funds alone, which...