National macro-economy and Commodity Market!

Macroeconomics is not a new word to listen. We have heard the word several times, but then do we know what it exactly means and how it affects the commodity prices in the country. It would not be a harm going back to the theory once again defining where the Macroeconomics comes from and what it is. Macroeconomics is that branch of economy which deals with the national indicators rather than the individual indicators referring to the performance, structure and decision-making. This branch usually studies about the Gross Domestic Product (GDP), unemployment situation in the country, price indices in the country, etc. Macroeconomics is very beneficial to develop, estimate and implement relationship between production & consumption, saving & investment, input & output, inflation & unemployment, international trade & international finance, etc. It is believed that among many others, two major areas of research in the field of macroeconomics can be (i) Causes and Consequences of the short-run fluctuations in the National Income, and (ii) Determinants of the long-run economic growth. Most of the macroeconomic theories remain around the phenomena of output, unemployment and inflation; therefore, they are taken to be the key elements of macroeconomics. Producers, Consumers and all other stakeholders in the community get benefitted out of it.

Because I have been trying to relate the macroeconomics to the commodity market, I would discuss about the commodity market before talking about the relationship between the two. Commodity market refers to the category of market place where the trading is usually done with the primary products rather than the manufactured or secondary/tertiary products. Usually, the two categories of the commodities are soft commodities and hard commodities. Soft commodity refers to the agricultural products like wheat, soybean, cotton, coffee, etc. whereas hard commodity refers to those which are extracted from the mines and refined to some extent. Commodity markets also include physical trading and derivatives trading using spot prices, forwards, futures, options and swaps. Farmers have used a simple form of derivative trading in the commodity market for centuries for the risk management.

Talking about few of the instances about the relationship – normal, symbiotic or parasitic, I would like discuss some examples. International price jolts for commodity-export markets pointedly affect their economic growth rates, trade balances, price levels, and nominal exchange rates or, for those with pegged currencies, international reserves.

 Source: www.wikipedia.org

To establish any kind of linkage, it is understood that one needs to be aware of all the concerned terms and mechanisms, even the hidden ones. But, in this case, we are aware of most of the hubs and their transfers and trans-linkages. To start up with the explanation of the above flowchart, let us first understand the term “Workforce Market”. Workforce refers to the working population in the society or country. All those who can work and who are available to work belong to this section of economy. The employers and management are also concerned in this sector, therefore a whole chain of demand and supply is formed which makes it a market. From above flowchart also, we can see that the supply of labour for the workforce market takes place from the household sector and the demand of labour takes place from the corporation or the corporate sector. Thus, macroeconomic flow chart introduces two more sectors - Household and Corporation sector.

Human beings are social animals. Human beings live in groups, in houses and form a society which integrates further to develop into a community and the communities come together to form a nation. As per traditional considerations, food, cloth and houses are the basic needs of human beings. So the household comes from the same origin, consisting of people. Therefore, in an economy, the household supplies the labour force and in return, the corporations or the corporate sector pays back the wage or the salaries to the labour force in an economy. Similarly, household is also the sector which takes the big role of the consumption from the commodity market. Consumption is always an important dimension of an economy. In classical economics, it was usually considered that whatever is produced is consumed in the economy and this is the only way the economy can be balanced. The term “saving” was introduced only coming to the neo-classical economics era and since then, savings has been an inevitable part of any generation.

Thus, another sector is introduced in the macroeconomic flow diagram, the commodity market. Since, we are to relate the commodity market to the economy, we have to get the details of pricing that is done in the commodity market and how is that reflected in the GDP or the macroeconomic variable of the nation.

Where, Q = Output

          = Price and Quantity of Commodity “x”

 = Price and Quantity of Commodity “y”

Because commodity market is all about market price determination of the commodities, the absolute price and quantity helps us find the exact value of the GDP. Moreover, if the saving is also promoted, then the quantity is also known for the future as the projection and helps in the efficient trading mechanism. In the case of agricultural products, like in Nepal, commodity market starts from the farm field and remains up to the stage where it is used as input in the industry to produce the required output. Thus, the commodity market gives the efficient and effective yield of the commodities that can be used for the development of corporation or the corporate sector in the nation. Besides that, commodity market also facilitates the import of the deficit commodities and export of the surplus commodities which adds up another dimension to the overall size of the economy. Discussing all this, we already talked a lot about the corporate sector or the corporations which have their specific roles in the economy. When imports and exports are dealt with, the graph alongside which gives the foundation to the trade creation cannot be ignored.

Now, here comes the role of the financial market. Many people might get confused why financial market and commodity market have been dealt differently. That is because commodity market joins financial market in the second stage when the value generation is to be made or else commodity market needs to be and usually is distinct to financial market. From the above flowchart, we can see that government is in the center of all the transactions, financial market being one of the core elements. It is to be understood from the flowchart that since the household pays tax to the government, the government pays back the services to the households. It is similar case in the corporation or the corporate sector. Corporations pay the taxes to the government and the government is supposed to transfer back the services essential for the proper functioning of the corporations. The savings from all the above sectors, Household, Government, Corporation and the foreign sector, if interested, is deposited in the financial institutions representing the financial market. Thus, financial market becomes the pool of fund which can also be used to invest in the development of commodity sector. Government can directly also invest in the development of commodity market. Commodity market has to use the financial market as the interface for the public or the household or else the relation does not maintain good.

Thus, there is an intact relation between the macroeconomic situation and the commodity market in an economy. Commodity market, if efficient, definitely helps boost the national economy.


Note: This article was published in the Capital Markets of South Asian Federation of Exchanges.