Monday, October 17, 2011

Real Commodity Prices In The Long Run & The Penn Effect

The below chart shows that though there are occassional periods of commodity prices booms (like the latest decade) in the long run, commodity prices have fallen relative to the prices of finished goods and services. This of course contradicts the views of those who claims that the world is running out of natural resources.

Does this mean that the future will necessarily be the same? No, not necessarily, but probably because the same mechanisms that have held back commodity prices in the past will continue to be there, Namely, that whenever a commodity has increased in price, this has increased supply by increased exploration and extraction (or planting in the case of food commodities) as well as increasing demand for substitutes and technological solutions to use it more efficiently. All of this causes the price increases to be self-reserving.

However, it is possible that for slow growing economies in America, Europe and Japan relative commodity prices could rise, while they fall in fast growing economies in for example Asia excluding Japan. The reason is that the relative price level in weaker growing economies because of the Penn Effect will, either because of lower price inflation, depreciating currencies or a combination of the two. Since commodity prices are basically the same across the world, a falling relative general price level in weaker economies means that for them inflation adjusted commodity prices could rise while the relative increase in the price level of stronger economies means that for them inflation adjusted commodity prices.


Blogger flute said...

I think you should differentiate between renewable commodities (e.g. wheat) recyclable commodities (e.g. copper) and energy commodities (e.g. oil). The last class of commodities shows a different price picture over the period you have in the diagram. See e.g. here. Energy commodities can by definition not be recycled to be reused once they have been burnt and by definition are not renewable.

I suppose you have read the discussion on the Swedish blog Ekonomistas about prices of commodities. If not, it's worth reading.

3:22 PM  

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