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Chicago Fed Letter, No. 75, November 1993
Commodity-based Indicators: Separating the Wheat from the Chaff
In terms of pedigree, commodity prices are the ultimate economic indicators, as they have been used to assess business conditions since markets were invented. During the early days of market economies the preeminence of commodity prices rested on two fundamental economic truths. First, since these economies offered few other goods or services, commodities had a direct and strong link to the performance of the overall economy. Second, since commodities of one sort or another were often used as units of account, commodity prices were also excellent measures of inflation. In modern economies neither of these truths still holds. Today, commodities make up only a very small proportion of overall economic output, and unbacked national currencies dominate the exchange process. In modern industrialized economies, any continued usefulness of commodity prices to measure business conditions is more statistical in nature than the result of any logical necessity.
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