deflation. As seen in Figure 3, as the demand for a commodity shifts in (less demand) the quantity decreases to q’. This decreased demand is likely to decrease GDP, as less exporting takes place, as demonstrated by the equation for GDP below. Similar to the reasoning in the previous section, as seen in Figure 4, a decrease in GDP leads to deflation. This can have negative or positive effects, depending on whether the nation's currency was overvalued or undervalued. Deflation can either be positive or negative in the long run as suggested by the effects section of the deflation article. It is important to note that while countries with commodity currencies benefit from higher demand of a commodity, countries that import this commodity face the opposite effects. Externalities Most commodities that are tied to currencies are natural resources such as gold, oil, timber and other minerals. However, the mining of these raw resources can lead to immense externalities such as pollution. Countries whose currencies do not hinge on commodity price movements are generally more willing to minimize harmful environmental processes, thus reducing affiliated externalities. Countries whose currencies are impacted profoundly by commodities are generally less willing to tighten their environmental policies which would reduce externalities. For example, the Canadian dollar is closely tied to soybeans and oil. The production of oil is extremely harmful to the environment. However, reducing oil production through cap-and-trade programs or production taxes can be devastating to the Canadian dollar. See also Gold standard Silver standard Hard currency Private currency Representative money Reserve currency Commodity money References External links IMF's study on commodity currencies Do Terms of Trade Drive Real Exchange Rates? Comparing Oil and Commodity currencies Currency Commodities