Have you ever heard someone say something like “professional actors get paid too high” or “these vegetables are too cheap”? What did you think? That the price tags that come with professional actors and some vegetables are fair, or not what they’re worth at all? If you don’t know your answer or why you think what you think, this post will be illuminating! So read on to learn more about value in exchange, value in use and their difference.
The Diamond-Water Paradox (Paradox of Value)
In his famous book “Wealth of Nations“, Adam Smith talked about a phenomenon that today is known as the paradox of value. Basically he said that if you have a diamond, you can trade it for a lot of money. But there aren’t many practical needs for diamonds. On the other hand, we all need water to stay alive. But if you wanted to sell some water, you couldn’t get much money for it. And this is where he came up with the two subjects of this article: value in exchange and value in use.
What’s Value in Exchange?
As you can probably tell from the name, value in exchange is the monetary value of a good, service or asset that can be found in a market. For example if you go to a farmer’s market and buy some apples for 10 dollars, that 10 dollars is those apples’ value in exchange. It can also be expressed in relation to some other commodity instead of money. So if you can get a certain amount of oranges for 10 dollars too, that amount of oranges can also be the exchange value for the amount of apples you’ve bought.
And in our paradox, the value in exchange is very high for the diamonds and relatively low for the water.
What’s Value in Use?
Value in use is the sum of all the benefits of a good, service or asset for someone. These benefits are things that satisfy human needs or wants. So for example, the value in use for those apples in the farmer’s market is satisfying the need for nutrition. Apples can be eaten by themselves or be used to make some other food. And they are healthy. These aspects will have different values for different people. And these values will translate to a monetary amount that they’ll be willing to pay to get the uses they want.
In our paradox, the value in use for water is always high but for diamonds, it’s relatively low.
Value in Exchange vs. Value in Use
Value in exchange is determined by the market. And it’s mostly affected by supply and demand. But value in use is different for everyone and very subjective. So two people may look at the same product in the market and one may say that its price tag is too high while the other thinks it’s too low or at least worth it. But whatever their opinions, this price tag is determined by the market and no one person can change it because of his/her opinion.
So the value in exchange will not always be equal to the value in use.
Why Is This Important for Traders and Investors?
Ultimately, investors and traders are focused on monetary gains. So they work with exchange values. But I’ve talked about the use value to show you its importance and potential in helping you make financial decisions.
For example, when you’re buying something for yourself, you should first consider the use value of different available options. This will usually eliminate some options to make your decision easier. Then you should compare the exchange value of the remaining options within themselves and with the use value for you.
Or if you want to invest in some projects -by purchasing their stocks or coins/tokens- you should consider the use value of the project for different people (not just for you). If you think the use value is higher than the current exchange value, you should consider it as a potentially good investment option. (if you don’t know what coins and tokens are, read this post.)
So think of “value in exchange vs. value in use” as another frame of reference -like technical analysis or fundamental analysis- that can help you make better financial decisions.
Do you have examples of difference between exchange and use values from your life? Write about them in the comments below.
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***Last Updated on 29 March 2022 by Hamed Derakhshani (Guy with a Wallet)