Theory Of Exchange Value

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The Theory of Exchange Value and Relative Prices Exchange Value Ricardo believed that by looking at the basis for the ratio of exchange between commodities, he would be able to establish the factors that cause a change in relative values over time; showing his interest in relative value over absolute value. Ricardo stated in Principles of Political Economy and Taxation (1871) that use value is needed to for a commodity to have exchange value. Although utility, which is the subjective want satisfying power, does not directly cause proportionate changes in exchangeable value, it helps to give an idea. According to Ricardo, the factors that affect exchange value of commodities boils down to scarcity and quantity of labor required to obtain them. In his labor theory of value, he only looks at reproducible goods which are produced constitutively while under conditions of competition. He ignores non-reproducible commodities because their exchange value is mainly determined by the wealth of their demand, and their fixed supply only serves to boost the desires for ownership. Ricardo’s labor theory of value states that the exchange value of a reproducible commodity depends on labor time required for production. Labor time includes work done from production of raw materials and capital goods needed to production of the commodity itself. By staging the process, Ricardo felt that it would be easier to establish what caused changes in exchange values over time. Therefore, if the ratio of exchange between commodity A and commodity B rose from 3:1 to 6:5, we would be able to determine the labor time and hence the factors causing the change in exchange values between the two. It should be noted that unlike Smith who gave distinction between primi... ... middle of paper ... ...y. Individuals tend to keep market prices proportional to values and equalize the profits so they get maximum benefits. Short and long-run values are things that are taken into account when determining their market value. The first depends greatly on supply and demand therefore its market price may fluctuate greatly. In long-run values however, more attention is paid towards the real and relative costs of production. They have to be proportional to the labor time of the entire production process. Still, there is no permanence in the market price hike above the natural price caused by demand however abundant demand can be. The value will always depend on the expenses of its production, which includes profits to producers. Therefore, the factors that change permanent price in the expenses of production, and their relationship with demand are prime subjects of study.

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