Two Values

• Value in Use: This means that the satisfaction of wants and needs is provided by the direct consumption of goods and services. Acquiring value from the use of goods and services is really the ultimate goal of economic activity. It is the final step in the production, allocation, and consumption activities that are undertaken to address the fundamental problem of scarcity.


• Value in Exchange: This means that an item, especially money, can be traded for other goods and services that can then be used to satisfy wants and needs. Value in exchange means that value, that is satisfaction, is obtained indirectly through the acquisition of something else. For an item to have value in exchange it need NOT have value in use.

From Commodity to Money

As such, this simple barter economy is bound to gravitate toward commodity money, to use commodities like grains or animal skins, which are generally desired by everyone, as the medium of exchange. Rather than spending the better part the day trying to trade hamster hats for knickers, Duncan can make a trade for a generally desired product, like corn. Because knicker tailors are bound to get hungry, the odds of achieving a double coincidence of wants in a knicker-corn trade are better than a knicker-hamster hat trade.

Others are likely to follow Duncan's lead, trading their knickers, candles, wagon wheels, and other goods for corn because they realize that everyone else is also likely to accept corn in payment. And in so doing, these folks develope commodity money. The commodity, corn, is also the medium of exchange, money.

From Use to Exchange

Should the value in use of commodity money change, then so too does the value in exchange. If a drought wipes out half of the corn crop, then the limited supply makes the value in use greater. People might now receive the same satisfaction from ONE pound of corn as from a pair of knickers or a dozen hamster hats. As such, the value in exchange also increases. ONE pound of corn can be exchanged for a pair of knickers or a dozen hamster hats.

The connection between value in use and value in exchange can play havoc for an economy using commodity money. A change in value in use--the market price--brought on by disruptions of the market, can affect value in exchange and thus disrupt with the critical role that the commodity money plays as a medium of exchange. The California gold rush of 1849, for example, increased the supply of gold, reduced the commodity price of gold, and reduced the exchange value of gold as commodity money. In other words, price inflation ran rampant.

Some Better than Others

The most important characteristic of metals is durability. As basic elements, metals do not wear out, do not decompose, do not break down, and usually do not get eaten by hungry hamster-hat makers. Metals also rate high in the divisibility category, and as alchemists discovered when trying to transform lead into gold, metals are also difficult to counterfeit. Transportability, however, is one drawback for metals. Transporting enough gold to buy a horse might actually require a horse to do the transporting.