Value means the utility of a commodity. However, in economics, the term ‘value’ has a quite different meaning.
According to Adam Smith, the word value can be used in two senses, i.e., value-in-use and value-in-exchange.
These are explained below:
It is the want satisfying power of a commodity. The satisfaction which one obtains from the use of a commodity is known as the value-in-use. For example water has immense use value, because it quenches thirst and without it daily life is just impossible. The quality of water is the value-in-use of water.
It is the amount of goods and services which we may obtain in the market in exchange of a particular thing. In other words, it is the price of a particular good which can be sold and bought in the market. For instance, if one kg of rice can be obtained in exchange of one dozen of banana, then we may say that value of one kg of rice is equal to one dozen of banana.
Thus, value-in-exchange depends on two things:
Value-in-exchange depends on time element. That is, with the change in time value- in-exchange for a commodity in respect to other commodity will vary.
Value-in-exchange also depends from place to place. Value-in-exchange for a particular commodity varies from one market to other markets. Hence, it varies according to time and place. Again, one commodity may have immense use value but no exchange value or vice versa. For example, water has immense use value but not exchange value. On the contrary, diamond has huge exchange value but no use value.