Adam Smith made important contributions to the theory of value and economic growth. Regarding value theory, he distinguished between value-in-use and value-in-exchange. Value-in-use represents the utility of an object, while value-in-exchange represents its purchasing power. Smith also analyzed how relative prices are determined by factors like labor costs, labor commanded, and total costs of production. He viewed specialization and the division of labor as central to improving productivity and driving economic growth, with the size of the market and capital accumulation also playing important roles.

1. 1. ExplainAdamSmith’scontributiontothe theoryof value
Answer:
AdamSmithmainlyemphasisontwoimportantissues.
a) Theoryof value
b) Theoryof economicgrowth
Explanationof the theoryof value:
The main questionfordiscussingthistheoryishow relative pricesongoodsare determinedbysmith’s
valuationtheory.
Smitharguedthat value canbe distinguishedbetweentwoparts
 Value inuse:Expressesthe utilityof some particularobject.Valueis come fromusefulness.
Example:Suppose the price of apenis10 taka.On otherword one can getutilityequal to10
taka fromthe pen.This10 taka isthe value inuse for the pen.
 Value inexchange: Expressesthe powerof purchasingothergoodswithaparticulargoodor
commodity.
Example:Suppose the price of pencil 1takaand the price of penis10 taka.So, the value in
exchange of 1 penis 10 pencils.
He alsodescribestwotypesof price:
 Absolute price:Absolute price isthe numberof takathat can be exchangedforaspecified
quantityof a givengood.
 Relative price:Relativeprice isthe quantityof some othergoodthatcan be exchangedfora
specifiedquantityof agivengood.Relativeprice showsthe intrinsicvalueof the product.
Example:Suppose we have twogoodsA andB. The absolute price of goodA is the numberof
dollarsnecessarytopurchase a unitof good A.The relative price of goodA intermsof B isthe
amountof goodB necessarytopurchase a unitof good A.
AdamSmithmainlyfocusedonexplainingexchangevalueof good.
Labor as a measure of value:
“The value of anycommodity……..isequal tothe quantityof laborwhichat enablesthe processorof the
commoditypurchase orcommandand labortherefore inthe real measure of the exchangeable value of
all commodity.”
The intrinsicvalue of the productdependsonhow muchlaboris usedforproduction.
Subsequently,he changeshismind.He distinguishesbetweennominal andreal price.

2. Nominal price:
Nominal price issimplythe taka price of anycommodity.
Real price:
Real price isthe nominal price adjustedforinflation.
He focusedmainlyonreal price.Afterthathe focusedonmarketprice andnatural price.
Market price:
Market price or actual price those price whichare determinedbythe interactionof supplyanddemand
inthe shortrun.
Natural price:
Natural price isthisprice whichis determinedbylongruncost of production.
Smith’stheoryof relative prices:
Smithdevelopsthreetheoriesof relative price;
a) A laborcost theory.
b) A labor commandtheory.
c) A cost of productiontheory.
He classifiedEconomyintotwoparts;
Primitive economy:
An economywhere landandcapital have noownership.Landandcapital supposedtobe free.Here,
Advance economy:
An economywhere capital andlandhave nolongerfree.Valueof agood determinedbytotal costof
production.Here,
Value of
the
production
Labor cost

3. In primitive economy,value of productmainlydependsonthe costof laborthisis labor cost theory.
Labor commandtheorymeanshowmuch laborcommandedforeachcommodity.
On the otherhand,in advance economythe value of good’spaymentsmade toall factorof production.
For example;wages,rent,profit.
By thistheorywe getthe total cost of productiontheoryof value.
Smith’sanalysisof marketsandpolicyconclusion:
Smith’smostsignificantcontributiontoeconomictheorywashisanalysisof the workingof competitive
markets.He specifiedthe mechanismwherebythe price resultingfromcompetitionwould,inthe long
run, equal costof production.
He emphasizedthe importationof competitivemarket.Withcompetitive marketandanabsence of
governmentregulation,the resultingnatural pricesbeingaboutanoptimumallocationof resourcesand
maximumratesof growthare assured.
Governmentinterference isundesirable anditresultsinanallocationof resourceswhichisless
desirable thanthatproducedbycompetitivemarketforces.
2. Explainhowthe twinprinciplesof specialization anddivisionof laborplayedacentral role inAdam
Smithgrowththeory?
AdamSmith’sviewof wealthwasdifferentfromthatof mercantilistsandphysiocrates.Smithdefined
wealthasan annual flowof goodsand services.Inotherword,wealthof nationis identifiedwithwhat
todaywe call percapita income orthe standardof livingof citizen.
Nownational income (Y) isequal tothe quantityof productobtainedonaverage byeach worker( or
laborproductivity, ∏) multipliedbythe numberof workeremployedinproduction(L):Thatis,
Dividingthroughbypopulation(P) we get,
Cost of
capital
Cost of land
Cost of
labor
Value of
the
production
Y ∏L
𝑌
𝑃
𝜋𝐿
𝑃

4. Finally,
That is percapita income isequal tolaborproductionmultipliedbythe share of active workerintotal
population.
Here we can see thatthe standard of living of populationdependsontwofactors:
a) The share of the populationemployedinproductivelabor
𝐿
𝑃
.
b) Productivityof labor∏.
Accordingto Smith,laborproductivitydependsondivisionof labor.Inturndivisionof labordependson
othertwo factors;
1. The size of the market.
2. Accumulationof capital.
𝑌
𝑃 ∏
𝐿
𝑃
The share of the
population
employed in
productive
labor (
𝐿
𝑃
)
Productivity of
labor (∏)
The
standard
of living of
population
Production Labor productivity Divisionof labor
The size of the
marketand
accumulationof
capital

5. He identifiesthree circumstancesthatconnectproductivitytothe divisionof labor:
1. Improvementinthe skill of the worker.
2. Savingof labortime.
3. Inducestechnical progress.
The secondthesisisthe connectionbetweengrowthof the marketanddevelopmentof the divisionof
labor.The market mustgrow inorderto absorb the increasingproductionresultingfromdivisionof
labor.
So,this ishowthe twinprinciplesof specializationanddivisionof laborplayedacentral role inAdam
Smithgrowththeory.
 Labor can be twotype;1) Productive labor,2) Unproductive labor.
 1) Productive labor:productive laboristhe laboremployedinproductive activitiesof capital like
agriculture andmanufacturingsector.
 2) Unproductive labor:unproductivelaborislaboremployedinproducingservice.
 Accumulationof capital determinesthe ratiobetweenthe membersof laborproductivity
employedandunproductivelyemployed.The greaterthe capital accumulation,the largerthe
proportionof laborinvolvedinproductive laborandgreaterthe wealthof nation.
Determinantsof wealth:
1. Productivityof labor:Thisdependsonthe amountof specializationanddivisionof labor.Whichis
 Limitedbythe extentof market.
 Limitedbycapital accumulation.
2. Proportionbetweenproductiveandunproductivelabor.Whichis
 Limitedbyaccumulationof capital.
Thus,capital is the chief determinantof the wealthof nation.
Governmentemphasize placedoncapital accumulationbyAdamSmith.A surplusiscreatedin
productionprocess.Partof thissurplusmustbe savedand investedinordertoachieve growth.
Who isgoingto save or invest?
 Worker
1. Improvementinthe skill of
the worker. Productivity
2. Savingof labortime.
Divisionof labor
3. Inducestechnical progress.

6.  Land owner.
 Industrial capitalist.
Labor cannot accumulate capital because the low level of wagespermitsonlynecessaryconsumption.
The landowningclasshasincome whichissufficienttoaccumulate capital buttheyspendthistosatisfy
theirdesires.
The risingindustrialistclassstrivesforprofitsandhence accumulatescapital toincrease theirwealthby
savingandinvesting.Anunequaldistributionof income inthe formof capitalististhereforeabsolutely
essential forachievingeconomicgrowthbecause the capitalistclass isthe onlyclasswhocan
accumulate capital.So,capital andcapitalistplaya critical role inthe processof economicgrowth.
Two majorpolicyconclusionof Smith:
1. The governmentshouldfollowalaissezfaire.
2. The distributionof income should be unequal.
Laissezfaire No governmentintervention Efficientresource allocation
Optimumgrowth.
ThomasMalthus:
He formulatedthe principle of populationwhichisconsideredasacornerstone of classical economics.
Three circumstancesappeartoaccount for the formulationof Malthus’stheory.
1. Englandbeganto importfoodafter1790 and foodpricesbeganto rise.
2. The povertyof lowerincome classeswasincreasing.
3. A reactionto the viewsexpressedbythe EnglandandFrenchutopianwritersGodwinandCondorcet.
Malthusfocusedhispopulationprincipleontwopostulates;
1. First postulate:Populationwhenuncheckedincreasedinageometricprogression.Populationwould
double itselfevery25years.But available statisticsprovidedlittle empirical supportforMalthus’sfirst
postulate.
2. Secondpostulate:Undereventhe mostfavorable circumstancesthe measure of sufficient(i.e.food
supply) cannotpossiblyincrease fasterthanthe arithmeticprogression.
The arithmeticprogressionof foodsupplycouldnotbe supportedbyfact.Neverthelessthe differences
betweenthe potential growthsof populationvs.the foodsupplywere recognized.

7. There are twovariable populationandfoodsupply.Itisa race betweenthistwo.Whenpopulation
growsat a fasterrate than foodsupplythe economywill reachthe subsistence level.If populationgoes
up the FAPCisgoingdownand inthe extreme situationcalledsubsistence level whichvictimispoor
people.
Solution:Checksthe population.Checksare twotypes.
1. Positive check:Asforexample diseases,war,famine,etc.whichincreasethe deathrate.Itisnot very
desirable.
2. Preventive check:Suchasa contraception,moral restraint,etcwhichlowerthe birthrate.