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What determines the value of an item?
- (A) the amount of goods that are produced
- (B) the capital required to build the factory
- (C) the unlimited wants of the consumers
- (D) the resources consumed in production
Answer: the amount of goods that are produced. The amount of goods that are produced determines the value of an item.
The value of an item is determined by how much it cost to produce the item. However, the more items that are produced, the less the value of an item tends to be (as costs like electricity, water, rent, etc. are spread over more items), and thus the value of an item is partially determined by the amount of goods that are produced.
Money has a value that is determined, just like other goods, by the principle of demand and supply. This idea appears to be so straightforward that early students of the subject concluded that a change in the amount of items without any variation in money volume, or per contra, a modification in money volume without change in the quantity of goods must result in a
Thus there emerged an abstract mathematical theory called the quantitative theory, which John Stuart Mill defined in these words:
“the value of money, other things being equal, varies inversely as its quantity, every increase of quantity lowering the value and every reduction boosting it by a ratio precisely equivalent.”
This idea has some validity, but in its usage to prices, it has been misinterpreted and perverted. It’s been taken to mean that as the quantity of money in a community increases, so will the costs of all goods.