Value and Wealth

Value, in economics, refers to the worth of a commodity, expressed either in terms of its usefulness or in terms of the other goods it can command in exchange. Adam Smith highlighted two distinct senses of the word 'value' through the classic water–diamond paradox:

• Value in use — the usefulness of a commodity in satisfying a want. Water has enormous value in use (life depends on it) yet commands almost no price.
• Value in exchange — the power of a commodity to command other goods (or money) in exchange. A diamond has very little value in use yet an enormous value in exchange, because it is extremely scarce relative to the largely ornamental want it satisfies.

The paradox is resolved once we note that price depends on marginal utility relative to scarcity, not on total usefulness: water is abundant, so its marginal utility (and hence price) is low even though its total utility is enormous; diamonds are scarce, so their marginal utility (and hence price) stays high even though their total utility to survival is negligible.

Wealth, in everyday speech, means anything valuable a person owns; in economics it has a narrower, precise meaning — the stock of economic goods, owned by an individual or a nation at a given point of time, that possess utility, scarcity and transferability, and that are external to the owner.

Essential characteristics of wealth:

1. Utility — it must satisfy some want.
2. Scarcity — it must be limited in supply relative to demand (this is what separates wealth from a free good like air).
3. Transferability — ownership must be capable of being transferred from one person to another.
4. Externality — it must be external to the person, i.e., a good, not a personal quality (a person's own honesty or skill is not 'wealth' in this sense, even though it may help create wealth). …