Study Guide

The Wealth of Nations Book I, Chapter 5

By Adam Smith

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Book I, Chapter 5

Of the Real and Nominal Price of Commodities, or of Their Price in Labour, and Their Price in Money

  • Adam Smith begins this chapter by reminding us that people are only rich or poor depending on how much stuff they can afford to buy. In other words, money itself doesn't have any value. It's only valuable insofar as it can buy "labour."
  • Maybe we should explain. When you spend five dollars on pop and chips, you're not just paying for the pop and chips. You're paying for all the work a bunch of other people had to do to create those things. In Adam Smith's mind, all value is connected to human work. Therefore, the value of stuff is connected to the trouble someone took to make that stuff.
  • But then again, Adam Smith reconsiders. Maybe the value of stuff isn't connected to labor, but to the value of other stuff that we're willing to exchange for.
  • At this point, Smith feels like he has to make a distinction between the "real" and "nominal" value of things.
  • The nominal value is the amount of money you pay for it. Sometimes gas is cheap and sometimes it's expensive, so its nominal value goes up and down. But the "real" value of something is the amount of necessary things (like food and shelter) that you can get for it.
  • Smith calls this "real" value because it's connected to the real needs of human life, while money value can change with taste and fashion over time.
  • For proof of this, just check out how much people were willing to pay for CDs in 2000… vs. today.

The Wealth of Nations Book I, Chapter 5 Study Group

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