Adam Smith

Question 1

Adam Smith’s contributions

Answer 1

1. Division of Labor
2. Invisible Hand
3. Theory of Value
4. The Role of Government

Question 2

Division of Labor

Answer 2

if laborers can divide up labor to increase output

• Economic growth is also dependent on the proportion of productive to unproductive labour
• Specialization and trade can increase the output at a global level

Question 3

Invisible Hand

Answer 3

Quest for profit.
Consequences:
1) Each firm will produce at minimum average costs.
2) Firms have incentive to innovate to improve quality and reduce costs.
3)Firms respond to changes in consumers’ tastes without government regulation.

Question 4

Smith’s Labor theory of Value

Answer 4

Value in use. Value in exchange (water-diamond paradox). He broke down value in exchange into two perspectives: in Primitive society and advanced society

Question 5

Exchange Value

Answer 5

1) Wages - based on bargaining & contracting; wage fund theory
2) Profits - subject to variation wages and profits are inversely related
3) Rents - Residual
- Weakness: no concern for relative value of different commodity

Question 6

How was Adam Smith influenced by Physiocriocrats

Answer 6

Motivation to prove mercantilists theory wrong was one of his major efforts in wealth of nations. Later drew the theme of wealth as “the consumable goods annually reproduced by the labor of society.”

Question 7

Labor theory of value in primitive society

Answer 7

Labor is the real measure of the exchangeable value of commodities

Question 8

Labor theory of value in Advanced society

Answer 8

goods will be exchanged for other goods, for money, or for labor at a figure high enough to cover wages, rent, and profits