<p>Interesting observation, but I think the answer is partly explained by several factors:</p>

<p>First, any calculation of <em>real</em> GDP would eliminate the year-over-year variance that could be due to taste shocks leading to significant price changes.</p>

<p>Second, I think your observation is partially true, however. What makes an iPhone more valuable than an old Motorola smartphone? Sure, some inputs might be slightly different, but the "production technology" of the iPhone makes it such that we (in general) <em>do</em> value it higher. While some measures like CPI try to account for some of those issues by considering benchmarks for certain performance criteria (like processing power, memory, etc.), in the end, there absolutely is some taste-based component.</p>

<p>I think it's partly accounted for by aggregation, as you mentioned, but I think the third point is that there's a bit of a disconnect between what <em>value</em> is trying to measure, and what GDP is interested in. Theories of value attempt to explain why we attach certain "utility amounts" to different goods. But that doesn't mean the <em>output</em> of any particular "theory of value" is subjective: the observed prices and quantities are quite objective. GDP (like other macroeconomic indicators) is more interested in tabulating those objective <em>outputs</em> of the theory of value and observing their change over time. </p>

<p>For example, I know I value the green mechanical pencil in front of me at \$2, despite the fact I only paid \$1 for it. Assuming the production costs are negligible, GDP would observe that as \$1 of economic activity. It doesn't consider how much I <em>would</em> have paid for it, which is what different theories of value attempt to explain. Furthermore, <em>why</em> I value it at \$2 might be for any host of reasons- perhaps its a subjective value, or perhaps that valuation reflects what I think the pencil will be worth in a year's time. Regardless of what that reasoning is, the objective measurements that GDP considers are the price paid and quantity.</p>

CC BY-SA 4.0
2018-05-26T06:18:18.290Z
So basically the presence of a market tends to level out the individual valuations into something more regular? In other words, subjective value says what an individual would be ready to pay but the market dictates what they will probably pay. (?)
Giorgio
CC BY-SA 4.0
2018-05-26T06:55:27.987Z
"the observed prices and quantities are quite objective": Yes, but, since they rely on the taste of the people who participate in the market, these objective values are pretty meaningless. I.e. the fact that the price of a smartphone converges to X $ just says that people, on average, attach that value to that smartphone. By assumption, there is no other objective information beyond observing what people liked and how much they liked it (how much they were willing to pay).
Giorgio
CC BY-SA 4.0
2018-05-26T22:55:49.717Z
@Giorgio I'd disagree a bit with the characterization of measures like price as "meaningless." Prices are a mechanism by which individuals, acting based on nothing but their own personal valuations, can allocate resources in a Pareto Efficient manner. Few other mechanisms can guarantee that, especially with such little necessary information. In addition, I'm left wondering what other theory of value provides any more "objectivity." Ultimately, the question "but why" leads most "objective" theories to collapse or impose some external justification.
AndrewC
CC BY-SA 4.0
2018-05-27T08:57:19.650Z
I was not arguing that price is meaningless. I was arguing that it seems meaningless to use (the sum of) prices (of goods sold over a certain period of time) to measure the performance of an economy since price is based on subjective valuations of each individual, not on some objective category common to all individuals. So it does not make sense to add the 20 \$ I spent on a dinner with the 5 \$ someone else spent on a toothbrush, because these two numbers express quantities that are not comparable. I am not able to resolve this.
Giorgio
CC BY-SA 4.0
2018-05-26T00:27:02.750Z
2018-05-26T00:27:02.750Z
AndrewC
<p>I am trying to understand the subjective theory of value and run into some considerations that make me think I got it wrong.</p>

<p>As far as I understand, the subjective theory of value states that the values (prices) of commodities are not related to any objective quantity but rather are a result of individual, subjective judgements. E.g. if I decide to pay 1000 \$ for a good, then for me that good has the (subjective) value of 1000 \$, and that is all there is to it.</p>

<p>As a result, the gross domestic product of a nation is the sum of all these subjective judgements about the values of goods that are bought and consumed by people over a period of time.</p>

<p>But, as far as I know, the GDP is used to evaluate the performance of an economy (growth and so on): Do economists really base their evaluation of an economy on some non-objective measure of value? Or value is subjective at the level of an individual and becomes something objective in the aggregate?</p>

<p>Can someone help me out?</p>

<value>
Subjective theory of value applied to gross domestic product
Giorgio
# Subjective theory of value applied to gross domestic product

(Asked by: username_0 on 2018-05-25)

I am trying to understand the subjective theory of value and run into some considerations that make me think I got it wrong.

As far as I understand, the subjective theory of value states that the values (prices) of commodities are not related to any objective quantity but rather are a result of individual, subjective judgements. E.g. if I decide to pay 1000 \$ for a good, then for me that good has the (subjective) value of 1000 \$, and that is all there is to it.

As a result, the gross domestic product of a nation is the sum of all these subjective judgements about the values of goods that are bought and consumed by people over a period of time.

But, as far as I know, the GDP is used to evaluate the performance of an economy (growth and so on): Do economists really base their evaluation of an economy on some non-objective measure of value? Or value is subjective at the level of an individual and becomes something objective in the aggregate?

Can someone help me out?

**Tags:** value

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## 1 answers

### Answer by username_1 on 2018-05-26. Score: 1

Interesting observation, but I think the answer is partly explained by several factors:

First, any calculation of *real* GDP would eliminate the year-over-year variance that could be due to taste shocks leading to significant price changes.

Second, I think your observation is partially true, however. What makes an iPhone more valuable than an old Motorola smartphone? Sure, some inputs might be slightly different, but the "production technology" of the iPhone makes it such that we (in general) *do* value it higher. While some measures like CPI try to account for some of those issues by considering benchmarks for certain performance criteria (like processing power, memory, etc.), in the end, there absolutely is some taste-based component.

I think it's partly accounted for by aggregation, as you mentioned, but I think the third point is that there's a bit of a disconnect between what *value* is trying to measure, and what GDP is interested in. Theories of value attempt to explain why we attach certain "utility amounts" to different goods. But that doesn't mean the *output* of any particular "theory of value" is subjective: the observed prices and quantities are quite objective. GDP (like other macroeconomic indicators) is more interested in tabulating those objective *outputs* of the theory of value and observing their change over time.

For example, I know I value the green mechanical pencil in front of me at \$2, despite the fact I only paid \$1 for it. Assuming the production costs are negligible, GDP would observe that as \$1 of economic activity. It doesn't consider how much I *would* have paid for it, which is what different theories of value attempt to explain. Furthermore, *why* I value it at \$2 might be for any host of reasons- perhaps its a subjective value, or perhaps that valuation reflects what I think the pencil will be worth in a year's time. Regardless of what that reasoning is, the objective measurements that GDP considers are the price paid and quantity.

> **Comments:**
> **username_0**: So basically the presence of a market tends to level out the individual valuations into something more regular? In other words, subjective value says what an individual would be ready to pay but the market dictates what they will probably pay. (?)  
> **username_0**: "the observed prices and quantities are quite objective": Yes, but, since they rely on the taste of the people who participate in the market, these objective values are pretty meaningless. I.e. the fact that the price of a smartphone converges to X $ just says that people, on average, attach that value to that smartphone. By assumption, there is no other objective information beyond observing what people liked and how much they liked it (how much they were willing to pay).  
> **username_1**: @Giorgio I'd disagree a bit with the characterization of measures like price as "meaningless." Prices are a mechanism by which individuals, acting based on nothing but their own personal valuations, can allocate resources in a Pareto Efficient manner. Few other mechanisms can guarantee that, especially with such little necessary information. In addition, I'm left wondering what other theory of value provides any more "objectivity." Ultimately, the question "but why" leads most "objective" theories to collapse or impose some external justification.  
> **username_0**: I was not arguing that price is meaningless. I was arguing that it seems meaningless to use (the sum of) prices (of goods sold over a certain period of time) to measure the performance of an economy since price is based on subjective valuations of each individual, not on some objective category common to all individuals. So it does not make sense to add the 20 \$ I spent on a dinner with the 5 \$ someone else spent on a toothbrush, because these two numbers express quantities that are not comparable. I am not able to resolve this.  

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