In the text box below, answer one of the following questions in 300 / 400 words
ID: 1197890 • Letter: I
Question
In the text box below, answer one of the following questions in 300 / 400 words.
A. What is Say’s Law? How may it fail to hold in a monetary economy? B. Explain how deficit spending may increase national output in a setting of flagging private investment. How does the propensity of consumers to spend their income shape this effect? C. What are the three types of financial structure identified by Hyman Minsky? Which of these types would best explain the situation faced by somebody taking out an interestonly mortgage? D. What are the limitations and possible analytical problems with the theory of comparative advantage? E. “In order to industrialize and ‘catch up’ economically, developing countries should adhere to the same ‘freetrade’ principles upheld by Britain as it industrialized in the course of the nineteenth century.” Discuss.
Explanation / Answer
The French economist, J.B.Say enunciated the proposition that "supply creates its own demand". He believed that there would not be general overproduction and the problem of unemployment in the country. There may be unemployment, but in the long run the economy will automatically tend toward full employment. He believed that production creates market for goods. In other words, whatever is produced is ultimately consumed in the economy. His theory in its original form was applicable to a barter form of economy, where goods are ultimately sold for goods.
According to Say, no person will work to make a product unless he wants to exchange it for some other product which he desires. Therefore, the act of supplying goods imply creating a demand for them. Say's law of markets does not consider the possibility of overproduction and reject the possibility of decrease in demand. Employing more factors of production means an increase in the level of employment, and hence profits are maximized. Investment in production is considered as savings which creates demand for products in the market. that saving investment equality is maintained so that general overproduction is avoided.
Say believed that rate of interest is a determinant factor to maintain equality between saving and investment. It investment exceeds savings, the rate of interest will rise and vice versa. This is because saving is an increasing function of interest rate and investment a decreasing function of interest rate.
Say' law is found unacceptable in modern economy because supply doesn't create its own demand. Because demand does not increase as much as production increases. The automatic adjustment process does not remove unemployment, but it can be removed only by the increase in rate of investment. Say has not given much importance to money, but according to Keynes,money is the medium of exchange, and it held for income and business motives. Say's law is based on laissez-faire policy, but modern economics highlights state intervention to tackle the case of general overproduction and mass unemployment.
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