Question

In your own words, what is Say's Law?

What does Say's Law imply for the length of recessions? Explain.

What does Say's Law imply is the best policy response for a recession? Explain.

Explain why investment is a source of instability in a market economy.

What is a difference between unemployment and other underused resources, such as unburnt fuel or an idle factory?

COVID-19 makes us recognize those people whose jobs are indispensable to the functioning of society, including front-line health-care workers, grocery workers, and delivery workers. Many earn low incomes while bearing the risk of becoming infected to meet other people’s living and medical needs. What new perspective does COVID-19 give you on the different importance of the essential/non-essential jobs to our economy? (You may want to refer to the material on care from Nancy Folbre earlier in the semester.) Feel free to reflect on how COVID-19 may have altered your future career plans.

Answer 1

- According to Say's law, the supply of goods creates its own demand. In other words, the production of a good X generates demand for another product Y ensuring an exchange between the two goods. Therefore, production is a source of demand in the economy.

- Say's law suggests that a recession is not an outcome of the failure of aggregate demand (as pointed out by Keynes). Instead, it is a failure in the structure of supply and demand. For example, during a recession, producers miscalculate what consumers want to buy which leads to lower demand. As long as the structure of supply and demand is corrected, a recession in the economy would soon get over.

- As per Say's law, the best policy response during a recession is more production in the economy. Moreover, correction in the structure of supply and demand in the economy.

- The investment could be a source of instability for two reasons -

1. It depends upon real interest rates in the economy which is determined by the policymakers. The fluctuations in the real interest rates lead to volatility in the investment that affects the business cycle of the economy.

2. Surplus or deficit in investment could result in a boom or bust of the economy and hence create instability in the economy.