What is Say’s Law? How may it
fail to hold in a monetary economy?
The law states and holds true
where production is viewed as a source of demand. According to the law, the
production efforts of an individual are rewarded relative to the work done. The
attained pay is then used to require and acquire other services and goods in
return. The law is attributed to a misconception among economists as they tend
to imply that demand can never be a problem. According to Jean Baptist, to who
the law is articulated, he argued in the 19th century that demand is always in
plenty due to the supply of services and goods. However, it emerges that there
are some shortcomings when it comes to selling a particular product. The
difficulty arises from the shortage of demand for the product. If such a
scenario occurs, there is increased demand for another good that makes the
demand as a whole remain high. The law holds true in a barter trade economy.
According to barter trade, a trader exchanges goods equivalent to what they
require. What one wants to buy is directly proportional to what they wish to
buy in such an economy. Therefore, the desire to sell equates to the desire to
obtain and hence a balance is struck making shortage not achievable.
In a monetary economy, different
goods and services have different values on the scale of the money. The
products with the highest demand and the least supply are the ones with the
highest monetary value as opposed to items with the largest supply and similar
demand. Money is the constant that dictates what to buy and sell. In such an
economy, demand also is a consideration when making transactions. Instant
buying will not lead to immediate selling, but hoarding may occur in anticipation
of increased demand in the future. If the concept of producing without prior
knowledge of the demand in the market is applied, people will suffer due to
lack of sales, and this will cause unemployment and collapse of the economy.
What are the limitations and
possible analytical problems with the theory of comparative advantage?
There are potential gains for
individuals, organizations and even countries that emerge from technological
advancement and endowment of production factors. Therefore, comparative
advantage is the resultant specialization towards the smallest opportunity cost
as opposed to lowest absolute cost. Hypothetically, if this principle holds
true, and the application is on a nationwide panorama, the resultant effect
would be an increase in the world output based on specialization. Countries
would specialize in the production of goods and services based on the resources
they have in favor of the absolute cost. There are some limitations associated
with the theory. The approach overstates the benefits of specialization without
consideration of external trade costs such as pollution. The method is also
limited as it assumes a perfectly competitive market. In the real world,
mobility of factors leads to diminishing returns and increased costs of
transportation. Exchange rates are not accounted for in the theory as an
increase in one variable relative to another has an effect on the overall
output.
If the theory was implemented, there
are several analytical problems that might arise. In this regard, if one country
was to specialize in the production of a certain commodity, structural
unemployment emerges since all workers cannot transfer and work in one
industry. Comparative advantage concept is not static. The resources may run
out with time. For example, if Germany were to specialize in the production of
cars only, the resources of production would be depleted over a given time. The
real world is complex, and the theory cannot hold true as it is derived from a
two country exchange model.
EmoticonEmoticon