Q.(a) Critically explain Say's Law of Market.

(a) Say's Law ('supply creates its own demand') rules out general overproduction and assumes automatic full employment; Keynes criticised it because saving may not equal investment, so aggregate demand can fall short and cause unemployment. (b) The BOP has three parts: current account, capital account and official reserves.

(a) Say's Law of Markets — critical explanation

Statement: The French economist J. B. Say held that 'supply creates its own demand.' The very act of producing goods generates factor incomes (wages, rent, interest, profit) exactly equal to the value of the goods produced, and this income is spent on buying those goods.

Implications of the law:

• There can be no general overproduction or general glut in the economy.
• Whatever is produced is automatically sold; demand adjusts to supply.
• The economy automatically tends toward full employment.
• Money is only a medium of exchange (a 'veil'); saving is automatically invested.

Critical evaluation (Keynes's criticism):

• All income is not always spent — a part is saved, and saving need not automatically equal investment, so aggregate demand can fall short of aggregate supply.
• General overproduction and demand deficiency are therefore possible, leading to a glut and unemployment.
• Full employment is a special case, not the rule; the economy can be in equilibrium with involuntary unemployment.
• Money is not merely a veil — people hold money (liquidity preference), which breaks the automatic supply-demand link.

Thus, though Say's Law was central to classical economics, Keynes showed it does not hold in a modern money economy where demand can be deficient.

(b) Components of the Balance of Payments account

The Balance of Payments (BOP) is a systematic record of all economic transactions between the residents of a country and the rest of the world in a year. Its components are:

• Current Account: Records transactions in (i) visible items — exports and imports of goods (the balance of trade); (ii) invisible items — services such as transport, banking, insurance and tourism; (iii) income — interest, profits and dividends; and (iv) unilateral transfers — gifts, remittances and grants. …