Thursday, 3 February 2011

The Sectoral Balances in a nutshell

This graph from Bill Mitchell's blog demonstrates the nominal accounting requirements of the different sectors in the economy. If you alter the balance in one of the sectors, the other sectors must alter as well to keep the balance.

X = Exports
M = Imports
G = Government Spending
T = Taxation
S = Private Savings
I = Private Investment

A negative (X-M) is a country that imports more than it exports.
A negative (G-T) is a country that runs a 'budget surplus'
A negative (S-I) is a private sector that is racking up the sort of borrowing that caused the financial crash.

In accounting everything must balance - here the private balance = Budget balance + External Balance.