Modern Money Theory

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Economics: Modern Money Theory – Sectoral Balances

A good explanation of sectoral balances in an economy. All surpluses must equal deficits. In order for the private sector to be in surplus, there must be a public sector deficit.

And this is the UK. Split into four sectors. The private sector is divided into public and private. But as the blog Coppola Comment correctly points out sectoral balances must sum to zero.

See what happens when we reduce public-sector deficit the private-sector surplus vanishes and the last time we did that there was a financial crisis.

And more on sectoral balances from Bill Mitchell.

I have noted some misperceptions about the derivation, meaning and application of the so-called sectoral balances framework that is used in Modern Monetary Theory (MMT) to help explicate the relationship between the government and the non-government sectors. Some of this confusion appears to be the product of a deeper misunderstanding of the difference between stocks and flows and relationships between flows in economics. Those who conclude that this framework is really just an accounting structure are incorrect. Equally, those who conclude that the accounting relationships that are part of the sectoral balances framework are matters of interpretation are also incorrect. It should be clear that the sectoral balances framework combines accounting structures, which are derived from the national accounts framework used by statisticians to measure economic activity, and theoretical propositions, which seek to explain relationships between variables within the accounting structures. In other words, we need to understand both the accounting aspects that are true by definition as well as the underlying theoretical structures which drive the balances.