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Concept
Sectoral balances
Summary
The sectoral balances (also called sectoral financial balances) are a sectoral analysis framework for macroeconomic analysis of national economies developed by British economist Wynne Godley. Sectoral analysis is based on the insight that when the government sector has a budget deficit, the non-government sectors (private domestic sector and foreign sector) together must have a surplus, and vice versa. In other words, if the government sector is borrowing, the other sectors taken together must be lending. The balances represent an accounting identity resulting from rearranging the components of aggregate demand, showing how the flow of funds affects the financial balances of the three sectors.
This corresponds approximately to Balances Mechanics developed by Wolfgang Stützel in the 1950s. The approach is used by scholars at the Levy Economics Institute to support macroeconomic modelling and by Modern Monetary Theorists to illustrate the relationship between government budget deficits and private saving.
The government fiscal balance is one of three major financial sectoral balances in the national economy, the others being the foreign financial sector and the private financial sector. The sum of the surpluses or deficits across these three sectors must be zero by definition. A surplus balance represents a net savings or net financial asset building position (i.e., more money is flowing into the sector than is flowing out), while a deficit balance represents a net borrowing or net financial asset reducing position (i.e., more money is flowing out of the sector than is flowing into it). Each sector may be defined as follows, using the U.S. as an example:
Private sector: A surplus balance means U.S. households and businesses together are net savers, building their financial asset position. In other words, savings by households exceed the amount borrowed and invested by businesses. There is a net inflow of money into the private sector. The private sector had a 4.4% GDP surplus in 2019.
Official source
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