Sectoral Balance Analysis

A sectoral balances perspective helps us to understand the relations among the monetary spending and income of the three economic system sectors: external (foreign), government and non-government (private domestic) which includes banks and households.

Insight into monetary system events may be drawn from this one accounting identity alone - it says, when appropriately defined, sectoral balances must sum to zero. It is impossible for all sectors (and countries) to run surpluses (to save overall - spend less than their income). For one sector to run a surplus, at least one other sector must run a deficit.

Government sector fiscal balance is either recording surplus or deficit. A surplus will indicate a net positive flow of financial assets from non-government sectors to government. A deficit is a positive net flow of financial assets from government to non-government sectors - this is government (domestic private sector financial claims on the government sector) creation by way of state purchasing (provisioning itself).

Simple models describe the monetary spending and income relationship between two of those economic sectors - the government and non-government private sector.

Further reading.