page_title: Sectoral balances
section_title: Sectoral balances description
hierarchical_section_title: Sectoral balances / Sectoral balances description
caption_attribution_description: English: Private sector balance showing household and business as separate items.
context_page_description: The sectoral 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 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.
context_section_description: GDP (Gross Domestic Product) is the value of all goods and services sold within a country during one year. GDP measures flows rather than stocks (example: the public deficit is a flow, the government debt is a stock). Flows are derived from the National Accounting relationship between aggregate spending and income. Ergo:
  where  is GDP (expenditure),  is consumption spending,  is private investment spending,  is government spending,  is exports and  is imports (so  = net exports).
  Another perspective on the national income accounting is to note that households can use total income () for the following uses:
  where  is total saving and  is total taxation (the other variables are as previously defined).
  You then bring the two perspectives together (because they are both just “views” of ) to write:
  You can then drop the  (common on both sides) and you get:
  Then you can convert this into the following sectoral balances accounting relations, which allow us to understand the influence of fiscal policy over private sector indebtedness. Hence, equation (4) can be rearranged to get the accounting identity for the three sectoral balances – private domestic, government budget and external:
  or
  or
  which implies that deficits at home (private and government) result in current account or trade deficits, and thus borrowing from abroad. 
  The sectoral balances equation (5) says that total private savings () minus private investment () has to equal the public deficit (spending,  minus taxes, ) plus net exports (exports () minus imports ()), where net exports represent the net savings of non-residents.
  Another way of saying this is that total private savings () is equal to private investment () plus the public deficit (spending,  minus taxes, ) plus net exports (exports () minus imports ()), where net exports represent the net savings of non-residents.
  All these relationships (equations) hold as a matter of accounting and not matters of opinion.
  Thus, when an external deficit () and public surplus () coincide, there must be a private deficit. While private spending can persist for a time under these conditions using the net savings of the external sector, the private sector becomes increasingly indebted in the process.
caption: U.S. private sector balance showing household and business components separately from 1990-2017. Ideally, households are net savers (surplus balance) while businesses are net borrowers/investors (deficit balance). However, since the early 2000s, businesses have shifted to surpluses in most years. Since the foreign sector has remained in surplus, the U.S. has offset this with higher budget deficits. The sum of the two components equaled 1.2% GDP in 2017, which matches the private balance in the graph showing the three sectors.[2][11]
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