posted on 14 July 2016
There is a sectoral accounting identity which has great value in assessing sustainability of national economies. This framework for macroeconomic analysis of national economies was developed by British economist Wynne Godley. At the highest level, this shows how the flow of funds affects the financial balances of the private sector, government sector and foreign sector, accounting for all the economic activity of any nation. The graphic below shows 25 years of flows for the U.S. (click to enlarge).
The general equation for sectoral balance accounting is (from Wikipedia):
The analysis in my note here uses Current Accounts (which includes net exports but also international investment and money flows), restricts (S-I) to domestic flows only, and continues the same definition for the government sector. The accounting identity then contains three simple terms which must, by identity, total to zero.
G + P + F = 0
The stock (account) balances for government, private sector and foreign sources must total zero, ie. they must balance. There is no other magic fairy involved.
From the original post (see note at end of this post).
Here the sectoral balances (in % of GDP; data from AMECO). Each graphic can be enlarged with successive clicks. Return to this page using the back arrow.
Note: This was adapted by Econintersect from Sectoral balances of the eurozone (Econoblog101).
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