Posted by: Dirk | January 12, 2017

In five steps from two identities to the sectoral balances (wonky macro)

I have seen a lot of ways to arrive at the sectoral balances identity, which states that the sum of the change in net financial assets of the private, the public and the external sector sums up to zero. I prefer to show my students six equations – hence five steps – to make them understand the nature of the identity. We start with two definitions (in bold), which are those of GDP (Y) and private saving (Sp). From there, we arrive at the sectoral balances through rearranging the private saving equation, then subtracting the GDP identity from it and rearranging again:

(1) Y = C + I + G + EX IM

(2) Sp= Y C T

(3) Y = Sp+ C + T

(4) 0 = Sp+ T – I – G – EX + IM                      [eq. (3) – eq. (1)]

(5) Sp – I + T – G + IM – EX = 0

(6) (Sp – I) + (T – G) + (IM – EX) = 0

This is not rocket science, but in terms of macro state-of-the-art. As I am currently building a textbook around this identity, keep on coming back to my blog to see some more stuff related to this way of theorizing macroeconomics that was pioneered by Wynne Godley and others before him.

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Responses

  1. Reblogged this on My WordPress blog.

  2. Dear Dirk,

    This new textbook you’re in the process of writing, will it just be a second revised and expanded edition of your current “MMT and European Macroeconomics” textbook, or will it be something substantially different?

    If it isn’t, is there a publication date for a paperback of your “MMT and European Macroeconomics”? The cost of these MMT books are straining my wallet!

    By the way, what are the chances of an English (paperback!) translation of your “Geld und Kredit”?

    • Dear John,

      the macroeconomics textbook will build on the other book, but will add lots of other chapters to the financial side. So, about a third will be “old” stuff and the rest new stuff. A paperback version of the old Routledge book should come out later this year or in spring 2018. The ebook is already more reasonably priced, btw.

      best,
      Dirk


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