The Government, Rest of the World and the financial markets

• Total expenditure of the government may be divided into two parts: transfers to the private sector and consumption.
• Government expenditure is total expenditure by the government on services and goods. Note that salary paid to an officer in the army is included in the government expenditure while the pension to the same officer is part of the transfers. We signify government expenditure by G.
• Government revenue is from taxes paid by private sector. As part of the taxes is returned through transfers, government has NT available for consumption.
• We say that government has a balanced budget if G= NT. We also state government savings as SG= NT- G.
• Total value of all exports to the rest of the world is signified by X whereas total value of all imports from rest of the world is denoted by Im. If I_m> X then value of all services and goods received from the rest of the world is larger than value of goods and services which we send to them. Difference, S_R= Im- X is rest of the world savings and this is also the amount we borrow from rest of the world which should eventually be paid back by exporting more than we import.
• Firms borrow money from financial markets in order to finance investments, signified by I. Investments are financed by private sector savings, government savings and rest of the world savings, I= S_H+ S_G+ S_R. Note that S_H, S_G and/or S_R may be negative.