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Bill Mitchell offers this quiz:
Question 1:
Assume that the current account deficit of a nation is on average over the business cycle equal to 2 per cent of GDP and that the government manages to run a balanced fiscal position when averaged over the same cycle. We can conclude that on average the private domestic sector overall is spending more than it is earning.
True or false?
The source.
I am at the very beginning of it, having just browsed L.R. Wray's Modern Money Theory, where he stresses that when one of the three sectors of the economy runs a deficit, there must be at least one other sector in surplus, as the balances of the three needs to sum to zero.
Government balance: G(overnment spending) + T(axes)
Private sector balance: S(avings) + I(investments)
External balance: X(exports) - M(imports)
More on sectoral balances.
In trying to answer the question I got confused owing to an incorrect assumption implied in my phrasing above: "the three sectors of the economy."
Actually, there are only two sectors that represent "the domestic economy," and one sector representing "the rest of the world."
If the external sector is erroneously considered part of the domestic economy, we have the contradictory situation that two sectors are in deficit, with no other sector providing an offsetting surplus.
But a current account deficit of the domestic sector means more imports than exports, i.e. more spending than income, hence a deficit.
And it implies a surplus for the external sector, "the rest of the world," which is importing less than it is exporting to the domestic economy, thus generating net income, a surplus.
So with the domestic government sector even, the external sector must fully offset the deficit of the domestic private sector.
Therefore, the answer to the question must be: yes.
In trying to answer the question I got confused owing to an incorrect assumption implied in my phrasing above: "the three sectors of the economy."
Actually, there are only two sectors that represent "the domestic economy," and one sector representing "the rest of the world."
If the external sector is erroneously considered part of the domestic economy, we have the contradictory situation that two sectors are in deficit, with no other sector providing an offsetting surplus.
But a current account deficit of the domestic sector means more imports than exports, i.e. more spending than income, hence a deficit.
And it implies a surplus for the external sector, "the rest of the world," which is importing less than it is exporting to the domestic economy, thus generating net income, a surplus.
So with the domestic government sector even, the external sector must fully offset the deficit of the domestic private sector.
Therefore, the answer to the question must be: yes.
"Yes" ist the answer to what question?
ReplyDeleteI refer to "Question 1," which does not contain, you are right, a grammatical question, i.e. an interrogative clause ("Fragesatz"). The paragraph, however, clearly implies a question: "Is it true or false that we can conclude ...?
ReplyDeleteDo you concur with my answer to the "Question1"?
You mean "yes" the private sector must have a deficit?
ReplyDeleteI mean: yes, "we can conclude that on average the private domestic sector overall is spending more than it is earning". In other words, as you've stated: "yes, the private sector must have a deficit."
Delete