The Government, Rest of the World and the financial markets

• total expenditure of government can be divided into two parts: transfers to private sector and consumption.
• Government expenditure is total expenditure by government on services and goods. Note that salary paid to an officer in the army is included in government expenditure whereas pension to the same officer is part of the transfers. We signify government expenditure by G.
• Government revenue is from taxes paid by the private sector. Because 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 describe government savings as S_G = NT - G.
• The total value of all exports to rest of the world is denoted by X, Whereas the total value of all imports from rest of the world is denoted by Im. If Im > X then value of all services and goods received from rest of the world is larger than value of services and goods that 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 that should ultimately 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. Please Note that S_H , S_G and/or S_Rcan be negative.