Question

Explain the sectoral balances approach to macroeconomic analysis and how they are related and why.

Answer 1

Sectoral analysis is a framework for macro economic analysis of economies. It points to say that the when there is a deficit in the government sector, that is when the government is borrowing, the other sector namely private and foreign sector must be lending.

The analysis takes into account three sectors of the economy, these are government sector, private sector and the foreign sector.The deficit in any one of the above shall be compensated by the surplus of the other two.

A surplus in the private sector means that the households are the net savers and boosting their financial positions.

A foreign sector surplus conveys that the imports have risen much into the country and the other countries or the rest of the world has saved.

A government sector surplus means that the government has spent less on infrastructure and other expenditures as compared to the tax receipts

DEFICIT / SURPLUS FROM {GOVERNMENT SECTOR + PRIVATE SECTOR + FOREIN SECTOR } = 0