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Money and credit - Ivanov V.M.

3.2. The role of the public sector in the circulation of products and revenues

In the circulation of products and revenues, the following analyzes the objects of the public sector. For convenience of analysis, we consider all levels of government organizations in such a way as if they functioned as a whole. The combined public sector is connected with the rest of the economic system in the following three ways: through taxes, public procurement and loans (Fig. 2). The first way is communication through the so-called net taxes (the difference between taxes and transfer payments), which move from households to the government. The second way is government procurement, as a result of which funds are transferred from the government to product markets. If public procurement exceeds net taxes in size (there is a budget deficit), then the government is forced to take loans in financial markets (the third way). If net taxes exceeded

Circuit Model Based on the Role of the Public Sector

Fig. 2. Circuit model taking into account the role of the public sector

if government purchases are the largest, then the volume of payments on past government debts will exceed the volume of new loans; as a result, a net flow of funds from the government to financial markets is formed (this case is not shown in the diagram).

Relations of the public sector with the circulation of revenues and products. When considering the circuit model, we are primarily interested in the net amount of cash in the sector represented by households. Tax revenues to the state budget exceed the amount of cash flow coming from the “households” sector, since this flow is partially reimbursed by government payments from the state budget to households. These payments take the form of transfer payments, which include state pensions, payments to low-income people and unemployment benefits that are not payments for any current labor services purchased by the state through the government. To obtain a reliable estimate of the net effect of the existing tax system on the amount of cash flow from households to the government representing the public sector, we subtract transfer payments from tax revenues. As a result, we obtain the amount of net taxes indicated in Fig. 2.

This figure does not show the direct flow of taxes paid by firms to the government (i.e., received by the state budget), although in practice, firms pay income taxes, as well as a number of other taxes. For simplicity, the diagram is constructed as if all firms first paid their profits to those households that are their owners, and then the owners of the firms, in turn, would pay the government taxes on these profits.

Total government spending1 is divided into two categories. 1 {In Western economic literature, the term "state" is practically not used. In Russian-language economic literature, this term is known to be used very widely. In our opinion, it more accurately reflects the real nature of such phenomena as government spending, government procurement, and government debt (Ed.).}

We have already used one of these categories, namely transfer payments, in calculating net taxes. Another category is represented by government procurement of goods and services, or simply government procurement. It includes state payments in the person of the government for all goods and services purchased by him, as well as the salaries of all civil servants. Thus, the term "government spending" can be formally defined as the sum of government procurement and transfer payments.

All public procurements are shown in Fig. 2 by an arrow directed from the government to food markets, from where this money flows to firms, and then, through resource markets, to households. Here, as when considering the movement of tax revenues, we made a well-known simplification in the model. In fact, that part of public procurement, which is represented by the salary of civil servants, is bypassed

in its movement, food markets, as well as the sector that is actually represented by firms, moving directly from the public sector towards labor markets, and then falling into the "households" sector.

The last way to connect the state in the person of the government with the rest of the economic system is through government loans in the financial markets.

The influence of the state in the person of the government on the revenue and product cycle: preliminary findings. Using connections (see. Fig. 2), the government can have a significant impact on the basic elements of the circulation of income and products. It can, through various actions, affect the value of nominal national income, as well as the extent to which changes in nominal income and product take the form of changes in real values ​​or changes in price levels. These aspects of state economic policy will be discussed in more detail in subsequent topics, but here it is necessary to give a preliminary overview of this topic.

One of the sources of state influence on the process of the circulation of income and products is the fiscal (fiscal) policy regarding taxes and government spending. By increasing net taxes, the government can increase the amount of money withdrawn from households. Households, in turn, in this situation are forced to cut back on either savings or consumption expenditures, or both at the same time. In any case, the result will be a decrease in the national product. This can happen both directly, i.e., due to a reduction in income received by firms from the sale of consumer goods, and indirectly, due to a decrease in the volume of savings and, consequently, the amount of investment funds that firms can spend on the acquisition of capital goods.

The reduction in net taxes stimulates the growth of both savings and consumption, positively influencing the growth of the national product.

Activities carried out within the framework of the fiscal (fiscal) policy of the government may also take the form of changes in public procurement. The growth of public procurement stimulates the growth of the national product, since as a result, the income of firms from the sale of goods and services to the state grows; household incomes also increase if the wages of workers employed in the public sector increase or the number of people employed in it increases. A decrease in public procurement has the opposite effect on a national product.

When considering the equation of exchange MV = PQ, it was noted that a change in the amount of money in circulation should, according to the equation, affect at least one, and possibly even a larger number of remaining variables: money velocity, price level or real national product .

The model of the revenue and product circulation taking into account the impact of the foreign sector of the economy. Import and export. In fig. Figure 3 shows how international economic relations can be included in the circuit model. Import of goods and services is the first link with the outside world.

All components of the circulation of flows are primarily flows of cash payments, and not flows of goods and services. Therefore, payments on imports are shown by an arrow directed from the domestic national economy abroad. Households and firms, like government institutions, acquire imported goods and services. However, in order to simplify the chart, it shows only one, the largest category of imports in terms of volume - import of consumer goods.

Export is another link linking the domestic national economic system with foreign countries. The funds received as payments that compensate for the cost of goods and services sold to foreign buyers enter the product markets, where they merge with the cash flows received from the sale of goods and services to domestic households, firms, and the state through the government. Funds from all these sources are added to the income received by firms from the sale of the national product.

Capital flows. Import and export of goods and services are not the only ways to connect the national economy with the outside world. The analysis must take into account many different kinds of international financial transactions, such as, for example, loans and credits, international purchases and sales of real financial assets.

Like imports and exports, international financial transactions by the very fact of their existence lead to the emergence of certain flows of payments directed both inside the economic system and beyond.

Circuit model taking into account the foreign sector of the economy

Fig. 3. The model of the circuit taking into account the foreign sector of the economy

Capital inflows have a kind of "mirror image". So, if a pension fund buys shares in a paper company or a bank gives a loan to some mining concern, then the money flows naturally from the economic system of the country in which the pension fund and bank are located.