Households

1. Households put their savings into the financial sector. Any income that households receive today but wish to put aside for the future is sent to the financial markets. Although individual households both save and borrow, there is almost always more saving than borrowing, so, on net, there is a flow of dollars from the household sector into the financial markets (private savings).

2. There is a flow of dollars between the financial sector and the government sector. This flow can go in either direction. “The Flows In and Out of the Financial Sector” is drawn for the case where the government is borrowing (there is a government deficit), so the financial markets send money to the government sector. In the case of a government surplus, the flow goes in the other direction. The national savings of an economy are the savings carried out by the private and government sectors taken together: national savings = private savings + government surplus or national savings = private savings − government deficit.

3. There is a flow of dollars between the financial sector and the foreign sector. This flow can also go in either direction. When our economy exports more than it imports, we are sending more goods and services to other countries than they are sending to us. This means that there is a flow of dollars from the economy as foreigners buy dollars so that they can make these purchases. It also means that we are lending to other countries: we are sending more goods and services to other countries now in the understanding that we will receive goods and services from them at some point in the future. By contrast, when our economy imports more than it exports, we are receiving more goods and services from other countries than we are sending to them.