A central bank, reserve bank, or monetary authority is the institution that manages the currency, money supply, interest rates of a state or formal monetary union, oversees their commercial banking system. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base in the state, generally controls the printing/coining of the national currency, which serves as the state's legal tender. A central bank acts as a lender of last resort to the banking sector during times of financial crisis. Most central banks have supervisory and regulatory powers to ensure the solvency of member institutions, to prevent bank runs, to discourage reckless or fraudulent behavior by member banks. Central banks in most developed nations are institutionally independent from political interference. Still, limited control by the executive and legislative bodies exists. Functions of a central bank may include: implementing monetary policies. Setting the official interest rate – used to manage both inflation and the country's exchange rate – and ensuring that this rate takes effect via a variety of policy mechanisms controlling the nation's entire money supply the Government's banker and the bankers' bank managing the country's foreign exchange and gold reserves and the Government bonds regulating and supervising the banking industry Central banks implement a country's chosen monetary policy.
At the most basic level, monetary policy involves establishing what form of currency the country may have, whether a fiat currency, gold-backed currency, currency board or a currency union. When a country has its own national currency, this involves the issue of some form of standardized currency, a form of promissory note: a promise to exchange the note for "money" under certain circumstances; this was a promise to exchange the money for precious metals in some fixed amount. Now, when many currencies are fiat money, the "promise to pay" consists of the promise to accept that currency to pay for taxes. A central bank may use another country's currency either directly in a currency union, or indirectly on a currency board. In the latter case, exemplified by the Bulgarian National Bank, Hong Kong and Latvia, the local currency is backed at a fixed rate by the central bank's holdings of a foreign currency. Similar to commercial banks, central banks incur liabilities. Central banks create money by issuing interest-free currency notes and selling them to the public in exchange for interest-bearing assets such as government bonds.
When a central bank wishes to purchase more bonds than their respective national governments make available, they may purchase private bonds or assets denominated in foreign currencies. The European Central Bank remits its interest income to the central banks of the member countries of the European Union; the US Federal Reserve remits all its profits to the U. S. Treasury; this income, derived from the power to issue currency, is referred to as seigniorage, belongs to the national government. The state-sanctioned power to create currency is called the Right of Issuance. Throughout history there have been disagreements over this power, since whoever controls the creation of currency controls the seigniorage income; the expression "monetary policy" may refer more narrowly to the interest-rate targets and other active measures undertaken by the monetary authority. Frictional unemployment is the time period between jobs when a worker is searching for, or transitioning from one job to another. Unemployment beyond frictional unemployment is classified as unintended unemployment.
For example, structural unemployment is a form of unemployment resulting from a mismatch between demand in the labour market and the skills and locations of the workers seeking employment. Macroeconomic policy aims to reduce unintended unemployment. Keynes labeled any jobs that would be created by a rise in wage-goods as involuntary unemployment: Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment.—John Maynard Keynes, The General Theory of Employment and Money p11 Inflation is defined either as the devaluation of a currency or equivalently the rise of prices relative to a currency. Since inflation lowers real wages, Keynesians view inflation as the solution to involuntary unemployment. However, "unanticipated" inflation leads to lender losses as the real interest rate will be lower than expected.
Thus, Keynesian monetary policy aims for a steady rate of inflation. A publication from the Austrian School, The Case Against the Fed, argues that the efforts of the central banks to control inflation have been counterproductive. Economic growth can be enhanced by investment such as more or better machinery. A low interest rate implies that firms can borrow money to invest in their capital stock and pay less interest for it. Lowering the interest is therefore considered to encourage economic growth and is used to alleviate times of low economic growth. On the other hand, raising the interest rate is used in times of high economic growth as a contra-cyclical device to keep the economy from overheating and avoid market bubbles. Further goals of monetary policy are stability of interest rates, of the financial market, of the foreign exchange market. Goals cannot be separated fr
Balance of trade
The balance of trade, commercial balance, or net exports, is the difference between the monetary value of a nation's exports and imports over a certain period. Sometimes a distinction is made between a balance of trade for goods versus one for services; the balance of trade measures a flow of imports over a given period of time. The notion of the balance of trade does not mean that exports and imports are "in balance" with each other. If a country exports a greater value than it imports, it has a trade surplus or positive trade balance, conversely, if a country imports a greater value than it exports, it has a trade deficit or negative trade balance; as of 2016, about 60 out of 200 countries have a trade surplus. The notion that bilateral trade deficits are bad in and of themselves is overwhelmingly rejected by trade experts and economists; the balance of trade forms part of the current account, which includes other transactions such as income from the net international investment position as well as international aid.
If the current account is in surplus, the country's net international asset position increases correspondingly. A deficit decreases the net international asset position; the trade balance is identical to the difference between its domestic demand. Measuring the balance of trade can be problematic because of problems with recording and collecting data; as an illustration of this problem, when official data for all the world's countries are added up, exports exceed imports by 1%. This cannot be true, because all transactions involve an equal credit or debit in the account of each nation; the discrepancy is believed to be explained by transactions intended to launder money or evade taxes and other visibility problems. For developing countries, the transaction statistics are to be inaccurate. Factors that can affect the balance of trade include: The cost of production in the exporting economy vis-à-vis those in the importing economy. In export-led growth, the balance of trade will shift towards exports during an economic expansion.
However, with domestic demand-led growth the trade balance will shift towards imports at the same stage in the business cycle. The monetary balance of trade is different from the physical balance of trade. Developed countries import a substantial amount of raw materials from developing countries; these imported materials are transformed into finished products, might be exported after adding value. Financial trade balance statistics conceal material flow. Most developed countries have a large physical trade deficit, because they consume more raw materials than they produce. Many civil society organisations claim this imbalance is predatory and campaign for ecological debt repayment. Many countries in early modern Europe adopted a policy of mercantilism, which theorized that a trade surplus was beneficial to a country, among other elements such as colonialism and trade barriers with other countries and their colonies; the practices and abuses of mercantilism led the natural resources and cash crops of British North America to be exported in exchange for finished goods from Great Britain, a factor leading to the American Revolution.
An early statement appeared in Discourse of the Common Wealth of this Realm of England, 1549: "We must always take heed that we buy no more from strangers than we sell them, for so should we impoverish ourselves and enrich them." A systematic and coherent explanation of balance of trade was made public through Thomas Mun's 1630 "England's treasure by foreign trade, or, The balance of our foreign trade is the rule of our treasure"Since the mid-1980s, the United States has had a growing deficit in tradeable goods with Asian nations which now hold large sums of U. S debt that has in part funded the consumption; the U. S. has a trade surplus with nations such as Australia. The issue of trade deficits can be complex. Trade deficits generated in tradeable goods such as manufactured goods or software may impact domestic employment to different degrees than do trade deficits in raw materials. Economies which have savings surpluses, such as Japan and Germany run trade surpluses. China, a high-growth economy, has tended to run trade surpluses.
A higher savings rate corresponds to a trade surplus. Correspondingly, the U. S. with its lower savings rate has tended to run high trade deficits with Asian nations. Some have said. Russia pursues a policy based on protectionism, according to which international trade is not a "win-win" game but a zero-sum game: surplus countries get richer at the expense of deficit
Government budget balance
A government budget is a financial statement presenting the government's proposed revenues and spending for a financial year. The government budget balance alternatively referred to as general government balance, public budget balance, or public fiscal balance, is the overall difference between government revenues and spending. A positive balance is called a government budget surplus, a negative balance is a government budget deficit. A budget is prepared for each level of government and takes into account public social security obligations; the government budget balance can be broken down into the primary balance and interest payments on accumulated government debt. Furthermore, the budget balance can be broken down into the structural balance and the cyclical component: the structural budget balance attempts to adjust for the impact of cyclical changes in real GDP, in order to indicate the longer-run budgetary situation; the government budget surplus or deficit is a flow variable. Thus it is distinct from government debt, a stock variable since it is measured at a specific point in time.
The cumulative flow of deficits equals the stock of debt. The government fiscal balance is one of three major sectoral balances in the national economy, the others being the foreign sector and the private sector; the sum of the surpluses or deficits across these three sectors must be zero by definition. For example, if there is a foreign financial surplus because capital is imported to fund the trade deficit, there is a private sector financial surplus due to household saving exceeding business investment by definition, there must exist a government budget deficit so all three net to zero; the government sector includes federal and local governments. For example, the U. S. government budget deficit in 2011 was 10% GDP, offsetting a capital surplus of 4% GDP and a private sector surplus of 6% GDP. Financial journalist Martin Wolf argued that sudden shifts in the private sector from deficit to surplus forced the government balance into deficit, cited as example the U. S.: "The financial balance of the private sector shifted towards surplus by the unbelievable cumulative total of 11.2 per cent of gross domestic product between the third quarter of 2007 and the second quarter of 2009, when the financial deficit of US government reached its peak...
No fiscal policy changes explain the collapse into massive fiscal deficit between 2007 and 2009, because there was none of any importance. The collapse is explained by the massive shift of the private sector from financial deficit into surplus or, in other words, from boom to bust."Economist Paul Krugman explained in December 2011 the causes of the sizable shift from private deficit to surplus: "This huge move into surplus reflects the end of the housing bubble, a sharp rise in household saving, a slump in business investment due to lack of customers." The sectoral balances derive from the sectoral analysis framework for macroeconomic analysis of national economies developed by British economist Wynne Godley. GDP is the value of all services produced within a country during one year. GDP measures flows rather than stocks. GDP can be expressed equivalently in terms of production or the types of newly produced goods purchased, as per the National Accounting relationship between aggregate spending and income: Y = C + I + G + where Y is GDP, C is consumption spending, I is private investment spending, G is government spending on goods and services, X is exports and M is imports.
Another perspective on the national income accounting is to note that households can allocate total income to the following uses: Y = C + S + T where S is total saving and T is total taxation net of transfer payments. Combining the two perspectives gives C + S + T = Y = C + I + G +. Hence S + T = I + G +; this implies the accounting identity for the three sectoral balances – private domestic, government budget and external: = +. The sectoral balances equation says that total private saving minus private investment has to equal the public deficit plus net exports, where net exports is the net spending of non-residents on this country's production, thus total private saving equals private investment plus net exports. In macroeconomics, the Modern Money Theory describes any transactions between the government sector and the non-government sector as a vertical transaction; the government sector includes the
In American public finance, discretionary spending is government spending implemented through an appropriations bill. This spending is an optional part of fiscal policy, in contrast to entitlement programs for which funding is mandatory and determined by the number of eligible recipients; some examples of areas funded by discretionary spending are national defense, foreign aid and transportation. In the United States, discretionary spending refers to optional spending set by appropriation levels each year, at the discretion of Congress. During the budget process, Congress issues a budget resolution which includes levels of discretionary spending, deficit projections, instructions for changing entitlement programs and tax policy. After setting discretionary spending levels, both the House Appropriations Committee and Senate Appropriations Committee divide the agreed-upon amount of discretionary spending into twelve suballocations for each of their twelve subcommittees; these subcommittees produce twelve annual appropriation bills for the next fiscal year.
While these bills are subject to revision as they move through hearings, Floor consideration, conference, the level of discretionary spending remains constrained by the budget resolution. These twelve bills must be approved by the full Appropriations Committee, followed by both Houses of Congress. Once passed, the president either signs them, vetoes them, or allows them to become law by not signing them within ten days. In 2016, the U. S. federal government spent $1.2 trillion on U. S. discretionary spending. Of this $1.2 trillion, nearly half was spent on national defense. The rest of U. S. discretionary spending was allocated for education, training and social services, as well as transportation, veterans' benefits and services, income security, administration of justice, international affairs, other areas related to natural resources, the environment, science and technology. In 1962, U. S. discretionary spending made up 47.2% of total U. S. spending, remaining the largest component of federal spending until the mid-1970s.
From this time forward, discretionary spending levels as a share of total federal spending has decreased significantly. This is due to the rapid growth of entitlement spending known as mandatory spending; as more participants become eligible for entitlement programs, mandatory spending automatically increases. This trend is projected to continue in the future. In fact, according to the Congressional Research Service, over the next decade, mandatory spending is projected to reach 14% of GDP, while discretionary spending is projected to continue getting smaller reaching 5% of GDP. By 2022, the Congressional Research Service projects that discretionary spending's share of the economy "will be equal to or less than spending in each of the two largest categories of mandatory programs, Social Security and Major Health Programs." Budget process Mandatory spending Appropriations bill
In economics, the monetary base in a country is the total amount of bank notes and coins circulating in the economy. This includes: the total currency circulating in the public, plus the currency, physically held in the vaults of commercial banks, plus the commercial banks' reserves held in the central bank; the monetary base should not be confused with the money supply, which consists of the total currency circulating in the public plus certain types of non-bank deposits with commercial banks. Open market operations are monetary policy tools which directly expand or contract the monetary base; the monetary base is manipulated during the conduct of monetary policy by a finance ministry or the central bank. These institutions change the monetary base through open market transactions: the buying and selling of government bonds. For example, if they buy government bonds from commercial banks, they pay for them by adding new amounts to the banks’ reserve deposits at the central bank, the latter being a component of the monetary base.
A central bank can influence banking activities by manipulating interest rates and setting reserve requirements. Interest rates on federal funds, are themselves influenced by open market operations; the monetary base has traditionally been considered high-powered because its increase will result in a much larger increase in the supply of demand deposits through banks' loan-making. If a country’s gross domestic product is declining or growing sluggishly, monetary policy can offset this with open market purchases of bonds, which expand the monetary base; this expansion of the base in turn leads to expansion of the money supply and to downward pressure on interest rates, which makes it less expensive for consumers to buy consumer goods and for companies to purchase new physical capital. On the other hand, if gross domestic product is growing at an unsustainably high rate, threatening to cause an increase in the inflation rate, contractionary open market operations can be used to slow the economy down.
As of February 2019, the monetary base in the United States was about USD $3,353,484,000,000, up from about $832,999,000,000 in March 2008. Money creation Monetary reform Fractional reserve banking Credit theory of money Karl. "High-powered money and the monetary base". In Newman, Peter K.. The New Palgrave Dictionary of Economics. New York: Macmillan. Doi:10.1057/9780230226203.2726. ISBN 0-935859-10-1. Retrieved 8 February 2011. Goodhart, Charles. "Monetary base". In Newman, Peter K.. The New Palgrave Dictionary of Economics. New York: Macmillan. Doi:10.1057/9780230226203.3102. ISBN 0-935859-10-1. Retrieved 8 February 2011. Cagan, Phillip. "High-Powered Money". Determinants and Effects of Changes in the Stock of Money, 1875-1960. Cambridge, Massachusetts: National Bureau of Economic Research. Pp. 45–117. ISBN 0-87014-097-3. Retrieved 8 February 2011. Aggregate Reserves Of Depository Institutions And The Monetary Base
Public finance is the study of the role of the government in the economy. It is the branch of economics which assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achieve desirable effects and avoid undesirable ones; the purview of public finance is considered to be threefold: governmental effects on efficient allocation of resources, distribution of income, macroeconomic stabilization. The proper role of government provides a starting point for the analysis of public finance. In theory, under certain circumstances, private markets will allocate goods and services among individuals efficiently. If private markets were able to provide efficient outcomes and if the distribution of income were acceptable there would be little or no scope for government. In many cases, conditions for private market efficiency are violated. For example, if many people can enjoy the same good at the same time private markets may supply too little of that good.
National defense is one example of non-rival consumption, or of a public good."Market failure" occurs when private markets do not allocate goods or services efficiently. The existence of market failure provides an efficiency-based rationale for collective or governmental provision of goods and services. Externalities, public goods, informational advantages, strong economies of scale, network effects can cause market failures. Public provision via a government or a voluntary association, however, is subject to other inefficiencies, termed "government failure." Under broad assumptions, government decisions about the efficient scope and level of activities can be efficiently separated from decisions about the design of taxation systems. In this view, public sector programs should be designed to maximize social benefits minus costs, revenues needed to pay for those expenditures should be raised through a taxation system that creates the fewest efficiency losses caused by distortion of economic activity as possible.
In practice, government budgeting or public budgeting is more complicated and results in inefficient practices. Government can pay for spending by borrowing, although borrowing is a method of distributing tax burdens through time rather than a replacement for taxes. A deficit is the difference between government spending and revenues; the accumulation of deficits over time is the total public debt. Deficit finance allows governments to smooth tax burdens over time, gives governments an important fiscal policy tool. Deficits can narrow the options of successor governments. Public finance is connected to issues of income distribution and social equity. Governments can reallocate income through transfer payments or by designing tax systems that treat high-income and low-income households differently; the public choice approach to public finance seeks to explain how self-interested voters and bureaucrats operate, rather than how they should operate. Collection of sufficient resources from the economy in an appropriate manner along with allocating and use of these resources efficiently and constitute good financial management.
Resource generation, resource allocation and expenditure management are the essential components of a public financial management system. The following subdivisions form the subject matter of public finance. Public expenditure Public revenue Public debt Financial administration Federal finance Economists classify government expenditures into three main types. Government purchases of goods and services for current use are classed as government consumption. Government purchases of goods and services intended to create future benefits – such as infrastructure investment or research spending – are classed as government investment. Government expenditures that are not purchases of goods and services, instead just represent transfers of money – such as social security payments – are called transfer payments. Government operations are those activities involved in the running of a state or a functional equivalent of a state for the purpose of producing value for the citizens. Government operations have the power to make, the authority to enforce rules and laws within a civil, religious, academic, or other organization or group.
Income distribution – Some forms of government expenditure are intended to transfer income from some groups to others. For example, governments sometimes transfer income to people that have suffered a loss due to natural disaster. Public pension programs transfer wealth from the young to the old. Other forms of government expenditure which represent purchases of goods and services have the effect of changing the income distribution. For example, engaging in a war may transfer wealth to certain sectors of society. Public education transfers wealth to families with children in these schools. Public road construction transfers wealth from people that do not use the roads to those people that do. Income Security Employment insurance Health Care Public financing of campaigns Government expenditures are financed in three ways: Government revenue Taxes Non-tax revenue Government borrowing Money