I want to find out how money flow works in the country. Imagine I leave in country X. Country has 100$ in general, 50 dollars have a government, 50 dollars have peoples. My part is 10 dollars, this means that other peoples have 40 dollars, I am an entrepreneur,I've made goods on 10 dollars, peoples, buy it, they have spent , 20 dollars for my goods, they have less money on 20 , Then I pay tax from this amount , for example 5 dollars, let's do the math

General - 100$
government - 50$
me - 10$
peoples - 40$

I've earned 20$ , peoples spend 20 dollars, I've paid 5 dollars tax

general - 100$
government = 55$
me - 25 dollars
peoples = 20 dollars

country pay salary to peoples to return this 20$ to peoples back

general  = 100 dollars
government = 35 dollars
me = 25 dollars
people = 40$

This mean that governent (budget) , have less money, and even If I will pay in future some tax from next iteration , it will not cover 20$ dollars which they paid to people, how then government compensate it ? Or I've misunderstood the process ?


1 Answer 1


Your example is faulty

  • You have 10 and spent it on Inputs (Let's assume just wages)
  • Now you have 0 and people have 50 (40 + 10 wages you paid them)
  • People buy your goods for 20. You have 20 and people have 30
  • You pay a tax of 5. You have 15, people have 30, govt has 55
  • Govt pays salaries (Only to its employees). You have 15, people have 50, Govt has 35

In this case, the govt ended up with less money than it started with. This is called a "Fiscal Deficit" when the govt spends more than it earns. A deficit can be funded in many ways - loan from international institutions - Monetary financing (Printing Money)

But a deficit is a choice the govt makes. It is by no means inevitable if the govt has budgetary discipline. It just needs to keep its expenses controlled w.r.t its income

  • $\begingroup$ Your explanation is clear , but as I undestand when government print new money it cause to inflation ? Isn't it ? $\endgroup$ Commented Apr 11, 2020 at 7:02
  • $\begingroup$ @AndreyRadkevich When the economy is in a crisis and demand is low and labour is idle, printing money to finance a deficit may not be inflationary. Otherwise, yes. Which is why most countries running a deficit (For e.g India) rely on borrowings. Monetary financing is reserved for crisis situations. For e.g. the UK is planning to use it to tackle the COVID crisis $\endgroup$
    – Arunkgp
    Commented Apr 11, 2020 at 7:29

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