Okay, let's get going on Unit 11. This is Lesson One. We'll discuss the budget  deficit and we'll define the definition of it. So let's look at the government deficit  and let's define it. Right, it's the difference between government outlays and  government revenues. Right. So what are they spending, and what are they  bringing in? Inflows and outflows are part of the circular flow of income.  Revenues flow to the government when it imposes taxes on households and  firms, and when it collects money through various other fees. For our purposes  here, we do not need to distinguish all the different kinds of taxes, and we do not worry about whether they are paid by firms or by households. All that matters is  that, in the end, some of the income generated by the economy flows to the  government. So money flows out in the form of government purchases of goods  and services and government transfers. Government purchases include things  like roads, street lamps, schools, and military defense. They also include wage  payments for government employees. That is the purchase of the services of  teachers, soldiers, and civil servants. Now, outlays occur when the government  gives money to households. These are called transfer payments or transfers for  short. Examples include unemployment insurance, Social Security payments,  Medicare payments. Transfers include the interest payments of the government  on its outstanding obligations. The outlays of the government and its revenues  are not always equal. The difference between government purchases and  transfers and government revenues represents a government deficit, as set out  in the following definition: government deficit equals outlays minus revenues. So obviously, the outlays are greater than the revenues, so therefore the  government will hold a deficit. This means that the government purchases plus  transfers is greater than the tax revenues. So then we look at government  purchases minus tax revenues minus transfers, and then government purchases minus net taxes. This will all give you whether the government will be operating  in a government deficit. Often, we find it useful to group taxes and transfers  together as net taxes and separate out government purchases, as in the last line of our definition. When outflows are less than inflows, then we say there's a  government surplus. In other words, a positive government surplus and a  negative government surplus is the same thing as a positive government deficit.  Government surplus equals a negative government deficit. So there are ways to  make sure that we impact the deficit by ensuring that you know through our  transfers and we have an ability to create and offset the government deficit in  the future, a government surplus is sometimes called government savings when  the government runs a deficit. Borrowing from the financial markets funds each  spending. When the government runs a surplus, these funds flow into the  financial markets and are available for firms to borrow. So, once the government disperses the cash out, it goes into the financial markets, goes into banks and  financial institutions, and they're able to lend out that cash. 



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