The economic web

Maria's father works for a large corporation. Every month he gets a salary. Quite a lot -- he has a good job. But, at the end of the month, the money has almost always run out. Maria's father says that "most of it goes to pay taxes".

What does that mean? Is it in some treasure box somewhere? No. Let's take it from the beginning. We call Maria's family a household.

A household, that's one or several people, living together, with a shared economy. Households come in all shapes and sizes -- mother-father-child, single parent with two kids, a few friends sharing a flat, two grownups without children... Yeah, you get it. If someone in the household is working for a company, the household will receive money, in the form of salary. And the company gets work, or labour, provided.

You could say that the company buys labour from its employees. For the money that the household receives as salary, some is spent on buying goods and services from other companies. Therefore, those companies receive money in the form of payments. And then there were those taxes. Some of the money that the households earn as salary, they can't keep.

This must be paid as tax, to the municipality, the county, or the state. Together, these are called: the public sector. Public, means collective, for everyone. It's the opposite of personal or private. Both households and companies pay tax to the public sector.

In return, households get services from the public sector. Like schools, hospitals, policing, roads, and bridges. The private sector also gets some services -- companies, too, use the roads, and can call the police. But it's not only services that go from the public to the private sector -- money goes too! Households get Student Benefit, pensions, Child Benefit, and other money, that's paid from state and municipality.

These payments are sometimes called transfer payments. Maria's mother works too, but not for a company. She's a doctor, and she is hired by the county administration -- that is, by the public sector. So, households can get salary, from the public sector, too. And the public sector buys labour from households.

It gets a bit messy with all the arrows up here. Let's split the public sector in two. One part deals with money. We call it public finance. This is the part that receives taxes and distributes transfer payments.

And the other part we could call public production. That's where Maria's mother is working. This produces services, like schools and healthcare for example. There you have them: The most important players in a nation's economy: Households, companies, and the public sector. No, wait a moment.

Something's missing. There are banks too. Well, a bank is really a kind of company. But it's a bit special. Banks lend money, both to households and to companies.

And in return, they get interest. If we are going to be picky here, it's not only banks who do this. There are other companies too, that aren't really banks, who lend money and take interest. We can call them credit institutions, then none of them will feel left out. There.

Now we have a simple model of the economy of a nation, with four different players. Oh well, we could add some international trade too. Households and companies can buy things from other countries. They can import. And many companies sell their goods to other countries, and get paid for it.

They export. Now that's it. Reality of course, is way more complex, but this model does fairly well.