Dividing – Economics VS Finance

* Economics science, in general, is divided in two main parts :

  • Micro Economics
  • Macro Economics

Micro-Economics : Small-scale market & interactions studies .. It studies interactions between individual markets, and focuses on specialization and supply & demand relations – between small entities and markets.

 Macro-Economics : Large-scale market & interactions studies .. It is not focusing on single or small or individual markets or entities , but on large and bigger variables – national , regional or world-wide levels. Terms include such as: National income and output, GDP, Price inflation and unemployment rate in a country, region or the whole world .

Public Finance VS Private Finance
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Finance , generally , is divided between 2 parts:

* Public finance  &

* Personal ( Private ) finance

OK, let’s get into more details .. The term “business finance” is about goods and products and the business environment related. What concerns us here is the difference between public finance & private ( personal finance ).

Public Finance

Public finance is the science’s part sector that deals with the : Allocation of resources and budgets set for the Government entities & bodies – no privates . This part is about Governmental incomes ( Taxes, Fines , customs, Fees, etc… ) , and how these allocations are sent on the public service and expenses ( salaries, infra structure building, Military affairs, civil affairs – buildings , maintenance , etc… )

Private Finance

The 2nd part of the finance as science . It consists of two parts :

  • Business Finance                       &                   Personal Finance
  • Business Finance studies the processes and steps taken to optimise corporates & business organizations’ financial matters. It is related to acquire cash & funding allocations, fund raising, cash & credit operations, managing cash flows, managing liabilities ( debts & obligations on the corporate) , all towards the best ways to maximise the business’s set goals and targets.
  • Personal finance manages the process of optimizing finances of the persons, families and single humans !!

Personal finance involves financial planning for the person’s income and expenses to reach maximum benefit . That includes salaries, freelancing income, stuff selling , insurance policies ( profits and expenses ), car expenses ( installments, maintenance , all costs related ) , bank loans, mortgages , stock market investments, retirement plans, and the list goes on.

Microsoft NZ

Difference between public & private finance

This table shows a summary of the differences between Public & Private finance. Source .

Public Finance VS Private Finance Table
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Going more in details, here is an explanation of the previous table ( some text quoted from the marvelous site DifferenceBetween.Net ..

  • Income and Expenditure Adjustments in Public and Private Finance ( Vice Versa )

Usually, each Government adjusts its income according to the expenditure budget expected for the coming period ( usually year ). The government first creates an outline for its national expenditure ( to fulfill the social comforts required ), and then plan how to get these amounts from its different income channels ( tax adjustments, fees increases and such ) …

Well, the scenario is reversed in the private sector – the management would adjust their expenses budget based on the expected income during the period – or future estimates..

Private finance involves cutting your coat according to your cloth.

1. Borrowing in Public vs. Private Finance

The government can borrow from the nation or its main institutes ( like Social Security Association, Customs Dept. or others ) . Gov. can simply go back to the people to ask for loans in whichever financial asset it has e.g. bonds.

However, an individual / corporate can’t borrow from itself, and has to go to financial corporates ( Governmental or private ones ) to meet certain conditions and get the loan required.

2. Currency ownership in Public vs. Private Finance

Nation’s currency is the government’s issue, it is – always – in charge of all aspects related to currency, from the creation, printing , distribution and monitoring of use .

No one in the private sector is allowed to create currency, this is illegal and most countries classify it as a capital offense.

3. Present vs. future Income

The public sector is more involved with future planning and making long-term decisions. Decisions that could show results in the long-term, reaching even ten years.

These investments could include building of schools, hospitals , airports, water sewage systems, roads and urbanization .

The private industry makes is financial decisions in shorter times ( based on industry too – like planes make take 10 years planning ) . Usually planning is for the coming two years.

4. Objective Difference in Public and Private Finance

The public sector’s main objective is to create social benefit, economical welfare and stability in the country. Even if that meant occurring losses in certain projects, or not making profits from some as well.

The private industry seeks to maximize profits / gains on the personal and corporate levels.

5. Coercion ( force to Get Revenue )

The government can use force to get revenue from individuals. This could involve the use of law & security forces to collect certain amounts or fight certain frauds.

The private sector however, doesn’t have this authority.

6. Ability to Make Huge and Deliberate Changes

Government bodies, and staff related to the financial sector in, can make huge decisions on income amounts without much consequences from direct controls , since the ultimate result is not about profits but has other sides.

Businesses and individuals can’t change their decisions or face severe consequences immediately as such.

7. Surplus Budget Concept

Excess income or surplus budgets is a great virtue in the private sector, this is however not the case in public finance; the government is expected to only raise what is needed for a fiscal year. Of what use would it be to have surplus budgets?

It would be much easier to offer tax reliefs to the tax-payers so as to off-set the surplus.

Want more resources to learn about finance & economics ? Check these books :

– Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics

The Infographic Guide to Personal Finance: A Visual Reference

– Or check this well-chosen list of Finance for Beginners Books @ Amazon.Com Site

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