JOURNAL OF REGIONAL SCIENCE, VOL. 31, NO. 4, 1991, pp. 385-396 GENERAL EQUILIBRIUM OF A REGIONAL ECONOMY WITH FRAMEWORK WITH BUDGET AND BALANCE SHEET LINKAGES A FINANCIAL SECTOR-PART I: AN ACCOUNTING Merritt Hughes Economic Research Service, United States Department of Agriculture, 1301 New York Avenue NW, Washington, D. C. 20005-4 788 ABSTRACT. An accounting framework is presented that can be used as a basis for a regional general equilibrium economic model that meaningfully incorporates both real and financial activity. The accounting framework describes a circular flow from regional income to credit base, and back to regional income, including the balance of payments identity. Both real market transactions and capital stock changes are explicitly recognized.Linkages between real activity flows and sectoral balance sheets are highlighted. Financial activity is recognized as a service, and all assets are assumed to be valued at market prices. 1. INTRODUCTION Among the topics traditional to regional economics, the determinants of differentialrates of growth in regional income are prominent. But only recently has interest turned to the role of financial factors in explaining differential growth rates. Early attempts frequently adopted a Mundell-type approach, but did not incorporate institutional or structural detail. Several recent papers analyze more detailed models of regional financial markets and their role as determinants of regional growth through their impact on the regional credit base. Moore and Hill (1982), Dow (19871, and Harrigan and McGregor (1987) advance the theory of regional financial markets but do not attempt to model the mutual determination of regional credit conditions and regional income. Moore, Karaska, and Hill (1985) present separate models of regional credit markets and regional income expansion. Finally, Amos and Wingender (1988) integrate previous models of regional financial markets and regional income generation and concludethat the expansion- ary impact of an exogenous increase in regional exports is reinforced by the inclusion of a financial sector. They do not, however, incorporate all accounting identities and hence do not fully exploit a general equilibrium framework for studying the mutual determination of financial and real product markets. In this paper, Part I of a two-part article, I present an accounting framework that can be used as a basis for a regional general equilibrium economic model that Received March 1989; in revised form January and September 1990 and March 1991; accepted June 1991. 385