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4 Major Sectors of an Economy

  • Difficulty Level : Expert
  • Last Updated : 22 Sep, 2021

For the macroeconomic analysis, the four aggregate macroeconomic sectors that form the basic foundation are household, business, government, and foreign—which account for four gross domestic product expenditures. On the macroeconomic stage, these four sectors are the major ‘actors’.

Consumption expenditures by the household sector, investment expenditures by the business sector, government purchases by the government sector, and net exports by the foreign sector are all examples of gross domestic product expenditures. Each sector also has a distinct function in macroeconomic activity: the home sector consumes, the business sector produces, the government sector regulates, and the foreign sector engages in external activity.

The consumer sector is mainly concerned with the consumption of products and services. Household income is spent on paying for products and services as well as paying taxes to the government. The performance of the households is divided into two categories: 

  1. It provides factor services to businesses in the form of production factors such as land, labor, and capital.
  2. It purchases all of the enterprises’ final goods and services directly from the markets. As a result, they provide various factor services to the economy while also creating market demand for final goods and services.

1. Household Sector

It plays a huge role in the Economic Development of any Country. The following are brief descriptions of some of the performances:

  • Work as a producer: In India, there are numerous families that own multiple small production businesses. These families are self-employed or generate a variety of goods and services. They create businesses that are essentially semi-corporate in character.
  • Act like a consumer: Households are the end customers of the companies goods and services. They generate demand in the market based on their interests and inclinations. Firms created and provided commodities in response to market demand. As a result, households decide on a country’s production line.
  • Pay taxes to Govt: Households are the primary source of tax income for the government. They are the primary taxpaying entity. A household pays direct taxes to the state in the form of income tax, wealth tax, estate duty, gift tax, and so on. Similarly, a household pays the government numerous indirect taxes such as sales tax, customs duty, VAT, and so on. All of these tax monies are collected for the economy’s welfare and growth.
  • Work as a professional: Households provide all sorts of professional services, such as doctors, teachers, lawyers, and engineers. Their efforts are critical to the country’s continued economic prosperity. People’s living standards are raised as a result of these professional services.
  • Act as a saver: Any money left over after consumption is set aside for savings. As a result, families receive money after providing a variety of services to the economy. After consumption, the remaining amount of their income is stored in banks or financial organizations. These savings are regarded as one of India’s primary sources of capital generation.

2. Production sector

The production sector is responsible for the creation of products and services. This sector pays for household factoring services, government taxes, and material imports. The stages that raw materials go through to become a finished product are referred to as the manufacturing process. The product design and materials specifications from which the product is manufactured are the first steps in the manufacturing process. These materials are subsequently transformed into the needed part through manufacturing procedures.



The production sector is responsible for 22% of GDP and employs 22% of the overall workforce. According to the data of the World Bank, in 2015, India gained the sixth position in the Industrial manufacturing GDP output which value was $559 billion US dollars and the 9th largest in inflation-adjusted constant Which value was $197.1 billion US dollars.  

3. Government Sector

The government sector is a segment of the economy that includes both government services and government-owned businesses. It is a welfare agency that is responsible for preserving law and order, defense, and other public welfare services. 

Governmental services such as the military, law enforcement, infrastructure, public transit, and public education, as well as health care and individuals who work for the government, such as elected politicians, are all included in the government sector. The government sector may offer services that a non-payer cannot be denied (such as street lighting), services that benefit society as a whole rather than simply the person who utilizes them. Public businesses, often known as state-owned firms, are self-financing commercial companies controlled by the government that sells a variety of private goods and services. They usually work on a for-profit basis.

4. The External Sector  

All international economic interactions between inhabitants of the country (private and public sector) and the rest of the world are referred to as the external sector of a country’s economy. Export, import, international investment, external debt, current account, capital account, and balance of payment are all examples of economic operations that take place in foreign exchange. Few components of external sectors are discussed below:

  • Foreign investment: Foreign direct investment and portfolio investment are the two types of foreign investment. Until 1999-2000, the majority of foreign direct investment (FDI) into and out of India was in the form of equity capital. Since 2000-01, the definition of FDI has been broadened to include, in addition to equity capital, reinvested earnings (retained earnings of FDI businesses), and ‘other direct capital,’ in line with worldwide best practices (intercorporate debt transactions between related entities). In addition to equity of incorporated organizations, data on equity capital includes equity of unincorporated businesses (mostly foreign bank branches in India and Indian bank branches operating overseas).
  • Portfolio investment: FIIs, raise money through GDRs/ADRs by Indian firms, and funds raised through offshore funds make up the majority of portfolio investments. Since 2000-01, data on foreign investment has been divided into equity capital and portfolio investment.
  • Exchange rate: The exchange rate is also one of the parts of the external sector. It is the rate at which one currency of a country will be exchanged with the currency of another country. The exchange rates are of two types. The first one is the fixed exchange rates, which are set by a country’s central bank, whereas the second one is floating exchange rates, which are determined by market demand and supply.

Conclusion:

Each of the four sectors receives compensation in lieu of products and services from the others, resulting in a steady flow of goods and physical services. With the advent of the foreign sector, the model is transformed from a closed to an open economy! The addition of the foreign sector will expose the local economy’s interactions with other countries. Foreigners engage with local businesses and consumers through products and service exports and imports, as well as financial market borrowing and lending operations. Exports are goods and services produced inside a country’s borders that are sold to foreigners. Each movement of money is accompanied by an equal and opposite flow of commodities or services.

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