In essence, the domestic sector includes all of the economic decision makers who are citizens of the particular country. The domestic sector provides a contrast to the foreign sector and is most important in the analysis of international or global topics that make up the study of international trade and international finance.

Three Sectors

• Household Sector: This sector includes the entire, wants-and-needs-satisfying, eating, breathing, consuming population of the economy. In a word, it includes everyone, all consumers, all people, and every member of society. The primary macroeconomic function of the household sector is the consumption of goods and services that satisfy wants and needs. Promoting consumption by members of the household sector is, in essence, the ultimate objective of economic activity.


• Business Sector: This sector contains the private, profit-seeking firms in the economy that combine scarce resources into the production of wants-and-needs satisfying goods and services. It includes proprietorships, partnerships, and corporations. The business sector exists to combine the resources used for the production of the goods that satisfy wants and needs of the household sector. If not for the productive efforts of the business sector, consumption would be less satisfying.


• Government Sector: This sector includes all government entities that impose resource allocation decisions, that might not be made otherwise, on the rest of the economy. It consists of the three primary levels of federal, state, and local government responsible for passing and enforcing laws. The macroeconomic function performed by the government sector is regulation. The government sector establishes the "rules of the game" and otherwise regulates resource allocation decisions of the other sectors.

The Foreign Sector

• Foreign Sector: This sector is comprised of everyone and everything outside the political boundaries of the domestic economy. It includes households, businesses, and governments in other countries. The foreign sector of the domestic United States economy includes the governments of other nations. The foreign sector is responsible for any and all economic activity that transpires beyond the political boundaries of the domestic macroeconomy. It is responsible for all external activity.

International Interaction: Foreign Trade

International or foreign trade contains two parts -- exports and imports. Exports are goods and services produced by the domestic sector and purchased by the foreign sector. Imports are goods and services produced by the foreign sector and purchased by the domestic sector.

Exports are the flow of goods and services from the domestic sector to the foreign sector, in return for monetary payment flowing the other way. In contrast, imports are the flow of goods and services from the foreign sector to the domestic sector, also in return for a monetary payment flowing the opposite way.

The combination of exports and imports, specifically exports minus imports, is termed net exports. Net exports capture the net interaction of foreign trade between the domestic sector and the foreign sector.

International Interaction: Foreign Exchange

In the real world, the foreign exchange market is actually a number of markets, each for the exchange of currency between any two nations. For example, one foreign exchange market exists for the exchange between United States dollars and Mexican pesos, another for United States dollars and Japanese yen, and yet another for Mexican pesos and Japanese yen.

With almost 200 nations around the globe, the domestic sector of a given nation has a separate foreign exchange market for each country that makes up its foreign sector.

Open and Closed

• Open Economy: An open economy is simply a nation that engages in international trade, one that exports to and imports from other countries in the foreign sector. It is "open" in the sense that goods and services flow into and out of the country.


• Close Economy: A close economy, in contrast, is a nation that does not engage in international trade. The country has neither exports nor imports and no other economic interaction with the foreign sector. Its borders are effectively "closed" to the rest of the world.

While examples of closed economies populate the historical landscape, virtually all economies in the modern world are open and engage in assorted forms of international interaction, particularly international trade. The question is not so much one of open versus closed, but the degree of openness. Some open economies engage in only limited interaction with their foreign sector and are largely self-sufficient. Others engage in a great deal more international interaction.

Polices: Beyond Domestic

Depending on the degree of openness of a country, the policies of the domestic sector commonly spill over to the foreign sector. Moreover, policies that might be undertaken by other nations in the foreign sector can also affect the domestic sector. This spill over from the foreign sector to the domestic sector is particularly critical because it can circumvent and negative domestic policies.