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FACTOR SUPPLY: The willingness and ability of scarce resources or factors of production to offer their services for use in productive activities. Like other types of supply, factor supply relates price and quantity. Specifically, factor supply is the range of factor quantities that are supplied at a range of factor prices. This is one half of the factor market. The other half is factor demand. The factors of production subject to factor supply include any and all of the four scarce resources--labor, capital, land, and entrepreneurship. However, because labor involves human beings directly, it is the factor that tends to receive the most scrutiny and analysis.

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GOVERNMENT SECTOR:

The aggregate macroeconomic sector that includes all levels of government, including federal, state, and local. The primary function of the government sector, also termed the public sector, is to impose resource allocation decisions on the rest of the economy that might not be made otherwise. This is one of the four macroeconomic sectors. The other three are household sector, business sector, and foreign sector.
The government sector includes all levels of government--federal, state, and local. These three levels intervene in the economy by collecting and spending tax revenue and by establishing and enforcing laws, rules, and other regulations. The government sector undertakes this intervention because society has deemed that the provision of some goods and services are better handled by the imposition of government than by voluntary market decisions.

Three Levels

For most economies, exemplified by the United States, the government sector is divided into three relatively distinct levels--federal, state, and local. Each level is generally divided into three branches. The legislative branch establishes the laws. The executive branch carries out or executes the laws. The judicial branch then enforces the laws by punishing those who do not comply.
  • Federal: The federal level is the national or central government, which has jurisdiction over the political boundaries of the entire country. In the United States, the federal level includes the three branches--executive (President, Department of Defense, Environmental Protection Agency, etc.), legislative (Congress, the Congressional Budget Office, and assorted Congressional committees), and judicial (Supreme Court and other lower courts).

    Each branch has a myriad of different committees, agencies, and administrative units. A number of relatively independent agencies and organizations, such as the Federal Reserve System, are also part of the federal level.

    Shady Valley, a hypothetical community, has a significant federal government presence--executive, legislative, and judicial. The legislative corner includes the local office of Congressional Representative, the Honorable Chester C. "Ted" Chandler. In the judicial corner, Shady Valley has several federal courts, including a District Court and a Bankruptcy Court.

    The executive branch has the most activity. The Department of Health and Human Services, which is responsible for Social Security, has an entire floor of the Sylvester J. Peabody Federal Office Building. The next floor up contains offices for the Treasury Department and Justice Department. A floor down has the Transportation Department and Labor Department. Other departments and specialized agencies (Environmental Protection Agency, Consumer Product Safety Commission, Central Intelligence Agency) are dispersed throughout the Sylvester J. Peabody complex.

    There is also a large military presence, including the Major General Air Force Base, located southwest of the city, the General Major Army Base, located northeast of the city, and Naval Training Center, which for no apparent reason is located in downtown Shady Valley hundreds of miles from the nearest sea-faring body of water.


  • State: The state level, in the United States, includes the governments of the fifty states. Much like the federal level, each state is divided into executive, legislative, and judicial branches. Each state government is responsible for enacting, executing, and enforcing the laws within their particular state political boundary.

    In other countries, the state level might be replaced by a provincial, regional, or territorial level of government.

    Shady Valley has several facets of state government operating within the city limits. The state government tends to do a lot with education, crime, and transportation. The most prominent state government facility is the Ambling Institute of Technology, a comprehensive, state-supported university. The state highway patrol has administrative offices in Shady Valley, as does the state department of transportation. The state's Bureau of Investigation (a counterpart to the Federal Bureau of Investigation) maintains investigative offices and a crime lab in Shady Valley.


  • Local: The local level of government includes all substate units, especially cities and counties. The United States contains thousands of local city and county governments. For some local governments the division between executive, legislative, and judicial branches is not clearly established. The city Mayor, who heads the executive branch, also might be the head of the city council, which functions as the legislative branch.

    In addition to traditional city and county governments, the local level also includes education boards, school districts, and multi-county planning commissions. Basically any substate entity that has some degree of government authority to tax, spend, or impose regulations, is part of the local level.

    Shady Valley is well represented at the local government level. This thriving metropolitan area is run by Mayor Victor Thurgood, who oversees a wide range of city government activities, including fire and police protection, street construction and maintenance, and public utility regulation.

    Shady Valley happens to be located in Shady County. The Shady County Commissioners are primarily responsible for the county sheriff, the county courthouse, and county road construction and maintenance. Another notable local government entity is the Shady Valley School Board, which runs the Shady Valley public school system (K through 12).

What It Does: Regulation

While the government sector is designated based on WHO is included--federal, state, and local--this sector can also be delineated based on WHAT it does--which is regulation. This macroeconomic sector is responsible for the economic act of regulation, the establishment, execution, and enforcement of laws.

While the term "regulation" is often used specifically to mean the laws affecting business activity, it is a much broader concept. Any law, rule, or legislative act imposes a regulation on members of society. A highway speed limit regulates the flow of traffic. A sales tax regulates the use of income. A worker safety rule regulates the conduct of business.

A critical function of the government sector is to establish the "rules of the game." In so doing, it seeks to maintain order and to provide structure to economic activity. Without such order and structure, without rules of the game, the result would be anarchy and chaos.

Government regulation, however, is like fire. When under control it can do a lot of good. When out of control it can do a lot of bad. Most debate over the proper role of government in society is whether or not this line has been crossed, whether or not government has gotten out of control.

What It Does: Taxes and Spending

The primary function of the government sector is to impose resource allocation decisions on the rest of the economy. It does this through regulation--establishing, executing, and enforcing laws and rules. To accomplish this it needs resources, which it acquires through taxes.

The ability to collect taxes, which is nothing more than a special type of regulation, also entails spending. The taxing and spending ability creates an important dimension of government. Rather than "ordering" others what to buy, the government sector can do so directly.

The imposition of taxes results in three important economic consequences.

  • First, taxes reduce the disposable income of the household sector. People have less income that can be used for consumption expenditures, which provides current satisfaction, or saving, which is used to finance capital investment.

  • Second, this tax revenue is diverted to government control, which allows the government to directly decide what goods and services are produced. Taxes provide the government sector with the revenue it uses to operate.

  • Three, if taxes are not equally applied to all activities, those activities taxed more heavily are discouraged in favor of those taxed less. This provides the government sector with an effective way of reallocating resources.

The spending side of the government sector suggests two related concepts--government spending and government purchases. While these two terms might seem identical, and are occasionally used synonymously, there is a difference.

  • Government Spending: This is the generic term for ALL spending by the government sector. It includes spending for the purchase of goods and services which falls under the title of government purchases. It also includes expenditures that are NOT for goods and services, which are termed transfer payments.

  • Government Purchases: This is a more specific term meaning actual expenditures by the government sector on final goods and services. These expenditures are used to purchase a share of gross domestic product.

A Word or Two About the Other Three

The government sector is one of four macroeconomic sectors. The other three are the household sector, business sector, and foreign sector.
  • 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. Pollyanna Pumpernickel, a hardworking mother of two, is a representative member of the household sector. So too is Winston Smythe Kennsington III, an affluent corporate executive.

  • 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. OmniConglomerate, Inc., a multi-billion dollar, multi-national, mega corporation, exemplifies a member of the business sector. However, Manny Mustard's House of Sandwich, a little sandwich shop, is also part of the business 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 such as the Republic of Northwest Queoldiolia. It also includes citizens and businesses in other nations, such as Horst Duncanstein, a citizen of Northwest Queoldiolia, and Quedoldiolian Sundial Company, also located in Northwest Queoldiolia.

Connecting to the Circular Flow

The Circular Flow
Circular Flow
The government sector is a component of the circular flow model of the economy. The circular flow captures the continuous movement of production, income, and factor payments between producers and consumers.

The four components of this simple model are: household sector, business sector, product markets, and resource markets. The household sector contains the consuming population of the economy. The business sector includes all of the producers.

The product markets direct production from the business sector to the household sector in exchange for payment flowing in the opposite direction. The resource markets direct factor services from the household sector to the business sector in exchange for payment flowing in the opposite direction.

The circular flow indicates that the income used by the household sector to purchase goods through the product markets is obtained by selling factor services through the resource markets. It also indicates that the revenue used by the business sector to pay for factor services obtained through the resource markets is generated by selling goods through the product markets.

The key function of the government sector is to divert a portion of income away from the household sector, through taxes or government borrowing, which it uses to finance government purchases.

<= GOVERNMENT PURCHASES LINEGOVERNMENT SUBSIDIES =>


Recommended Citation:

GOVERNMENT SECTOR, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: January 22, 2018].


Check Out These Related Terms...

     | macroeconomic sectors | household sector | business sector | foreign sector | macroeconomic markets | product markets | resource markets | financial markets |


Or For A Little Background...

     | macroeconomics | government functions | public sector | ownership and control | macroeconomic goals | microeconomics |


And For Further Study...

     | circular flow | first estate | business cycles | macroeconomic problems | macroeconomic theories | mixed economy | central planning | laissez faire | political views | paternalism |


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