March 18, 2018 

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ABSTRACTION METHODS: Abstraction is the process of simplifying the complexities of the real world by ignoring (hopefully) unimportant details, especially (for our purposes) while doing economic analysis. Three common methods of actual, real world abstraction used in economic theories are words, graphs, and equations. Words can be misunderstood. Graphs are a little more precise. And equations tend to be the most precise of the three.

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The aggregate macroeconomic sector that includes the entire wants and-needs-satisfying population of the economy. The primary economic role of the household sector is consumption. The share of gross domestic product purchased by the household sector is termed consumption expenditures. This is one of four macroeconomic sectors. The other three are business sector, government sector, and foreign sector.
The household sector includes the entire population of society. It includes all of the consumption-seeking members of society--the entire population. It IS society. In effect, the economy exists to satisfy the wants and needs of the household sector.

Members of the household sector also own all of the factors of production, all resources. Every resource, every worker, every factory, every acre of land, every risk-taking entrepreneur is owned by someone in the household sector. This means that the other two domestic sectors--business and government--exist to satisfy the wants and needs of the household sector.

No House Needed

While this sector goes by the name "household," members are not required to own a house, to live in a house, or to have ever seen a house. The term household sector is merely a short-cut used to indicate the consuming, wants-and-needs-satisfying population of society, most of who actually do live in houses.

For example:

  • Pollyanna Pumpernickel, who lives in a rented two-room apartment, is a member of the household sector.

  • Winston Smythe Kennsington III, who owns several residences, including an extremely large mansion, a penthouse apartment, and a yacht docked in the harbor, is a member of the household sector.

  • Alton Hogkins, who spends his nights sleeping in a cardboard box under a bridge, is a member of the household sector.

  • Even Duncan Thurly, who owns an actual house in the suburbs, is part of the household sector.

What It Does: Selling Factor Services

The household sector owns the factors of production--labor, capital, land, and entrepreneurship. It sells the services of these resources to the business sector in exchange for income.

For example, a pleasant mother of two, Pollyanna Pumpernickel, is a member of the Shady Valley household sector who own labor resources. Pollyanna sells her labor services as a part-time pet store clerk at Perry Paxton's Pet Palace. Labor is the extent of the Pollyanna's productive resources.

Winston Smythe Kennsington III, the President, Chief Executive Officer, and Chairman of the Board of Directors of OmniConglomerate, Inc., is also a member of the Shady Valley household sector. Winston also receives income from providing productive labor resources as President of OmniConglomerate. In addition, Winston provides his entrepreneurship as the BIG guy who takes the BIG risks and makes the BIG decisions for OmniConglomerate. Moreover, Winston owns OmniConglomerate stock, which means that he owns part of OmniConglomerate's capital and land resources.

What It Does: Consumption

While the household sector is designated based on WHO is included--households, people--this sector can also be delineated based on WHAT it does--which is consumption. This sector is responsible for the economic act of consumption, as well as the related consumption expenditures on gross domestic product.

While these two terms might seem identical, and are occasionally used synonymously, there is a difference.

  • Consumption: This is the generic term for the use of goods and services to satisfy wants and needs. This activity may or may not involve actual purchases or expenditures. For example, enjoying a scenic sunrise is an act of consumption that involves no expenditure.

  • Consumption Expenditures: This is a more specific term meaning actual expenditures by the household sector on final goods and services. While the motivation behind consumption expenditures is the satisfaction of wants and needs, such is not guaranteed. That is, some consumption expenditures might be for the purchase of goods or services that do not provide satisfaction. For example, buying an ice cream cone that falls to the hot pavement before it is eaten is a consumption expenditure without consumption.
Pollyanna Pumpernickel uses her income for consumption expenditures on food, clothing, shelter, entertainment, and other wants-and-needs satisfying goods and services. Pollyanna pays the rent, puts food on the table, and treats her girls to an occasional Hot Momma Fudge Bananarama Ice Cream Sundae. The Pumpernickels also consume goods that require no expenditure, such as "quality" family time.

While Winston Smythe's bank account is substantially bigger than Pollyanna's, he also uses his income for consumption expenditures food, clothing, shelter, entertainment, and other wants-and-needs satisfying goods and services. While the quality, expense, and volume of Winston's consumption expenditures might differ from those of the Pollyanna's, the underlying process is the same. Rather than tacos, T-shirts, and 2-room apartments, Winston tends to purchase Filet Mignon, designer suits, and 100-room mansions. And of course, Winston is also inclined to consume expenditure-free goods, such as strolling through a nearby park.

The Only Owners

The household sector, which contains ALL people in the economy, also owns ALL resources. While it might be obvious that households, by containing ALL people, own ALL labor, but what of the other resources--especially capital and land? It might seems as though the business sector owns a substantial amount of capital and a great deal of land. OmniConglomerate, for example, owns factories worldwide, including several in the Shady Valley area. Does this not mean that OmniConglomerate (and the business sector) owns at least some capital?

As a matter of fact, it does. But the next question is then: Who owns OmniConglomerate? The answer is that the OmniConglomerate stockholders, including Winston Smythe Kennsington III, own OmniConglomerate. The OmniConglomerate stockholders are the ones with ultimate ownership of OmniConglomerate, Inc. These owners, like every other human being, are members of the household sector.

Consumers and Producers

While all factors of production are owned by members of the household sector, not all members of the household sector own factors of production. Winston Smythe clearly owns a lot of productive factors. Pollyanna owns labor resources.

However, the household sector includes little Priscilla Pumpernickel, Pollyanna's youngest daughter, who is too young to work and thus has no productive resources (not yet anyway). The household sector also includes Winston's cousin, Dunston Smythe Kennsington, who suffered serious injury in a tragic scuba diving accident as a child and has been in a coma, connected to wires and tubes in a hospital, since the age of twelve. Dunston has no productive labor, neither does he have ownership of other productive resources.

Even though Priscilla Pumpernickel and Dunston Smythe Kennsington own no productive resources they consume. Priscilla's consumption is provided for by her mother. Dunston's consumption is paid for by assorted government run health and welfare programs.

A Word or Two About the Other Three

The household sector is one of four macroeconomic sectors. The other three are the business sector, government sector, and foreign sector.
  • 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.

  • 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 responsible for passing and enforcing laws. Of course, all branches and agencies of the U.S. Federal Government--Congress, Department of Transportation, Environmental Protection Agency, etc.--is part of the government sector. So too is the Shady Valley City Council and the local Shady Valley Board of Education included in the government 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 household sector is a key component of the circular flow model of the economy. The circular flow captures the continuous movement of production, income, and factor services that move between producers and consumers.

A basic representation of the circular flow is displayed to the right. The four components of this simple model are: household sector, business sector, product markets, and resource markets. The household sector at the far left contains the consuming population of the economy. The business sector at the far right includes all of the producers.

The product markets at the top of the flow direct production from the business sector to the household sector in exchange for payment flowing in the opposite direction. The resource markets at the bottom of the flow 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.


Recommended Citation:

HOUSEHOLD SECTOR, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2018. [Accessed: March 18, 2018].

Check Out These Related Terms...

     | macroeconomic sectors | business sector | government sector | foreign sector | consumption | macroeconomic markets | product markets | resource markets | financial markets |

Or For A Little Background...

     | macroeconomics | factors of production | ownership and control | satisfaction | macroeconomic goals | microeconomics | production |

And For Further Study...

     | circular flow | consumer sovereignty | Consumer Confidence Index | wants | needs | third estate | utility | business cycles | unemployment | inflation | macroeconomic problems | macroeconomic theories |

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