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UTILITY MAXIMIZATION: The process or goal of obtaining the highest level of utility from the consumption or use of goods and services. This is based on the seemingly obvious presumption that people prefer more to less, which is intimately tied to the unlimited wants and needs aspect of scarcity. In other words, because people have unlimited wants and needs, because they always have unfulfilled wants or needs, satisfying these wants and needs is a desirable thing to do.

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The four aggregate sectors of the macroeconomy--household, business, government, and foreign--that reflect four key macroeconomic functions and are responsible for four expenditures on gross domestic product. These four sectors are the primary "actors" on the macroeconomic stage. Macroeconomic theories then explain macroeconomic phenomena by exploring the interaction among these four sectors.
The four aggregate macroeconomic sectors that form the foundation for macroeconomic analysis are the household sector, the business sector, the government sector, and the foreign sector.

Each sector is responsible for a different expenditure on gross domestic product: 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.

Each sector also has a unique role to play in macroeconomic activity: consumption by the household sector, production by the business sector, regulation by the government sector, and external activity by the foreign sector.

What They Are

The four macroeconomic sectors are often delineated by who or what is included. Consider each 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, a proprietor who owns and operates 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 government 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.

What They Do: Macroeconomic Functions

Each of the four sectors has a distinct functional role to play in the macroeconomy.
  • Consumption: 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. Consumption occurs if Pollyanna Pumpernickel enjoys a slice of pecan pie.

  • Production: 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. Production is illustrated by the creation of a Deluxe Club Sandwich by Manny Mustard's House of Sandwich.

  • Regulation: 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. If the Shady Valley City Council imposes a tax on the sale jogging shoes, then the government sector is engaging in regulation.

  • External: 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. The sale of Queoldiolian sundials, imported from Northwest Queoldiolia, provides an example of external activity originating in the foreign sector.

What They Buy: Aggregate Expenditures

Gross domestic product, the total output produced by the domestic economy, is divided among the four macroeconomic sectors.
  • Consumption Expenditures: Expenditures on gross domestic product made by the household sector are consumption expenditures. These expenditures generally reflect the basic macroeconomic activity of consumption, but the two terms are not necessarily identical. That is, the satisfaction of wants and needs can occur without an expenditure (such as enjoying a scenic sunset) and expenditures can be made that do not result in the satisfaction of wants and needs (such as ice cream that melts before eaten). The purchase of a slice of pecan pie by Pollyanna Pumpernickel illustrates a consumption expenditure.

  • Investment Expenditures: The portion of gross domestic product purchased by the business sector is investment expenditures for capital goods. Although the business sector "buys" a lot of things, investment expenditures include only those expenditures that acquire capital goods. The purchase of raw materials or intermediate goods is not part of investment expenditures. The business sector purchases capital goods to facilitate the production of other goods. A prime example of investment expenditures is the purchase of a newly constructed factory by OmniConglomerate, Inc.

  • Government Purchases: The government sector purchases a portion of gross domestic product to perform its assorted government functions. Included in these purchases is such production as military equipment, office supplies, highway construction, and the services of employees. The government sector purchases this production to undertake regulation and to provide public goods. When the Shady Valley City Council authorizes the purchase of paper clips and office supplies, then government purchases have occurred.

  • Net Exports: The expenditure on gross domestic product attributable to the foreign sector is net exports. Net exports are the difference between exports, goods produced by the domestic economy and purchased by the foreign sector, and imports, goods produced by the foreign sector and purchased by the domestic economy. Imports are subtracted from exports to adjust for imported goods included under the other three expenditure categories. The sale of domestically produced Wacky Willy Stuffed Amigos to someone living in Northwest Queoldiolia is an example of an export. The purchase by a resident of Shady Valley of Queoldiolian sundials produced in Northwest Queoldiolia is an example of an import.

All for One

While each of the four sectors plays a key role in the macroeconomy, a strong case can be made that the household sector rises head and shoulders above the others.
  • First, the household sector 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.

  • Second, the household sector owns all of the factors of production, all resources. Every resource, every worker, every factory, every acre of land, every risk-taking entrepreneur is all owned by someone in the household sector.

  • Third, the business and government sectors exist to address the wants and needs of the household sector. The business sector uses the resources owned by the household sector to produce the goods and services consumed by the household sector. The government sector oversees the provision of public goods and regulates economic activity so that the wants and needs of the household sector are satisfied.


Recommended Citation:

MACROECONOMIC SECTORS, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2024. [Accessed: July 24, 2024].

Check Out These Related Terms...

     | household sector | business sector | government sector | foreign sector | macroeconomic markets | macroeconomic problems | macroeconomic theories | public sector | private sector |

Or For A Little Background...

     | macroeconomics | macroeconomic goals | scarcity | production | satisfaction | wants | needs | government functions |

And For Further Study...

     | circular flow | business cycles | investment, production possibilities | economic system | capitalism | four estates |

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