May 23, 2024 

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ACCOUNTING COST: The actual outlays or expenses incurred in production that shows up a firm's accounting statements or records. Accounting costs, while very important to accountants, company CEOs, shareholders, and the Internal Revenue Service, is only minimally important to economists. The reason is that economists are primarily interested in economic cost (also called opportunity cost). That fact is that accounting costs and economic costs aren't always the same. An opportunity or economic cost is the value of foregone production. Some economic costs, actually a lot of economic opportunity costs, never show up as accounting costs. Moreover, some accounting costs, while legal, bonified payments by a firm, are not associated with any sort of opportunity cost.

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The combination of the household, business, and government sectors that operate within the political boundaries of a given economy. Of the four aggregate macroeconomic sectors, the domestic sector specifically excludes the foreign sector. Domestic sector is a handy term when referring to economic activity for a given country, especially in the context of international trade. economy.
The domestic sector includes the three macroeconomic sectors, other than the foreign sector, that undertake production, consumption, investment, regulation, and other economic activity in an economy. The three domestic sectors that make up THE domestic sector are the household sector, the business sector, and the government sector.

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

The three aggregate, macroeconomic sectors contained in the domestic sector are the household sector, business sector, and government 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. 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

Notably absent from the above list of domestic macroeconomic sectors is the foreign sector. A word or two about the foreign sector is in order.
  • 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

The domestic sector interacts with the foreign sector in a number of ways. At the top of the list is international trade, or from the perspective of the domestic sector, what is also commonly termed 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

A second interaction between the domestic sector and the foreign sector is through the foreign exchange market. The foreign exchange market is a theoretical model of the exchange of currency (often termed foreign exchange) between nations, an exchange necessitated by the flow of exports and imports. Because each nation uses its own domestic currency, the exchange of goods requires the exchange of domestic currencies for payments.

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

Designating the household, business, and government sectors as the domestic sector is really only necessary for what are termed open economies. The contrast to an open economy is a closed economy.
  • 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.
The interaction between the domestic sector and the foreign sector is important to the operation of an open economy. However, there is no interaction between the domestic sector and foreign sector of a close economy and thus no real need to designate the household, business, and government sectors as the domestic sector.

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

A given nation inevitably undertakes government policies aimed at regulating and presumably improving the domestic sector. Common policies include monetary and fiscal business-cycle stabilization policies, business and social regulation policies, environmental quality policies, and income redistribution policies.

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.

For example, a country might implement contractionary monetary policy to reduce inflation in the domestic sector. However, expansionary monetary policies undertaken by other countries in the foreign sector might infiltrate the domestic sector, undermining this goal. Such policy interaction raises serious questions about national sovereignty and the ability of a country to control its domestic sector.


Recommended Citation:

DOMESTIC SECTOR, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2024. [Accessed: May 23, 2024].

Check Out These Related Terms...

     | open economy | closed economy | household sector | business sector | government sector | foreign sector |

Or For A Little Background...

     | international trade | comparative advantage | law of comparative advantage | exports | imports | net exports | foreign trade | terms of trade | gains from trade | macroeconomic sectors | monetary policy | fiscal policy |

And For Further Study...

     | balance of trade | balance of trade surplus | balance of trade deficit | balance of payments | foreign exchange market | international market | foreign trade policies | tariffs | import quotas | export subsidies | protectionism |

Related Websites (Will Open in New Window)...

     | World Trade Organization | North American Free Trade Agreement | General Agreement on Tariffs and Trade | European Union |

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