What It Does: External Activity

The study of macroeconomics is generally directed toward the activity transpiring within the confines of a particular nation. Macroeconomic theories seek to explain the interplay between the domestic household, business, and government sectors. They also point toward policies that can influence domestic economic activity, hopefully to the benefit of the domestic population.

The focus is usually on what can be controlled within the domestic economy. However, some influences on the domestic economy come from beyond the domestic boundaries. The foreign sector is the catch-all category for these external influences. The foreign sector, as such, provides a convenient method of categorizing these influences.

What It Does: Foreign Trade

Foreign trade gives rise to two exchange flows--imports and exports.

• Imports: Imports are goods produced by the foreign sector and purchased by the household, business, or government sectors in the domestic economy.

  Shady Valley offers examples of imports by the household sector. Pollyanna Pumpernickel often purchases bananas and coffee imported from South America, chocolate imported from Germany, and cheese imported from Switzerland from the local grocery store. Dan Dreiling, the drywall guy, recently purchased a new car imported from Japan.

  The Shady Valley business sector also purchases imported capital goods. The Wacky Willy Company uses sewing machines imported from Canada. Waldo's TexMex Taco World makes use of taco steamers imported from Mexico.

  The government sector is not above importing goods, too. The local state-supported university, the Ambling Institute of Technology, has several foreign citizens on its faculty. The Shady Valley city government buys paper parchment imported from China.



• Exports: Exports are goods produced by the domestic economy and purchased by the foreign sector.

  Many Shady Valley businesses export their production to buyers in other nations. OmniMotors has a substantial South American market for its popular XL GT 9000 Sports Coupe. The Quadra DG Computer Works sells a great number of computers to willing buyers in Australia and New Zealand. Wacky Willy Stuffed Amigos are extremely popular throughout Asia.

  While the list of tangible goods exported to other countries is lengthy, exports include any good or service purchased by a foreign citizen. For example, the Shady Valley Amusement Park attracts a number of foreign tourists. When they pay park admission, an export occurs. The educational services purchased by foreign students enrolled at the Ambling Institute of Technology also fall under the heading of exports. Other services purchased by foreign individuals, including medical exams, dental check-ups, and legal advice, are also exports.

A Word or Two About the Other Three

• 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, provides 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--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.--are part of the government sector. So too are the Shady Valley City Council and the local Shady Valley Board of Education included in the government sector.

Connecting to the Circular Flow

Adding Foreign Trade

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.