The private and foreign sectors

The private and foreign sectors - Afrika Kesho

In Revisiting the economic cycle, we included the government as the third stakeholder to illustrate how it controls and sets policies so that all stakeholders in the economy can interact legally, fairly and to the benefit of that economy. In this article, we incorporate the private and foreign sectors and talk about the open market economic model.

The role of the private sector in the economy

Now, back to the closed economic model, the model that we’ve been talking about so far has one missing element, the private sector. The private sector consists of all industries that are not solely owned by government or under full government control. This sector is referred to as the Capitalist sector: all wealth made by a stakeholder in the private sector solely belongs that stakeholder and they do not have to share it with anyone else. To see how the private sector behaves in an economy we start by looking at the jobs market – the private sector will hire consumers from households to assist in generating economic activity, for example, mining gold, manufacturing sheets, conducting business deals. In return, these consumers receive a salary or wage as a form of income. The portion of that income is paid off to government as taxes and usually the rest is used for the consumer’s needs and wants.

A portion of the income the private sector receives from the services and goods they sell is paid off to the government as business taxes. To allow for more of this to happen, the government has to develop business-friendly policies, such as tax systems that encourage participation, that ensure that all participants in the private sector have an equal chance of economic productivity. As long as both the government and the private treat each other and other stakeholders fairly and ethically, then the economy stands to benefit.

The role of the foreign sector in the economy

For simplicity, we will assume that the foreign sector only interacts with government and assume that it’s made up of only of sovereign states or foreign governments. According to google, a sovereign state is, “a state with a defined territory that administers its own government and is not subject to or dependent on another power,” and a foreign government is, “the national government of a country other than [your own].” So, by adding this stakeholder into the closed economic model, we “open” the economy and it operates as an open market economic model.

There are two things that guide how the local government and foreign governments trade with one another: imports and exports. Exports are goods and services sold by the local government to foreign governments. These can be a range of services, like loans, and goods, like gold, that other countries need. This is one of the ways local government generates revenue; unfortunately, though, the local government pays export duties – taxes that foreign governments will require from the exporting country for the goods to enter their borders. Foreign governments can also sell to the local government, in that case the local government is importing goods and services it needs. In this case, the local government would receive payment from foreign governments for export duties.

So, the next time you buy something from Amazon, remember that an open market economic model is what allows for that.

This article was written by Realeboha Molaba.

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