FORMAL AND INFORMAL SECTORS

Formal sector: activities which are taxed and monitored by the government and the activities involved are included in the Gross Domestic Product (GDP). In contrast to formal economy is the informal sector which is neither taxed nor included in the GDP and Gross national product (GNP) of a country

”GDP: value of all final goods and services produced by a country in a year”

Formal sector

·         Includes businesses that are registered

·         Businesses in this sector are registered to pay taxes

·         Businesses in this sector are controlled by laws and regulations of the government

·         Developed countries have more businesses operating in this sector

·         Examples: manufacturing and trading businesses, banking and insurance, large retail companies.

Informal sector

·         Includes businesses that aren’t legally registered

·         Businesses in this sector do not pay any form of tax

·         Businesses in this sectors aren’t monitored by the government and aren’t added into the GDP figures

·         Developing countries have more businesses operating in this sector.

·         Examples: vendors, spaza shops, hairdressers.