The segment of an economy that is officially recognized, regulated, and taxed by the government is known as the formal economic sector. Activities within this sector are included in a country’s Gross Domestic Product (GDP) and are subject to governmental oversight regarding labor standards, environmental regulations, and business practices. Examples include registered businesses, salaried employment with benefits, and industries that adhere to legal and regulatory frameworks.
Participation in the formal sector provides numerous advantages. Governments benefit from increased tax revenue, enabling them to fund public services and infrastructure development. Workers gain security through employment contracts, minimum wage laws, and access to social security and healthcare. Businesses operating formally benefit from legal protection, access to credit, and the ability to participate in international trade. Historically, the growth of this sector has been a key indicator of economic development and modernization, reflecting a shift from agrarian to industrial and service-based economies.