What sector of the economy is monitored and taxed by the government?

The formal economy is the sector where economic activities are officially recognized by the government, meaning that businesses and workers within this sector adhere to established regulations, labor laws, and taxation requirements. This sector includes all legal production and employment activities that contribute to the gross domestic product (GDP) of a country.

Governments monitor the formal economy to ensure compliance with laws and to collect taxes, which provide necessary revenue for public services and infrastructure. This monitoring includes overseeing wages, working conditions, and the operation of businesses, ensuring that they are functioning within the legal framework.

In contrast, the informal economy encompasses unregulated and often untaxed activities, where workers and businesses operate outside government oversight. The shadow and underground economies further pertain to economic activities that evade taxation and regulation, often due to illegal activities or intentional avoidance of oversight. Thus, the formal economy is distinct in its regulated nature and significance to government finance and economic planning.