PRODUCTION SECTORS: CHARACTERISTICS, AND EXAMPLES - ECONOMY - 2024

The production sectors are the areas of the economy where companies share the same product or related service. They can also be thought of as industries or markets that share common operational characteristics. Dividing an economy into different sectors of production allows a more in-depth analysis of the economy as a whole.

The economy of a nation can be divided into several sectors of production to define the proportion of the population that participates in different activities. This categorization represents a progressive distance from the natural environment.

Division of production sectors

A classic breakdown of economic activity distinguishes three main production sectors of the economy:

At first, an economy will be essentially based on the primary sector, with food production and agriculture the main source of employment for people.

As an economy develops, improved technology allows less labor to be needed in the primary sector and allows more workers to produce manufactured goods in the secondary production sector.

The subsequent development allows the growth of the tertiary production sector, services and leisure activities.

In the last 100 years, developed economies have seen the transition from an economy based on manufacturing to one where the service sector or tertiary sector dominates.

Although many economic models divide the economy into only three sectors of production, others divide it into four or even five sectors. These last two sectors are closely linked to services in the tertiary sector.

Investment in sectors

Investors use production sectors to place stocks and other investments in categories such as technology, healthcare, energy, utilities and telecommunications.

Each production sector has unique characteristics and a different risk profile that attracts a specific type of investor. As a result, it is common for analysts and other investment professionals to specialize in certain sectors of production.

characteristics

Historical evolution

The old economy was built mainly on the basis of subsistence agriculture.

The Industrial Revolution diminished the role of subsistence agriculture, converting land use to more extensive and specific forms of agriculture. Economic growth occurred primarily in the mining, construction, and manufacturing industries.

In the economies of modern consumer societies, services, finance and technology play an increasingly important role.

Characteristics of the primary sector

Export earnings

Making use of natural resources can be a way for an economy to generate export earnings.

The sale of oil, gas and other natural resources has enriched many developing economies, allowing them to raise capital to invest in public services within the economy.

Monopoly power

One problem with relying on the primary sector is that wealth is often unevenly distributed. A small number of firms gain monopoly power over the production of raw materials and pay workers only a small fraction of the income earned.

Many developing countries have remained poor, despite being rich in raw materials. A large primary sector alone is not enough to lead to economic development.

Volatility

Primary products are susceptible to being volatile both in price and in production. Commodities, such as oil and food products, can have large variations in price. The demand is quite inelastic.

If prices drop, countries that are based on a particular industry can see a big drop in revenue, causing problems.

Dutch disease

If primary products are very profitable, resources will be diverted from manufacturing industries and concentrated only on primary industries.

The problem is that when raw materials run out or industry shrinks, the economy needs broad diversification. This may be known as the "Dutch disease" or the resource curse.

Characteristics of the secondary sector

Economic development and manufacturing

Economic development will allow raw materials to be more refined, so that products with greater added value are produced.

Manufacturing goods requires more human capital and also better technology to be able to use raw materials and produce a finished product.

Industrial Revolution

The UK economy was largely based on agriculture until the 18th century. However, with the advancement of new techniques, such as the steam engine, a vertiginous industrialization was achieved, allowing the promotion of the secondary sector.

Economic development prompted people to abandon work on the land to go to work in new factories that sprung up across the UK. The manufacturing sector became the largest component of the country's economy.

Advantages of the development of the manufacturing sector

- Allows higher income. Greater income elasticity in manufacturing demand.

- Diversify the economy so as not to depend on primary products.

- With higher added value, manufacturing allows higher real wages than in agriculture.

- It allows countries to specialize and benefit from economies of scale.

Potential problems in the development of the manufacturing sector

- Pollution generated by the production process.

- By working in boring and repetitive factories, workers can become alienated.

- Developing economies may lack the necessary human capital and must import workers and machines, which could be very costly.

- Landlocked countries will find it more difficult to export goods.

Characteristics of the tertiary sector

A growing tertiary sector is often a sign of rising living standards as it enables consumers to enjoy more leisure-based service activities such as tourism, sports and restaurants.

Improved labor productivity

Better technology and labor productivity have led to a higher yield of manufactured and agricultural products, with less labor. This increased performance has led to:

- An increase in the income of workers to spend on services.

- Available manpower to be able to work in the most labor-intensive tertiary sector.

Globalization

Globalization and free trade have allowed the economies of developed countries to import more manufactured goods. Thus, a growing proportion of the economy can be devoted to the higher value service sector.

Increased globalization has also made it possible to exchange more services, for example cross-border information technologies. Support is much easier with the internet.

Increase in real wages and leisure time

The rise in real wages has allowed for a drop in the average work week. In 1850, the average job took 60 hours, leaving little time for leisure activities.

This average workweek has dropped to 35 hours, leaving more hours for leisure activities.

Technology

New technology has allowed the development of new industries in the service sector. Computers and telephones have been developed in the last 100 years. The growth of the Internet has enabled a new range of tertiary services.

Current account deficit

A potential problem in the tertiary sector is that it is often more difficult for service sector industries to export. A country with a large service sector may run a current account deficit by importing manufactured goods and financing the deficit by attracting capital flows.

What are the production sectors?

Primary sector

The primary sector is sometimes known as the extraction sector, because it involves the extraction and production of raw materials and basic foods.

It can be renewable resources, such as fish, corn, wool, iron, and wood, or it can be the use of non-renewable resources, such as oil or coal extraction. A farmer, a coal miner or a fisherman would be workers in the primary sector.

In both developed and developing countries, a decreasing proportion of workers is involved in the primary sector.

Only about 2% of the US workforce is engaged in primary sector activity today, a dramatic decline since the mid-19th century, when more than two-thirds of the workforce was made up of primary sector workers..

Examples from the primary sector

Activities associated with primary economic activity include:

- Agriculture (both subsistence and commercial).

- Mining.

- Forestry.

- Grazing.

- Oil exploitation.

- Fishing.

Secondary sector

Also called the manufacturing sector, it is concerned with the production of finished products from raw materials extracted by the primary production sector.

It involves the transformation of raw or intermediate materials into goods; for example, turning steel into automobiles, or textiles into clothing. A builder and a dressmaker would be workers in the secondary sector.

All manufacturing, processing and construction jobs are within this sector.

The manufacturing industry takes raw materials and combines them to produce a higher value-added finished product. For example, sheep's wool can be spun to form a better quality wool. This yarn can be threaded and knit to produce a wearable vest.

The secondary sector forms a substantial part of GDP, creates values ​​(goods), and is the engine of economic growth. It is crucial for all developed economies, although the trend, in most developed countries, is the predominance of the tertiary sector.

In the United States, just under 15% of the workforce is engaged in secondary sector activity.

Evolution

Initially, manufacturing was based on a labor-intensive "cottage industry," for example, the turning of a hand. However, the development of improved technology, such as spinning machines, allowed the growth of larger factories.

Benefiting from economies of scale, they were able to reduce the cost of production and increase labor productivity. Higher labor productivity also allowed for higher wages and more income to spend on goods and services.

Examples from the secondary sector

Among the activities associated with the manufacturing sector or secondary sector are the following:

- Automotive.

- Electrical industry.

- Chemical industry.

- Food production and processing.

- Energy industry.

- Metallurgical industry.

- Small craft production workshops.

- Construction industry.

- Glass industry.

- Oil refinery.

- Textile and clothing industry.

- Consumer goods industry (all consumables).

Third sector

The tertiary or service sector is responsible for offering intangible goods and services to consumers and companies. A merchant and an accountant would be workers in the tertiary sector.

This sector sells the goods produced by the secondary sector. It also provides commercial services both to the general population and to companies in the five economic sectors.

The service sector has grown due to higher labor productivity and higher disposable income. This higher income allows for more spending on "luxury" service items, such as tourism and restaurants.

In most developed and developing countries, an increasing proportion of workers are in the tertiary sector. In a developed economy, the service sector is the largest component of the economy, comprising almost 80% of GDP and a similar share of employment.

During the 20th century, economists began to suggest that traditional tertiary services could be further subdivided into quaternary and quinary service sectors.

Examples from the tertiary sector

A coffee shop is an example from the service sector. It makes use of coffee beans (raw material-primary sector) and manufactured products (cups, saucers and coffee machine). Examples from the service sector include:

- Retail and wholesale trade.

- Computers and information technology services.

- Hotels and tourist services.

- Media.

- Restaurants and Cafes.

- Transport and distribution: rail, bus, air, sea.

- Communications.

- Administrative, banking and insurance services.

- Food and beverage services.

- Medical attention.

- Postal services.

Quatern sector

Some economists further subdivide the quaternary sector into the quinary sector, which includes industry related to human services, and the highest levels of decision-making in a society or economy.

This includes the government that passes the legislation. It also includes the main decision makers in industry, commerce and also in the education sector.

References

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2. Tejvan Pettinger (2017). Sectors of the economy. Economics Help. Taken from: economicshelp.org.
3. Matt Rosenberg (2018). The 5 Sectors of the Economy. ThoughtCo. Taken from: thoughtco.com.
4. Tejvan Pettinger (2018). Primary sector of the economy. Economics Help. Taken from: economicshelp.org.
5. Investopedia (2018). Sector. Taken from: investopedia.com.
6. Tejvan Pettinger (2018). Manufacturing - Secondary sector. Economics Help. Taken from: economicshelp.org.
7. Managementmania (2016). Secondary Sector (Manufacturing and Industry). Taken from: managementmania.com.